SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission only
(as permitted by Rule 14a-6(e)(2)).
[_] Definitive Proxy Statement.
[_] Definitive Additional Materials.
[_] Soliciting Material Pursuant to Rule 14a-12
PartsBase, Inc.
_____________________________________________________________________
(Name of Registrant as Specified In Its Charter)
_____________________________________________________________________
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, par value $0.001 per share.
(2) Aggregate number of securities to which transaction applies:
5,012,302 shares of Common Stock, par value $0.001 per share.
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
The filing fee was determined based upon the (a) product of 5,012,302
shares of Common Stock and the merger consideration of $1.50 per share
or $7,518,453 and (b) the product of options to purchase 20,000 shares
of common stock and the merger consideration of $1.50 per share less
the applicable exercise price per share or $17,400. In accordance with
Rule 0-11 under the Securities Exchange Act of 1934, as amended, the
filing fee was determined by multiplying the amount calculated
pursuant to the preceding sentence by 1/50 of one percent.
(4) Proposed maximum aggregate value of transaction: $7,535,853
(5) Total fee paid: $1,507
[X] $1,417 of the fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the
offsetting fee was paid previously. Identify the previous filing by
registration statement number, or the Form or Schedule and the date
of its filing.
(1) Amount Previously Paid: _____________
(2) Form, Schedule or Registration Statement No.: _____________
(3) Filing Party: _____________
(4) Date Filed: _____________
Preliminary Copy, filed on December 20, 2002
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THIS TRANSACTION, PASSED UPON THE MERITS
OR FAIRNESS OF THE TRANSACTION OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE
INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PARTSBASE, INC.
905 Clint Moore Road
Boca Raton, FL 33487
PROPOSED MERGER -- YOUR VOTE IS VERY IMPORTANT
To Our Stockholders:
You are cordially invited to attend a special meeting of the stockholders
of PartsBase, Inc. ("PRTS" or the "Company") to be held on __________, 2003, at
____ _.m., local time, at 905 Clint Moore Road, Boca Raton, Florida 33487. A
notice of the special meeting, a proxy statement and a proxy card are enclosed.
Please read the enclosed proxy statement carefully as it sets forth details of
the proposed merger and other important information relating to the merger and
the special meeting.
As is more fully described in the enclosed proxy statement, the purpose of
the meeting is as follows:
(1) to consider and vote upon an Agreement and Plan of Merger, dated as of
August 26, 2002, and amended on December 20, 2002, among the Company
and affiliates of Robert A. Hammond, Jr., Chairman of the Board, Chief
Executive Officer, President, Secretary, Treasurer, and majority
stockholder, pursuant to which the Company will be merged with a
company affiliated with and controlled by Mr. Hammond, and each
outstanding share of the Company's common stock, other than shares
owned by Mr. Hammond and his affiliates and those shares held by
stockholders who become entitled to appraisal rights will be converted
into the right to receive $1.50 in cash; and
(2) to consider and vote upon such other matters as may properly come
before the meeting, including the approval of any adjournment or
postponement of the meeting.
Stockholders of the Company will be entitled to appraisal rights under
Delaware law as described in Appendix C in the enclosed proxy statement.
A copy of the merger agreement, as ammended, is attached to the proxy
statement as Appendix A and we urge you to read it in its entirety. As a result
of the merger, Mr. Hammond and his affiliates will acquire all of the
outstanding shares of the Company's common stock not already owned by them and
the stockholders of the Company unaffiliated with Mr. Hammond (the "Unaffiliated
Stockholders") will no longer have an equity interest in the Company.
The Board of Directors of PRTS formed a Special Committee, composed of
independent directors who are not officers or employees of PRTS and who have no
financial interest in the proposed merger different from PRTS stockholders
generally, in order to eliminate any conflict of interest in evaluating,
negotiating and recommending the merger proposal, including the terms of the
merger agreement.
The Board of Directors, acting on the unanimous recommendation of the
Special Committee, has approved the merger agreement and the merger. The Special
Committee, and, based in part upon the determination and recommendation of the
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Special Committee, the Board of Directors, believe that the terms of the merger
agreement and the proposed merger are fair from a financial point of view to,
and in the best interests of the Unaffiliated Stockholders . Therefore, the
Board of Directors, based in part on the unanimous recommendation of the Special
Committee, recommends that you vote FOR the approval and adoption of the merger
agreement and the merger.
In reaching their decisions, the Board of Directors and the Special
Committee considered, among other things, their understanding of the PRTS
business, their general business knowledge, the written opinion of vFinance
Investments, Inc. ("vFinance"), the Special Committee's financial advisor, that,
based upon and subject to the considerations and limitations set forth in that
opinion, as of August 26, 2002 and reaffirmed as of the date of this proxy
statement, the $1.50 per share cash consideration to be received by the
Unaffiliated Stockholders in the proposed merger was fair to the Unaffiliated
Stockholders from a financial point of view. The opinion of vFinance is attached
to the proxy statement as Appendix B.
The enclosed proxy statement provides information about the proposed
merger, the merger agreement and the special meeting. In addition, you may
obtain additional information about PRTS from documents filed with the
Securities and Exchange Commission. Please read the entire proxy statement
carefully, including the appendices.
Your vote is very important. The merger cannot be completed unless the
merger agreement and the merger are approved and adopted by the affirmative vote
of the holders of a majority of the outstanding shares of PRTS common stock, and
a majority of the shares not owned or voted by Mr. Hammond and his affiliates
are not voted AGAINST the merger and the merger agreement. Regardless of whether
you plan to attend the special meeting, please complete, sign and return the
enclosed proxy card.
If you complete, sign and return your proxy card without indicating how you
wish to vote, your proxy will be counted as if a vote IN FAVOR OF approval and
adoption of the merger agreement and the merger. If you fail to return your
proxy card and fail to vote at the special meeting, the effect will be the same
as a vote AGAINST approval and adoption of the merger agreement and the merger
for purposes of obtaining the affirmative vote of the holders of a majority of
the outstanding shares, however, it will NOT be considered a vote against the
merger and merger agreement for purposes of calculating the number of shares not
owned or voted by Mr. Hammond or his affiliates who vote against the merger and
the merger agreement in the vote referred to above.
Returning the proxy card does not deprive you of your right to attend the
special meeting and vote your shares in person.
If the merger is consummated, you will receive instructions for
surrendering your PRTS stock certificates and a letter of transmittal to be used
for this purpose. You should NOT submit your stock certificates for exchange
until you have received the instructions and the letter of transmittal.
Sincerely,
/s/ Robert A. Hammond, Jr.
---------------------------
Chairman of the Board of Directors,
Chief Executive Officer
Boca Raton, Florida
______________, 2002
This proxy statement is dated __________, 2002 and is first being
mailed to stockholders of PRTS on or about _____________, 2002.
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PARTSBASE, INC.
905 Clint Moore Road
Boca Raton, FL 33487
_________________________
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON _____________, 2003
To Our Stockholders:
A special meeting of the stockholders of PartsBase, Inc., a Delaware
corporation ("PRTS" or the "Company") will be held on ________, 2003, at ____
_.m., local time, at 905 Clint Moore Road, Boca Raton, Florida 33487, for the
following purposes:
1. To consider and vote upon a proposal to adopt and approve the
Agreement and Plan of Merger, dated as of August 26, 2002 and amended
on December 20, 2002, by and among Robert A. Hammond, Jr., the
Chairman of the Board, Chief Executive Officer, President, Secretary,
Treasurer and majority stockholder of the Company; Hammond I, Inc., a
Florida corporation ("Hammond I"), formed by Mr. Hammond; Hammond
Acquisition Corp. ("HAC"), a Delaware corporation and a wholly-owned
subsidiary of Hammond I; and the Company pursuant to which: (i) HAC
will merge into the Company, with the Company continuing as the
surviving corporation and (ii) each outstanding share of the Company's
common stock will be canceled and converted into the right to receive
$1.50 in cash, except for shares controlled by Mr. Hammond and shares
held by stockholders who perfect their appraisal rights under Delaware
law. A copy of the merger agreement, as amended is attached to the
proxy statement as Appendix A; and
2. To consider and vote upon such other matters as may properly come
before the meeting, including the approval of any adjournment or
postponement of the meeting.
Stockholders of PRTS who do not vote in favor of approval and adoption of
the merger agreement and the merger will have the right to seek appraisal of the
fair value of their shares if the merger is completed, but only if they submit a
written demand for an appraisal before the vote is taken on the merger agreement
and the merger and they comply with Delaware law as explained in the
accompanying proxy statement.
We have specified _______, 2002, at the close of business, as the record
date for the purpose of determining the Company's common stockholders who are
entitled to receive notice of and to vote at the special meeting. A list of the
Company's common stockholders entitled to vote at the special meeting will be
available for examination by any stockholder at the special meeting. For ten
days prior to the special meeting, this stockholder list will also be available
for inspection by stockholders at our corporate offices at 905 Clint Moore Road,
Boca Raton, Florida 33487, during ordinary business hours.
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Each share of our common stock will be entitled to one vote. The merger
agreement requires (i) that the merger must be approved by the affirmative vote
of at least a majority of the outstanding shares of our common stock entitled to
vote at the special meeting and (ii) that a majority of the Company's shares of
common stock not controlled or voted by Mr. Hammond are not voted against the
merger. A quorum for the meeting requires that holders of a majority of the
outstanding shares of common stock must be present in person or by proxy.
The Acquisition Group, which consists of Hammond I, Mr. Hammond and certain
of their affiliates, owned, as of the record date, an aggregate of 9,000,000
shares of common stock, constituting approximately 64.23% of the outstanding
shares of common stock entitled to vote at the special meeting, and has
indicated to our Board of Directors their intention to vote all of their shares
in favor of the merger and the merger agreement. In addition, pursuant to a
voting agreement between Hammond I, HAC, Atlas II, LP ("Atlas") and Marathon
Partners, LP ("Marathon"), Atlas and Marathon granted to Hammond I irrevocable
proxies to vote certain of their PRTS shares in favor of the merger and the
merger agreement, which shares constitute approximately 9.78% of the outstanding
shares of common stock entitled to vote at the special meeting. Therefore, the
Acquisition Group beneficially owns or has voting control over approximately
74.01% of the outstanding shares of common stock entitled to vote at the special
meeting, which is a sufficient number of shares of our common stock to approve
the merger and the merger agreement under the first voting requirement. A copy
of the voting agreement is attached to the proxy statement as Appendix F.
For a more complete statement regarding the matters to be acted upon at the
special meeting, please read the proxy statement and the other materials
concerning the Company and the merger, which are included with this notice.
The Board of Directors, acting on the unanimous recommendation of the
Special Committee, has approved the merger agreement and the merger. The Special
Committee, and, based in part upon the determination and recommendation of the
Special Committee, the Board of Directors, believe that the terms of the merger
agreement and the proposed merger are fair from a financial point of view to,
and in the best interests of, PRTS stockholders who are unaffiliated with Mr.
Hammond, Hammond I and their affiliates (the "Unaffiliated Stockholders").
Therefore, the Board of Directors, based in part on the unanimous recommendation
of the Special Committee, recommends that you vote FOR the approval and adoption
of the merger agreement and the merger.
Your vote is very important. The merger cannot be completed unless the
merger agreement and the merger are approved and adopted by the affirmative vote
of the holders of a majority of the outstanding shares of PRTS common stock, and
a majority of the shares not owned or voted by than Mr. Hammond, Hammond I and
their affiliates are not voted against the merger and the merger agreement.
Whether or not you plan to attend the special meeting and regardless of the
number of shares of the Company's common stock that you own, please complete,
sign and date the accompanying proxy card and return it in the enclosed prepaid
envelope. Failure to return a properly executed proxy card or vote at the
special meeting will have the same effect as a vote AGAINST the merger and the
merger agreement. However, it will NOT be considered a vote against the merger
and merger agreement for purposes of calculating the number of shares held by
stockholders unaffiliated with Mr. Hammond, Hammond I, and their affiliates who
vote against the merger and the merger agreement in the vote referred to above.
Your proxy is revocable and will not affect your right to vote in person if
you decide to attend the special meeting. Simply attending the special meeting,
however, will not revoke your proxy. For an explanation of the procedures for
revoking your proxy, see page 21 setting forth the section of the proxy
statement captioned "The Special Meeting". Returning your proxy card without
indicating how you want to vote will have the same effect as a vote "FOR" the
adoption and approval of the merger agreement.
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The merger is described in the enclosed proxy statement, which you are
urged to read carefully. In addition, you may obtain information about the
Company from documents that the Company has filed with the Securities and
Exchange Commission, including the Schedule 13E-3, as amended, transaction
statement filed in connection with the merger.
No person has been authorized to give any information or make any
representation other than those contained in this proxy statement, and, if given
or made, such information or representation must not be relied upon as having
been authorized. This proxy statement does not constitute a solicitation of a
proxy in any jurisdiction from any person to whom it is unlawful to make a proxy
solicitation in such jurisdiction. The information in this proxy statement may
only be accurate on the date of this proxy statement.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS
OF THE TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
By Order of the Board of Directors,
/s/ Robert A. Hammond
---------------------
Chairman of the Board of Directors
Chief Executive Officer
Boca Raton, Florida
_____________, 2002
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TABLE OF CONTENTS
SUMMARY TERM SHEET............................................................ 1
QUESTIONS AND ANSWERS ABOUT THE MERGER........................................ 3
SUMMARY.......................................................................10
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS....................18
SELECTED FINANCIAL INFORMATION................................................19
SPECIAL MEETING...............................................................21
DATE, TIME AND PLACE........................................................21
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING.............................21
RECORD DATE, OUTSTANDING VOTING SECURITIES AND VOTING RIGHTS................21
REQUIRED VOTES..............................................................22
APPRAISAL RIGHTS............................................................22
PROXIES; REVOCATION OF PROXIES..............................................22
EXPENSES OF PROXY SOLICITATION..............................................23
ADJOURNMENTS................................................................23
THE PARTIES TO THE MERGER.....................................................23
PARTSBASE, INC..............................................................23
ROBERT A. HAMMOND, JR.......................................................24
HAMMOND I, INC..............................................................24
HAMMOND ACQUISITION CORP....................................................24
SPECIAL FACTORS...............................................................24
BACKGROUND OF THE MERGER....................................................24
THE SPECIAL COMMITTEE.......................................................39
RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS;
FAIRNESS OF THE MERGER.....................................................40
POSITION OF THE ACQUISITION GROUP AS TO THE FAIRNESS OF THE MERGER..........46
OPINION OF SPECIAL COMMITTEE'S FINANCIAL ADVISOR............................46
PURPOSE AND STRUCTURE OF THE MERGER.........................................52
CERTAIN EFFECTS OF THE MERGER...............................................54
RISKS THAT THE MERGER WILL NOT BE COMPLETED.................................55
INTERESTS OF CERTAIN PERSONS IN THE MERGER..................................55
INDEMNIFICATION; DIRECTORS AND OFFICERS INSURANCE...........................56
FINANCING OF THE MERGER.....................................................56
FEES AND EXPENSES OF THE MERGER.............................................57
ACCOUNTING TREATMENT OF THE MERGER..........................................57
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES...............................57
CONDUCT OF THE COMPANY'S BUSINESS AFTER THE MERGER..........................58
REGULATORY APPROVALS........................................................58
LITIGATION CHALLENGING THE MERGER...........................................58
EFFECTIVE TIME OF THE MERGER................................................60
PAYMENT OF MERGER CONSIDERATION AND SURRENDER OF STOCK CERTIFICATES.........60
APPRAISAL RIGHTS............................................................61
THE MERGER AGREEMENT..........................................................63
GENERALLY...................................................................63
EFFECTIVE TIME OF THE MERGER................................................63
CONVERSION OF SECURITIES....................................................64
STOCK OPTIONS AND WARRANTS..................................................64
REPRESENTATIONS AND WARRANTIES..............................................64
COVENANTS...................................................................65
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SPECIAL MEETING.............................................................66
INDEMNIFICATION.............................................................67
CONDITIONS..................................................................67
TERMINATION OF THE MERGER AGREEMENT.........................................68
AMENDMENT TO THE MERGER AGREEMENT...........................................69
MARKETS AND MARKET PRICES OF THE COMMON STOCK AND RELATED STOCKHOLDER
MATTERS................ ......................................................69
COMMON STOCK PURCHASES........................................................71
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................72
BUSINESS OF THE COMPANY.......................................................73
INDUSTRY OVERVIEW...........................................................73
BUSINESS STRATEGY...........................................................77
SALES AND MARKETING.........................................................78
SCREENING/QUALITY MANAGEMENT................................................79
SALES AND MARKETING TO HOSPITALS AND HEALTHCARE FACILITIES..................80
ACCOUNT MANAGEMENT..........................................................80
PLACEMENT...................................................................80
REGISTERED NURSE PAYROLL....................................................80
REGISTERED NURSE BENEFITS...................................................81
COMPETITION.................................................................82
INTELLECTUAL PROPERTY.......................................................83
GOVERNMENT REGULATION.......................................................83
EMPLOYEES...................................................................84
PROPERTIES..................................................................84
INDEPENDENT AUDITORS..........................................................84
OTHER MATTERS FOR ACTION AT THE SPECIAL MEETING...............................84
STOCKHOLDER PROPOSALS.........................................................84
WHERE YOU CAN FIND MORE INFORMATION...........................................85
INFORMATION INCORPORATED BY REFERENCE.........................................85
OTHER BUSINESS................................................................86
APPENDIX A Agreement and Plan of Merger, as Amended.........................A-1
APPENDIX B Opinion and Consent of vFinance Investments, Inc.................B-1
APPENDIX C Section 262 of the Delaware General Corporation Law..............C-1
APPENDIX D Annual Report on Form 10-K for the Year Ended December 31, 2001..D-1
APPENDIX E Quarterly Report on Form 10-Q for the Nine Months Ended
September 30, 2002..............................................E-1
APPENDIX F Voting Agreement.................................................F-1
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SUMMARY TERM SHEET
This Summary Term Sheet highlights certain material information from this
proxy statement and does not contain all of the information that is important to
you. To understand the merger fully, you should read carefully this entire proxy
statement, the appendices and the additional documents referred to in this proxy
statement. In this proxy statement, the terms "PRTS", "Company", "we", "us" and
"our" refer to PartsBase, Inc. In this proxy statement, "Hammond I" refers to
Hammond I, Inc, a Florida corporation, and "HAC" refers to Hammond Acquisition
Corp., a Delaware corporation and wholly-owned subsidiary of Hammond I. In this
proxy statement, the terms the "Acquisition Group" and "Hammond I and its
affiliates" refer to Hammond I, Robert A. Hammond, Jr. and any entity that is
controlled by Hammond I or Robert A. Hammond, Jr.
o Parties to the Merger - Hammond I, the proposed acquirer of PRTS,
formed HAC as its wholly owned subsidiary solely for the purpose of
effecting the merger. The sole stockholder and director of Hammond I
is Robert A. Hammond, Jr., who is also Chairman, Chief Executive
Officer, President, Secretary and Treasurer of PRTS. Mr. Hammond,
Hammond I and certain of their affiliates together own approximately
64.23% of the outstanding shares of PRTS common stock. In addition,
Hammond I has voting power over an additional 9.78% of the outstanding
shares of PRTS common stock. In this proxy statement, the term
"Acquisition Group" refers to Hammond I, Mr. Hammond and any entity
that is controlled by Hammond I or Mr. Hammond. See "The Parties to
the Merger" beginning on page 23.
o The Merger - At the special meeting, you are being asked to adopt and
approve the merger agreement pursuant to which HAC will be merged into
PRTS. PRTS will continue as the surviving corporation. For additional
information about the merger and the merger agreement see "The Merger
Agreement" on page 63.
o Stockholder Vote -- The merger requires the approval by a majority of
all of the outstanding shares of PRTS common stock entitled to vote at
the special meeting including shares owned and/or controlled by Mr.
Hammond, and it also requires that a majority of the outstanding
shares of PRTS common stock owned or voted by stockholders other than
the Acquisition Group (the "Non-Acquisition Group Stockholders") are
not voted against the merger. Abstentions and broker non-votes will
have the effect of a vote "AGAINST" the adoption and approval of the
merger agreement for purposes of obtaining the affirmative vote of the
holders of a majority of the outstanding shares. However, they will
NOT be considered a vote against the merger and merger agreement for
purposes of calculating the number of shares not owned or voted by the
Acquisition Group who vote against the merger and the merger agreement
in the vote referred to above. See "The Special Meeting" beginning on
page 21. The Acquisition Group owns or has voting control over 74.01%
of the outstanding shares of PRTS common stock, and Mr. Hammond has
indicated to our Board of Directors the Acquisition Group's intention
to adopt and approve the merger agreement and the merger. Other than
Mr. Hammond, none of our directors or officers have informed us
whether they currently intend to vote any PRTS shares owned or
controlled by them for or against the merger or the merger agreement,
nor have any of them made a recommendation, individually, either in
support of or opposed to the merger or the merger agreement.
o Consideration -- At the effective time of the merger, each outstanding
share of common stock held by PRTS stockholders other than Mr. Hammond
or his affiliates will be canceled and converted into the right to
receive $1.50 in cash, except for shares held by stockholders who
perfect their appraisal rights under Delaware law, shares of common
stock held by the Acquisition Group and any shares of common stock
held in our treasury. Each share of common stock of HAC then issued
and outstanding will, by virtue of the merger and without any action
on the part of HAC, become one fully paid and non-assessable share of
common stock of PRTS, the surviving corporation.
o Voting Stock, Record Date -- Only holders of record of shares of
common stock of PRTS at the close of business on _________, 2002 are
entitled to notice of and to vote at the special meeting. On that
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date, there were _________ holders of record of common stock, and
14,012,302 shares of our common stock outstanding. Each such share of
common stock entitles the holder to cast one vote at the special
meeting. For additional information about the record date for voting,
see "Special Meeting" on page 21.
o Special Committee - The Special Committee is the committee of our
Board of Directors, consisting of three non-employee, non-officer
directors of PRTS, formed to eliminate any conflict of interest in
evaluating, negotiating and recommending the merger proposal,
including the terms of the merger agreement and the proposed merger
with HAC. The Special Committee consists solely of directors who are
not officers or employees of PRTS and who have no financial interest
in the proposed merger different from PRTS stockholders other than Mr.
Hammond or his affiliates (the "Unaffiliated Stockholders"). The
members of the Special Committee are Pierre Narath, Edward McCartin,
and Thomas Van Hare. See "Special Factors - The Special Committee" on
page 39.
o Fairness of the Merger -- The Special Committee and, based in part
upon the determination and recommendation of the Special Committee,
the Board of Directors of PRTS have each determined that the terms of
the merger agreement and the proposed merger are fair from a financial
point of view to, and in the best interests of, the Unaffiliated
Stockholders, based on the factors described in page 40 (See "Special
Factors - Recommendations of the Special Committee and the Board of
Directors; Fairness of the Merger"). The Special Committee also
received an opinion from vFinance Investments, Inc. ("vFinance"), its
financial advisor, to the effect that as of the date of such opinion
and based upon and subject to the considerations and limitations set
forth in such opinion, the per share merger consideration to be
received by the Unaffiliated Stockholders in the proposed merger is
fair to such stockholders from a financial point of view. vFinance
informed the Board that the increase in the merger price from $1.41 to
$1.50 in December 2002 had not caused vFinance to change its opinion
dated August 26, 2002 regarding the fairness of the transaction
covered by the merger agreement. The members of the Acquisition Group
also believe that the terms of the merger agreement and the proposed
merger are fair from a financial point of view to the Unaffiliated
Stockholders. For a more detailed discussion of the material factors
upon which these beliefs are based, see "Special Factors -
Recommendation of the Special Committee and the Board of Directors;
Fairness of the Merger" beginning on page 40.
0 Tax Consequences - The receipt of cash by you in the merger will be a
taxable transaction to you. See "Special Factors--Material U.S.
Federal Income Tax Consequences" beginning on page 58.
o Conditions -- The merger agreement and the merger are subject to
several conditions, including, among other things:
(i) the adoption and approval of the merger agreement by the
affirmative vote of the holders of a majority of our
outstanding shares entitled to vote thereon, and a majority of
the PRTS shares held by the Non Acquisition Group Stockholders
entitled to vote thereon are not voted against the merger
agreement. The Acquisition Group owns or has voting control
over 74.01% of the outstanding shares of PRTS common stock, and
has indicated to our Board of Directors its intention to adopt
and approve the merger agreement and the merger;
(ii) stockholders asserting their appraisal rights with respect to
PRTS common stock shall constitute less than 5% of all shares
of PRTS common stock outstanding immediately prior to the
effective time;
(iii) there being no material litigation or similar proceedings
pending or threatened against PRTS at the time of the closing
seeking to restrain the consummation of the merger or seeking
damages which would result in a material adverse effect;
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(iv) obtaining any necessary third party consents and approvals.
See "The Merger Agreement - Conditions" beginning on page 67.
o After the Merger -- Upon completion of the merger, the Acquisition
Group is expected to own 100% of the surviving corporation's capital
stock outstanding immediately after the merger. See "Special Factors -
Interests of Certain Persons in the Merger" beginning on page 55.
QUESTIONS AND ANSWERS ABOUT THE MERGER
The following questions and answers are intended to address briefly some
commonly asked questions regarding the merger. These questions and answers may
not address all questions that may be important to you as a stockholder. Please
refer to the more detailed information contained elsewhere in this proxy
statement, the appendices to this proxy statement, and the documents referred to
or incorporated by reference in this proxy statement. In this proxy statement,
the terms "PRTS", "Company", "we", "us" and "our" refer to PartsBase, Inc.
Q: WHAT ARE WE VOTING ON?
A: Whether to adopt and approve an Agreement and Plan of Merger, as amended, by
and among Mr. Hammond, Hammond I, HAC (a newly-formed, wholly-owned
subsidiary of Hammond I) and the Company, pursuant to which HAC will merge
into the Company, with the Company continuing as the surviving corporation.
Q: WHAT ARE THE RELATIONSHIPS AMONG THE PARTIES TO THE MERGER AGREEMENT?
A: Hammond I, the proposed acquirer of PRTS, formed HAC as its wholly-owned
subsidiary solely for the purpose of effecting the merger. Hammond I is
wholly-owned by Mr. Hammond, who is the sole director and officer of Hammond
I and HAC, and who is also Chairman, Chief Executive Officer, President,
Secretary and Treasurer of the Company. In this proxy statement, the term
"Acquisition Group" refers to Hammond I, Mr. Hammond and any entity that is
controlled by Hammond I or Mr. Hammond. The Acquisition Group together owns
approximately 64.23% of the outstanding shares of the Company's common
stock, and pursuant to a voting agreement has voting power over an
additional 9.78%, for a combined voting percentage of 74.01%. Mr. Hammond
has indicated to our Board of Directors the Acquisition Group's intention to
adopt and approve the merger agreement and the merger. Other than Mr.
Hammond, none of our directors or officers have informed us whether they
currently intend to vote any PRTS shares owned or controlled by them for or
against the merger or the merger agreement, nor have any of them made a
recommendation, individually, either in support of or opposed to the merger
or the merger agreement.
Q: ARE THERE CONDITIONS TO THE COMPLETION OF THE MERGER?
A: Yes. Before completion of the transactions contemplated by the merger
agreement, PRTS and Hammond I must fulfill or waive several closing
conditions, including adoption and approval of the merger agreement by the
holders of common stock, the accuracy of representations and warranties made
by the parties, the absence of certain material adverse effects on PRTS and
other customary closing conditions. If these conditions are not satisfied or
waived, the merger will not be completed even if the holders of common stock
vote to adopt and approve the merger agreement and the merger.
Q: WHAT VOTE IS REQUIRED TO ADOPT AND APPROVE THE MERGER AGREEMENT AND THE
MERGER?
3
A: The merger requires the approval by a majority of all of the outstanding
shares of PRTS common stock entitled to vote at the special meeting
including shares owned or controlled by the Acquisition Group, and it also
requires that a majority of the shares of PRTS common stock owned by the
Non-Acquisition Group Stockholders are not voted against the merger.
Q: WHAT WILL BE THE EFFECT OF THE MERGER?
A: After the merger, you will no longer own any PRTS stock, and the Acquisition
Group will own 100% of our common stock.
Q: IF THE MERGER IS COMPLETED, WHAT WILL I RECEIVE FOR MY PRTS COMMON STOCK?
A: If the merger is completed, each of the shares of PRTS common stock owned by
the Unaffiliated Stockholders will be automatically canceled and converted
into the right to receive $1.50 in cash, without interest or any other
payment thereon, except that if you perfect your appraisal rights, your
shares will be subject to appraisal in accordance with Delaware law. See
page 60 ("Special Factors - Payment of Merger Consideration and Surrender of
Stock Certificates") and page 61 ("Special Factors - Appraisal Rights").
Q: IF THE MERGER IS COMPLETED, WHAT WILL THE ACQUISITION GROUP RECEIVE FOR ITS
PRTS COMMON STOCK?
A: If the merger is completed, each share of PRTS common stock held by the
Acquisition Group will remain outstanding and the Acquisition Group will not
receive any cash consideration for its shares of PRTS common stock.
Q: HOW WILL HAC FINANCE THE MERGER?
A: HAC intends to finance all of the merger consideration through the cash
reserves of PRTS which will become available immediately upon the
effectiveness of the merger.
Q: WHAT DOES OUR BOARD OF DIRECTORS RECOMMEND REGARDING THE MERGER AGREEMENT?
A: After receiving the unanimous recommendation of the Special Committee,
consisting solely of directors who are not officers or employees of PRTS,
our Board of Directors unanimously, with Mr. Hammond abstaining from
participating in the discussion and/or voting on the proposal, determined
that the terms of the merger are advisable, fair from a financial point of
view to, and in the best interests of the Unaffiliated Stockholders. Our
Board of Directors unanimously recommends that you vote "FOR" the adoption
and approval of the merger and the merger agreement.
Q: WHY DID OUR BOARD OF DIRECTORS FORM THE SPECIAL COMMITTEE?
A: Hammond I will own all of the outstanding shares of the Company's common
stock immediately following the completion of the merger. The Board of
Directors believed that a Special Committee of independent directors who are
not officers or employees of the Company or Hammond I and who have no
financial interest in the merger different from the Unaffiliated
Stockholders should be formed to eliminate any conflict of interest in
evaluating, negotiating and recommending the merger and the terms of the
merger agreement to the full Board of Directors. The Special Committee
independently selected and retained legal counsel and a financial advisor to
assist it in deliberations. The Special Committee received an opinion from
its financial advisor, vFinance Investments, Inc. ("vFinance"), dated August
26, 2002, and reaffirmed as of the date of this proxy statement, which the
4
Special Committee and the Board of Directors adopted, and in conjunction
with their understanding of the Company's business and their general
business knowledge, that as of ________ ____, 2002, the $1.50 per share you
will receive in the merger is fair from a financial point of view to the
Unaffiliated Stockholders.
Q: HAS THE SPECIAL COMMITTEE CONCLUDED THAT THE MERGER IS FAIR TO THE COMPANY'S
UNAFFILIATED STOCKHOLDERS?
A: Yes. The Special Committee has determined that the merger is fair from a
financial point of view to the Unaffiliated Stockholders.
Q: HAS THE COMPANY'S BOARD OF DIRECTORS DETERMINED THAT THE MERGER IS FAIR TO
THE UNAFFILIATED STOCKHOLDERS?
A: Yes. The Board of Directors has determined that the merger is fair to the
Unaffiliated Stockholders.
Q: WHY IS THE BOARD OF DIRECTORS RECOMMENDING THAT I VOTE FOR THE MERGER?
A: The Board of Directors, based in part on the recommendation of the Special
Committee, had approved the merger and the merger agreement and voted to
recommend that you vote "FOR" approval of the merger and the merger
agreement. The Board of Directors is recommending that you vote in favor of
the merger agreement because it believes that the merger and the cash
consideration to be provided to you upon the closing thereof is a more
desirable alternative for you than to hold shares of PRTS. In reaching this
conclusion, the Board of Directors, based in part on the recommendation of
the Special Committee, considered among other factors:
o The Special Committee's and the Board of Directors' familiarity with,
and presentation by vFinance with regard to, the Company's business and
prospects and current economic and market conditions and the opinion of
vFinance, as adopted by the Special Committee and the Board of
Directors, that $1.50 per share was fair from a financial point of view
to the Unaffiliated Stockholders.
o The expenses of maintaining the Company as a public entity, such as
those expenses associated with its compliance with the reporting
requirements and public filing requirement of a public company.
o The fact that $1.50 per share represents a premium of 108% over the
$0.72 closing sale price for the Company's Common Stock as traded on
Nasdaq on April 9, 2002, the last trading day before the Company
announced the initial offer by Hammond I; a premium of approximately 30%
over the $1.15 average closing sale price of the common stock on August
23, 2002, the last trading day prior to the August 26, 2002 Board
meeting at which the merger was approved; and approximately 70% over the
average reported closing price of $0.88 for the one-year period prior to
August 26, 2002.
o The possibility that if the Company remains a public corporation,
because of a decline in the market price of the common stock or the
stock market in general, the price received by the Unaffiliated
Stockholders in the open market or in a future transaction might be less
than $1.50 per share.
Q: DID THE SPECIAL COMMITTEE RECEIVE ANY OFFERS FROM OTHERS TO ACQUIRE THE
COMPANY AT PRICES HIGHER THAN $1.50 PER SHARE?
A: Yes. The Company did receive offers from each of Mr. Harold Van Arnem and
Aviall Inc. ("Aviall") to acquire the Company at prices higher than $1.50
per share. However, after consultation with Mr. Hammond, Mr. Hammond
informed the Company he would not vote in favor of either of these offers.
5
Accordingly, the Special Committee and the Board of Directors believed that
despite the fact that Mr. Hammond's $1.50 per share offer was less than
either of Harold Van Arnem's or Aviall's offers, Mr. Hammond's offer
represented the only offer which had a reasonable expectation of being
consummated.
Q: WHAT ARE THE CONSEQUENCES OF THE MERGER TO PRESENT MEMBERS OF MANAGEMENT AND
THE BOARD OF DIRECTORS?
A: Current members of the Board of Directors will resign effective upon the
closing of the merger, and the directors of HAC will become the directors of
the Company. Other than this change in the composition of the Board of
Directors, it is expected that, in general, all members of the Company's
current management will continue as management of the Company after the
merger. As is the case with the other PRTS stockholders, members of
management and the Board of Directors (other than Mr. Hammond) will be
entitled to receive $1.50 per share in cash for each of their shares of
common stock.
Q: IS THE MERGER SUBJECT TO THE SATISFACTION OF ANY CONDITIONS?
A: Yes. Before completion of the merger, certain closing conditions must be
satisfied or waived. These conditions include, among other conditions,
obtaining required consents and approvals, adoption and approval of the
merger agreement (by a majority of all of the outstanding shares of the
Company's Common Stock entitled to vote at the special meeting including
shares owned or controlled by Mr. Hammond, and a requirement that a majority
of the Company's shares of common stock held by the Non-Acquisition Group
are not voted against the merger), the accuracy of each party's
representations and warranties, each party's compliance in all material
respects with its respective obligations under the merger agreement, there
being no material litigation or similar proceedings pending or threatened
against PRTS at the time of the closing seeking to restrain the consummation
of the merger or seeking damages which would result in a material adverse
effect; and the absence of laws or governmental orders that would make the
merger illegal or prohibit the consummation of the merger. If these
conditions are not satisfied or waived, the merger will not be completed
even if the requisite stockholder vote to adopt and approve the merger
agreement is obtained.
In April, May and June 2002, several of our stockholders, individually and
as purported representatives of all of the Unaffiliated Stockholders, filed
a total of four purported class action lawsuits against PRTS, the members of
the Board of Directors and specified officers of PRTS alleging, among other
things, a breach of the defendants' fiduciary duties to the stockholders of
PRTS in connection with the merger on the terms then proposed, and seeking
an injunction, damages, costs and other relief. In October 2002, the parties
in the two lawsuits filed in the State of Florida entered into a Memorandum
of Understanding, which provided for an agreement-in-principle to settle the
class action lawsuits. The Memorandum of Understanding provided for the
parties to enter a joint stipulation and such other documentation as may be
required to obtain final approval of the court. The settlement of the class
action lawsuits is subject to the approval of the court. In November 2002,
the parties in the Florida lawsuits agreed to dismiss the Florida lawsuits
and to pursue a class action settlement in Delaware. The parties are
currently drafting a Joint Stipulation of Settlement which will contain
substantially the same terms of settlement as the October Memorandum of
Understanding . The settlement of the class action lawsuits is subject to
the final approval of the Delaware Court. If approved by the Delaware Court,
the two lawsuits filed in Delaware will be dismissed with prejudice, and the
settlement of the class action lawsuits will release the defendants in all
such actions from further liability relating to the merger. Partsbase
anticipates that the hearing to settle the class action lawsuits will take
place in the Delaware Court during the first quarter of 2003. Assuming the
fulfillment or waiver of all other conditions to the merger, we expect to
complete the merger promptly after the special meeting.
Q: CAN THE MERGER AGREEMENT BE TERMINATED PRIOR TO COMPLETION OF THE MERGER?
6
A: Yes. The parties may agree to terminate the merger agreement at any time
before the merger is completed. In addition, the merger agreement may be
terminated:
o by either Hammond I or the Company if the merger is not completed on or
prior to March 31, 2003;
o if approval of the stockholders of the Company necessary to consummate
the merger has not been obtained; or
o by the non-breaching party in the event of a material breach by the
other party which is not cured after ten (10) days written notice is
given to the breaching party.
Q: WHAT HAPPENS IF THE MERGER AGREEMENT IS TERMINATED PRIOR TO COMPLETION OF
THE MERGER?
A: If the merger agreement is terminated prior to the completion of the merger,
the Company will remain a public company as it is today and each stockholder
will continue to hold its shares of common stock in the Company. Further,
unless the merger agreement is wrongfully terminated, there will be no
liability on the part of the Company, Hammond I or any of their affiliates
as a result of the termination.
Q: WHAT WILL HAPPEN TO THE MARKET FOR COMMON STOCK AFTER THE MERGER?
A: At the effective time of the merger, trading in the common stock on Nasdaq
will cease. The Acquisition Group has informed us that it may cause PRTS to
continue to be a reporting company under the Securities Exchange Act of
1934, as amended.
Q: WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER?
A: The receipt of cash for shares of the Company's common stock in the merger
will be a taxable transaction for U.S. federal income tax purposes and also
may be a taxable transaction under applicable state, local, foreign or other
laws. You will recognize gain or loss equal to the difference between $1.50
per share and your tax basis for the shares of the Company's common stock
that you owned immediately before completion of the merger. For U.S. federal
income tax purposes, this gain or loss generally will be a capital gain or
loss if you held the share of common stock as a capital asset. Tax matters
are very complicated and the tax consequences of the merger to you will
depend on the facts of your own situation. You should consult your own tax
advisor for a full understanding of the tax consequences of the merger to
you.
Q: WHO CAN VOTE ON THE MERGER?
A: If you are a stockholder of record as of the close of business of
_______________, 2002, you will be entitled to be noticed of, and vote at,
the special meeting to approve the merger and merger agreement.
Q: WHAT SHOULD I DO NOW? HOW DO I VOTE?
A: After you read and consider carefully the information contained in this
proxy statement, please fill out, sign and date your proxy card and mail
your signed proxy card in the enclosed return envelope as soon as possible
so that your shares may be represented at the special meeting. Failure to
return your proxy or vote in person at the meeting will have the same effect
as a vote against the adoption and approval of the merger and the merger
agreement.
7
Q: WHAT RIGHTS DO I HAVE TO DISSENT FROM THE MERGER?
A: If you wish, you may dissent from the merger and seek an appraisal of the
fair value of your shares of PRTS common stock, but only if you comply with
the requirements of Delaware law which are attached to this proxy statement
as Appendix C and which are summarized on pages 61 - 63. Based on the
determination of the Delaware Court of Chancery, the appraised fair value of
your shares of PRTS common stock, which will be paid to you if you seek an
appraisal, may be more than, less than, or equal to the $1.50 per share
price of common stock to be paid in the merger.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Yes, but only if you provide instructions to your broker on how to vote. You
should fill out, sign, date and return the proxy card and otherwise follow
the directions provided by your broker regarding how to instruct your broker
to vote your shares. See page 22 ("Special Meeting - Proxies; Revocation of
Proxies"). Without instructions, your shares will not be voted by your
broker and the failure to vote will have the same effect as a vote for the
merger on the outcome of the second voting requirement.
Q: CAN I CHANGE MY VOTE OR REVOKE MY PROXY AFTER I HAVE MAILED MY SIGNED PROXY
CARD?
A: Yes, you can change your vote at any time before your proxy is voted at the
special meeting. You can do this in one of three ways. First, you can send a
written notice stating that you would like to revoke your proxy. Second, you
can complete and submit a new proxy card. If you choose either of these
methods, we must receive your notice of revocation or your new proxy card
before the vote is taken at the special meeting. Third, you can attend the
special meeting and vote in person. Simply attending the meeting, however,
will not revoke your proxy; you must vote at the meeting. If you have
instructed a broker to vote your shares, you must follow directions received
from your broker to change your vote. See page 22 ("Special Meeting -
Proxies; Revocation of Proxies").
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. If the merger agreement is adopted and approved, then shortly after the
merger is completed, you will receive a letter of transmittal with
instructions informing you how to send in your stock certificates to Hammond
I's payment agent. You should use the letter of transmittal to exchange your
stock certificates for the merger consideration to which you are entitled as
a result of the merger. YOU SHOULD NOT SEND ANY STOCK CERTIFICATES WITH YOUR
PROXY CARD. You should follow the procedures described on page 60 ("Special
Factors - Payment of Merger Consideration and Surrender of Stock
Certificates").
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We are working towards completing the merger as soon as possible. For the
merger to occur, it must be adopted and approved by our stockholders and
certain other customary closing conditions must be fulfilled or waived (to
the extent permitted by law). In addition, the merger is conditioned upon
there being no material litigation or similar proceedings pending or
threatened against PRTS at the time of the closing. In April, May and June
2002, several of our stockholders, individually and as purported
representatives of all of the Unaffiliated Stockholders, filed a total of
four purported class action lawsuits against PRTS, the members of the Board
of Directors and specified officers of PRTS alleging, among other things, a
breach of the defendants' fiduciary duties to the stockholders of PRTS in
connection with the merger on the terms then proposed, and seeking an
injunction, damages, costs and other relief. In October 2002, the parties in
the two lawsuits filed in the State of Florida entered into a Memorandum of
8
Understanding, which provided for an agreement-in-principle to settle the
class action lawsuits. The Memorandum of Understanding provided for the
parties to enter a joint stipulation and such other documentation as may be
required to obtain final approval of the court. In November 2002, the
parties in the Florida lawsuits agreed to dismiss the Florida lawsuits and
to pursue a class action settlement in Delaware. The parties are currently
drafting a Joint Stipulation of Settlement which will contain substantially
the same terms of settlement as the October Memorandum of Understanding. The
settlement of the class action lawsuits is subject to the final approval of
the Delaware Court. If approved by the Delaware Court, the two lawsuits
filed in Delaware will be dismissed with prejudice, and the settlement of
the class action lawsuits will release the defendants in all such actions
from further liability relating to the merger. Partsbase anticipates that
the hearing to settle the class action lawsuits will take place in the
Delaware Court during the first quarter of 2003. If the court enters a
settlement order at that time, and assuming the fulfillment or waiver of all
other conditions to the merger, we expect to complete the merger promptly
after the special meeting.
Q: WHAT OTHER MATTERS WILL BE VOTED ON AT THE SPECIAL MEETING?
A: We do not expect any other matters will be voted upon at the special
meeting.
Q: WHO CAN HELP ANSWER MY OTHER QUESTIONS?
A: If you have more questions about the merger, you should contact Mark
Weicher, our Chief Financial Officer, at PartsBase, Inc., 905 Clint Moore
Road, Boca Raton, Florida 33487, Telephone: (561) 953-0700.
9
SUMMARY
-------
This summary highlights certain material information from this proxy
statement and does not contain all of the information that is important to you.
To understand the merger fully, you should read carefully this entire proxy
statement, the appendices and the additional documents referred to in this proxy
statement. In this proxy statement, the terms "PRTS", "Company", "we", "us" and
"our" refer to PartsBase, Inc. In this proxy statement, "Hammond I" refers to
Hammond I, Inc., a Florida corporation, and "HAC" refers to Hammond Acquisition
Corp., a Delaware corporation. In this proxy statement, the term the
"Acquisition Group" and "Hammond I and its affiliates" refer to Hammond I,
Robert A. Hammond, Jr. and any entity that is controlled by Hammond I or Robert
A. Hammond, Jr.
THE PARTIES TO THE MERGER (PAGE 23)
PartsBase, Inc. - PRTS, a Delaware corporation, is an online provider of
Internet business-to-business e-commerce services for the aviation industry. Our
global e-commerce market place, sometimes referred to as our "e-marketplace" or
"our solution," provides our subscribers in more than 115 countries with the
ability to buy and sell new, used and overhauled aviation parts and products in
an efficient, competitive and cost-effective matter. Since October 2001, we have
provided, for a fee, registered nurses to our hospital clients to supplement
their staff through RNpartners, Inc., a Florida corporation wholly owned by
PRTS. Hospitals generally obtain supplemental staffing from local temporary (per
diem) agencies. Our common stock is quoted on the Nasdaq National Market under
the symbol "PRTS".
Robert A. Hammond, Jr. - Robert A. Hammond, Jr. is the Chairman of the
Board of Directors, Chief Executive Officer, President, Secretary and Treasurer
of PRTS (with which he has been associated since its inception in 1998), and the
Chairman of the Board of Directors and the Chief Executive Officer of Hammond I.
As of the record date, Mr. Hammond or his affiliates owned 9,000,000 shares of
PRTS common stock, which represents approximately 64.23% of our outstanding
common stock. Mr. Hammond owns 100% of Hammond I. For additional information
about Mr. Hammond, see page 55 ("Special Factors - Interests of Certain Persons
in the Merger").
Hammond I - The principal activity of Hammond I, a Florida corporation, is
the acquisition, ownership and operation through its wholly-owned entities and
other affiliates, of the common stock of PRTS. As of the record date, Hammond I
and its affiliates own 9,000,000 shares of our outstanding common stock, which
represents approximately 64.23% of our outstanding common stock.
HAC - HAC is a Delaware corporation and a wholly-owned subsidiary of
Hammond I that was formed solely for the purpose of effecting the transactions
contemplated by the merger and has not engaged in any business except in
furtherance of this purpose.
The Acquisition Group - The Acquisition Group consists of Hammond I, Mr.
Hammond and their affiliates. Hammond I's sole director and executive officer,
Mr. Hammond, is also Chairman and Chief Executive Officer of PRTS. As of the
record date, the Acquisition Group owned 9,000,000 shares of PRTS common stock,
which represents approximately 64.23% of our outstanding common stock. Upon
completion of the merger, pursuant to which Hammond I's wholly-owned subsidiary,
HAC, will merge into PRTS, the certificate of incorporation and bylaws of
Hammond I's wholly-owned subsidiary will become our certificate of incorporation
and bylaws, and the ownership of our common stock by the Acquisition Group will
increase from approximately 64.23% to 100%.
For additional information, see page 55 ("Special Factors - Interests of
Certain Persons in the Merger").
10
THE SPECIAL MEETING (PAGE 21)
Date, Time and Place - The special meeting of common stockholders of PRTS
will be held on ________, 2003 at _____ _.m. local time, at 905 Clint Moore
Road, Boca Raton, Florida 33487.
Matters to be Considered at the Special Meeting - At the special meeting,
you are being asked to adopt and approve the merger agreement pursuant to which
HAC, a wholly-owned Hammond I subsidiary, formed solely for the purpose of
effecting the merger, will be merged into PRTS. PRTS will continue as the
surviving corporation. For additional information about the merger, see pages
24 -63 ("Special Factors"). For additional information about the merger
agreement, see page 63 (The Merger Agreement).
Record Date and Voting Information - You are entitled to vote at the
special meeting if you owned shares of voting stock at the close of business on
____________, 2002, which is the record date for the special meeting. You will
have one vote at the special meeting for each share of common stock you owned at
the close of business on the record date. On the record date, there were
14,012,302 shares of common stock entitled to be voted at the special meeting.
Required Vote -- Under Delaware law, the presence, in person or by proxy,
of the holders of a majority of all outstanding shares of PRTS common stock as
of the record date is necessary to constitute a quorum at the special meeting.
The Acquisition Group, which, as of the record date, had the right to vote
approximately 74.01% of the Company's outstanding shares of common stock,
therefore have sufficient votes to ensure the presence of a quorum. Mr. Hammond
has indicated to our Board of Directors the Acquisition Group's intention to
adopt and approve the merger agreement and the merger. Other than Mr. Hammond,
none of our directors or officers have informed us whether they currently intend
to vote any PRTS shares owned or controlled by them for or against the merger or
the merger agreement, nor have any of them made a recommendation, individually,
either in support of or opposed to the merger or the merger agreement.
The approval and adoption of the merger agreement and the merger requires
the approval by a majority of the outstanding shares of PRTS common stock
entitled to vote at the special meeting, including shares owned and/or
controlled by Mr. Hammond, and it also requires that a majority of the shares
held by the Non-Acquisition Group Stockholders are not voted against the merger.
Abstentions and broker non-votes will have the effect of a vote "FOR" the
adoption and approval of the merger agreement.
APPRAISAL RIGHTS (PAGE 61)
PRTS is a corporation organized under Delaware law. Under Section 262 of
the Delaware General Corporation Law, if you do not vote in favor of the merger
and instead follow the appropriate procedures for demanding and perfecting
appraisal rights as described on pages 61 through 63 and in Appendix C, you will
receive a cash payment for the "fair value" of your shares of voting stock, as
determined by the Delaware Court of Chancery, instead of the $1.50 per share
merger consideration to be received by the Unaffiliated Stockholders in
connection with the merger. The price determined by the Delaware Court of
Chancery may be more than, less than or equal to the $1.50 merger consolidation
you would have received for each of your shares of common stock in the merger if
you had not exercised your appraisal rights. Generally, in order to exercise
appraisal rights, among other things:
o you must not vote for approval and adoption of the merger agreement
and the merger; and
o you must make written demand for appraisal in compliance with
Delaware law prior to the vote on the merger agreement and the
merger.
Merely voting against the merger agreement and the merger will not preserve
your appraisal rights under Delaware law. Appendix C to this proxy statement
contains the Delaware statute relating to your appraisal rights. IF YOU WANT TO
EXERCISE YOUR APPRAISAL RIGHTS, PLEASE READ AND CAREFULLY FOLLOW THE PROCEDURES
11
DESCRIBED ON PAGES 61 THROUGH 63 AND IN APPENDIX C. FAILURE TO TAKE ALL OF THE
STEPS REQUIRED UNDER DELAWARE LAW MAY RESULT IN THE LOSS OF YOUR APPRAISAL
RIGHTS.
THE MERGER (PAGE 63)
At the effective time of the merger, HAC will merge with and into PRTS, and
each outstanding share of PRTS common stock will be canceled and converted into
the right to receive $1.50 in cash, except for shares held by stockholders who
perfect their appraisal rights under Delaware law, shares of common stock held
by the Acquisition Group and any shares of common stock held in our treasury.
Each share of common stock of HAC then issued and outstanding will, by
virtue of the merger and without any action on the part of HAC, become one fully
paid and non-assessable share of common stock of PRTS, the surviving
corporation.
PAYMENT FOR STOCK CERTIFICATES (PAGE 60)
Promptly after the merger, the paying agent for the merger will send a
letter of transmittal to you to be used for surrendering your PRTS stock
certificates in exchange for the merger consideration. You should not send in
your PRTS stock certificates until you receive the letter of transmittal.
PURPOSES AND STRUCTURE OF THE MERGER (PAGE 52)
The principal purposes of the merger are to permit PRTS stockholders to
realize cash for their shares in an amount substantially in excess of the market
price at which their shares traded just prior to the announcement of the signing
of the merger agreement and to permit the Acquisition Group to increase its
ownership of PRTS from approximately 64.23% to 100%. The proposed transaction
has been structured as a going private cash merger of HAC into PRTS. PRTS will
be the surviving corporation in the merger and, upon completion of the merger,
will be a privately-held, wholly-owned subsidiary of Hammond I. The proposed
transaction has been structured as a going private transaction to permit the
Acquisition Group to own 100% of a privately-held corporation and as a cash
merger in order to provide the Unaffiliated Stockholders with cash for all of
their shares.
RECOMMENDATIONS OF THE SPECIAL COMMITTEE AND OUR BOARD OF DIRECTORS (PAGE 40)
The Special Committee of our Board of Directors, consisting of three
non-employee, non-officer directors of PRTS, was formed to consider and evaluate
the proposed merger. The Special Committee has determined unanimously that the
merger consideration is fair from a financial point of view to our Unaffiliated
Stockholders and recommended to our Board of Directors that it declare the
merger advisable and in the best interests of PRTS and our Unaffiliated
Stockholders, approve the merger agreement, and recommend to our stockholders to
vote to adopt and approve the merger agreement. Our Board of Directors, based in
part on the unanimous recommendation of the Special Committee, has unanimously
(with Mr. Hammond not participating in the discussion and abstaining from
voting) determined that the merger consideration is fair from a financial point
of view to our Unaffiliated Stockholders and that the merger is advisable and in
the best interests of PRTS and Unaffiliated Stockholders and declared that the
merger agreement is advisable. Accordingly, our Board of Directors has approved
the merger agreement and unanimously (other than Mr. Hammond, who abstained from
voting) recommends that you vote "FOR" the proposal to adopt and approve the
merger agreement.
For a discussion of the material factors considered by the Special
Committee and our Board of Directors in reaching their conclusions and the
reasons why the Special Committee and our Board of Directors determined that the
merger is fair, see page 40 ("Special Factors - Recommendation of the Special
Committee and the Board of Directors; Fairness of the Merger") and page 52
("Special Factors - Purpose and Structure of the Merger").
12
OPINION OF FINANCIAL ADVISOR TO SPECIAL COMMITTEE (PAGES 46 - 52)
In deciding to approve the terms of the merger agreement and the merger,
one of the various factors that the Special Committee and the Board of Directors
considered was the opinion of the Special Committee's independent financial
advisor, vFinance Investments, Inc. ("vFinance"). Based upon and subject to the
considerations and limitations set forth in the vFinance opinion delivered on
August 26, 2002 and reaffirmed as of the date of this proxy statement, the $1.50
per share merger consideration to be received by the Unaffiliated Stockholders
in the proposed merger was fair, from a financial point of view, to our
Unaffiliated Stockholders. The complete vFinance opinion, including applicable
limitations and assumptions, describes the basis for the opinion and is attached
as Appendix B to this proxy statement. YOU ARE URGED TO READ THE ENTIRE OPINION
CAREFULLY. vFinance's opinion is directed to the Special Committee and does not
constitute a recommendation to any stockholder as to any matter relating to the
merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER (PAGE 55)
In considering the recommendation of the Special Committee and our Board of
Directors with respect to the merger and the merger agreement, you should be
aware that Mr. Hammond, a director, executive officer and the controlling person
of PRTS, has interests in the merger that are different from or in addition to
the interests of our stockholders generally, and which present actual, apparent
or potential conflicts of interest in connection with the merger. For example:
As a result of the completion of the merger, Mr. Hammond and his affiliates
will beneficially own 100% of our outstanding common stock, his aggregate
interest in our net book value will increase from approximately 64% to 100%
(from $1.44 to $1.66 of our net book value per share as of September 30, 2002);
and he will have the ability to benefit solely from our future earnings and
profits, if any, and any divestitures, strategic acquisition or other corporate
opportunities that may be pursued by us in the future;
Mr. Hammond, Chairman of the Board, Chief Executive Officer, President,
Secretary and Treasurer of PRTS, will continue as Chairman of the Board, Chief
Executive Officer, President, Secretary and Treasurer of PRTS after the merger
and the other members of the current management of PRTS will continue as members
of management of the surviving corporation; and
In connection with the merger, all outstanding options and warrants
(including those held by our directors and executive officers) will be canceled
to the extent not exercised prior to the effective time of the merger in
exchange for an amount of cash, if any, determined by multiplying (i) the
excess, if any, of $1.50 over the per share exercise price of the option,
multiplied by (ii) the number of shares of common stock subject to the option or
warrant, net of any applicable withholding taxes, except for currently
outstanding warrants which do not expire by their terms.
The Special Committee and the Board of Directors were aware of these
interests and considered them, among other factors, when approving the merger
agreement. These interests are more fully described under "Special
Factors-Interests of Certain Persons in the Merger" beginning on page 55.
THE COMPANY'S POSITION AS TO THE FAIRNESS OF THE MERGER (PAGE 40)
We believe the merger and the merger consideration to be fair from a
financial point of view to our Unaffiliated Stockholders. In reaching this
determination we have relied on numerous factors, including:
o the merger consideration of $1.50 per share represents a 30% premium
over $1.15, the closing sale price of our common stock on August 23,
2002, the last trading day prior to our August 26, 2002 announcement
of the proposed merger; a 70% premium to the average closing price
of $0.88 per share for our common stock for the one-year period
prior to August 26, 2002; and a 108% premium over $0.72, the per
13
share closing sale price of our common stock on April 9, 2002, the
last trading day prior to the announcement of Mr. Hammond's offer.
For additional information, see page 69 (Markets and Market Price
of the Common Stock and Related Stockholder Matters);
o the approval of the merger by all of the members of the Special
Committee and the fact that the members of the Special Committee,
based on the factors described in page 40 ("Special Factors -
Recommendation of the Special Committee and the Board of Directors;
Fairness of the Merger"), determined that the merger is fair and in
the best interests of PRTS and our Unaffiliated Stockholders and
declared that the merger agreement is advisable;
o the merger agreement was extensively negotiated between the
representatives of the Special Committee and the representatives of
Hammond I; and
o the members of the Special Committee who negotiated the transaction
on behalf of our Unaffiliated Stockholders are not officers or
employees of PRTS and are not affiliated with Hammond I.
THE ACQUISITION GROUP'S POSITION AS TO THE FAIRNESS OF THE MERGER (PAGE 46)
The Acquisition Group believes the merger consideration to be fair to the
Unaffiliated Stockholders. In reaching this determination, the Acquisition Group
relied on numerous factors, including among other things the per share price to
be paid on PRTS common stock in the merger represents a 30% premium over the
reported closing sale price of $1.15 for shares of PRTS common stock on August
23, 2002, which was the last day on which shares of PRTS common stock traded
prior to our August 26, 2002 announcement of the execution of the merger
agreement, a 70% premium to the average closing price of $0.88 per share for our
common stock for the one year period prior to August 26, 2002, and a 108%
premium over the reported closing price of $0.72 for shares of PRTS common stock
on April 9, 2002, the day prior to the initial offer by the Acquisition Group.
For a detailed discussion of the material factors upon which these beliefs
are based, see page 46 ("Special Factors - Position of the Acquisition Group as
to the Fairness of the Merger").
FINANCING OF THE MERGER; FEES AND EXPENSES OF THE MERGER (PAGE 57)
The total amount of funds required to consummate the merger and to pay
related fees and expenses is estimated to be approximately $8.4 million. The
Acquisition Group, through the cash reserves of PRTS which will become available
immediately upon the effectiveness of the merger, has sufficient funds available
to pay the merger consideration and pay its portion of the fees and expenses
incurred in connection with the merger. The merger is not conditioned on any
financing arrangements.
THE MERGER AGREEMENT (PAGE 63 - 69)
Generally -- The merger agreement provides for HAC to merge with and into
PRTS. PRTS will be the surviving corporation in the merger, and, as a result of
the merger, the Acquisition Group will own 100% of the common stock of PRTS. In
the merger, HAC's certificate of incorporation, as in effect immediately prior
to the effective time, shall be the certificate of incorporation of PRTS,
provided, that HAC's certificate of incorporation will be amended by the
certificate of merger to read as follows: "The name of the corporation is:
PartsBase, Inc." As of the completion of the merger, the bylaws of HAC will be
the bylaws of PRTS.
Effective Time - The merger will be consummated and become effective at the
time a certificate of merger is filed with the Secretary of State of the State
of Delaware or such later time as specified in the certificate of merger.
14
Competing Transactions - Nothing contained in the merger agreement shall
prohibit us from, prior to the date of the stockholder's meeting, doing any of
the following:
o furnishing information or entering into discussions with any person
that makes an unsolicited written proposal to us with respect to a
competing transaction, which could reasonably be expected to result
in a superior proposal (as defined in the merger agreement), if the
failure to take such action would be inconsistent with the Board of
Directors' and the Special Committee's fiduciary duties to PRTS
stockholders. Prior to furnishing information to, or entering into
negotiations with, such person, we will provide reasonable notice to
Hammond I that we are furnishing information or negotiating with
such person, and will have received from such person a fully
executed confidentiality agreement;
o complying with Rule 14d-9 or Rule 14e-2 under the Securities
Exchange Act of 1934, as amended with regard to a tender offer or
exchange offer;
o failing to make or withdrawing or modifying our recommendation to
the PRTS common stockholders that they adopt and approve the merger
agreement; or
o recommending an unsolicited, bona fide proposal with respect to a
competing transaction which could reasonably be expected to result
in a superior proposal, if the failure to take such action would be
inconsistent with the Board of Directors' and the Special
Committee's fiduciary duties to the stockholders.
Taking these actions, however, may result in reimbursement for expenses of
Hammond I. See page 57 ("Special Factors - Fees and Expenses of the Merger").
Conditions -- The completion of the merger depends on several conditions
being satisfied or waived, including, among others, the following:
o the adoption and approval of the merger agreement by the affirmative
vote of the holders of a majority of our outstanding shares entitled
to vote thereon, and a majority of the shares held by the
Non-Acquisition Group Stockholders entitled to vote thereon are not
voted against the merger agreement. The Acquisition Group owns
64.23% of the outstanding shares of PRTS common stock, and has
voting control over an additional 9.78%, for a combined voting
percentage of 74.01% and has indicated to our Board of Directors its
intention to adopt and approve the merger agreement and the merger;
o the absence of any legal prohibition against the merger;
o the material accuracy of the representations and warranties of the
parties contained in the merger agreement and the material
compliance with the obligations of the parties to be performed under
the merger agreement;
o our stockholders asserting their appraisal rights with respect to
PRTS common stock shall constitute less than 5% of all shares of
PRTS common stock outstanding immediately prior to the effective
time;
o a material adverse effect with respect to our operations has not
occurred, and no facts or circumstances arising have occurred which,
individually or in the aggregate, could reasonably be expected to
have a material adverse effect on us;
o obtaining any necessary third party consents and approvals; and
15
o no restraining order or permanent injunction or other order issued
by any court of competent jurisdiction or other legal prohibition
preventing the consummation of the merger are in effect; provided
that, subject to the merger agreement, we and HAC use reasonable
efforts to have any such injunction, order, restraint or prohibition
vacated.
Fees, Expenses and Other Payments - If the merger is consummated, all costs
and expenses incurred in connection with the merger agreement are to be borne by
the party which incurs those costs and expenses. We have agreed to pay Hammond I
an amount equal to all of Hammond I's expenses, if the merger agreement is
terminated:
o because our common stockholders do not adopt and approve the merger
and the merger agreement at the stockholders' meeting and at the
time of the stockholders' meeting there exists a proposal with
respect to a competing transaction which either (1) our Board of
Directors or the Special Committee has not publicly opposed or (2)
is consummated or a definitive agreement providing for such
competing transaction is entered into at any time prior to or within
12 months after the termination of the merger agreement;
o because we entered into an agreement with respect to a competing
transaction which the Board of Directors has determined is a
superior proposal (as defined in the merger agreement);
o by Hammond I, if the Special Committee or our Board of Directors has
withdrawn, modified or adversely changed its approval or
recommendation of the merger and the merger agreement or recommended
or approved a competing transaction or superior proposal, entered
into an agreement with respect to a competing transaction or
superior proposal (as defined in the merger agreement), or shall
have resolved to do any of the foregoing;
o by Hammond I, if we fail to reject a tender offer or exchange offer
proposal by a third party within ten days of its commencement or the
date such proposal is first publicly disclosed; and
o by us, upon the Special Committee and our Board of Directors'
authorization to enter into a written agreement with respect to a
competing transaction that the Special Committee and our Board of
Directors have determined to be a superior proposal.
CERTAIN EFFECTS OF THE MERGER (SEE PAGE 54)
Upon the effective time of the merger, current PRTS stockholders, other
than the Acquisition Group, will cease to have ownership interests in PRTS or
rights as PRTS stockholders. Therefore, the current stockholders of PRTS, other
than the Acquisition Group, will not participate in any future earnings or
growth of PRTS and will not benefit from any appreciation in value of PRTS. Upon
completion of the merger, the Acquisition Group is expected to own 100% of the
capital stock of the surviving corporation outstanding immediately after the
merger. As a result of the merger, the common stock will cease to be quoted on
the Nasdaq National Market.
ACCOUNTING TREATMENT (PAGE 57)
The merger will be accounted for under the purchase method of accounting
whereby the majority interest will be recorded at historical cost and the
minority interest as prescribed by Statement of Financial Accounting Standards
No. 141, Business Combinations and Emerging Issues Task Force Abstract 88-16,
Basis in Leveraged Buyout Transactions. For a discussion of the accounting
treatment for the merger see page 57 ("Special Factors - Accounting Treatment of
the Merger").
16
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO OUR STOCKHOLDERS (PAGE 57)
The receipt of $1.50 in cash for each outstanding share of common stock
will be a taxable transaction for U.S. federal income tax purposes and under
most state, local, foreign and other tax laws. For U.S. federal income tax
purposes, each of our stockholders generally will realize taxable gain or loss
as a result of the merger measured by the difference, if any, between the tax
basis of each share of our common stock owned by such stockholder and $1.50 for
each share of common stock owned by such stockholder. For additional information
regarding material U.S. federal income tax consequences of the merger to our
stockholders, see page 57 ("Special Factors - Material U.S. Federal Income Tax
Consequences").
LITIGATION CHALLENGING THE MERGER (PAGE 58)
In April, May and June 2002, several PRTS stockholders, individually and as
purported representatives of all of the stockholders of PRTS except the
Acquisition Group, filed a total of four purported class action lawsuits against
PRTS, the members of the Board of Directors and specified officers of PRTS. Two
of the lawsuits were filed in the Court of Chancery in the State of Delaware,
and the other two were filed in the Circuit Court of the 15th Judicial Circuit
in Palm Beach County, Florida (the "Florida Court"). These lawsuits allege,
among other things, that the defendants breached their fiduciary duties to the
stockholders of PRTS in connection with the merger on the terms then proposed,
that the proposed merger is unfair and that the PRTS directors breached their
fiduciary duties by failing to fully disclose material non-public information
related to the value of PRTS and by engaging in self-dealing. Generally, each of
the complaints seeks an injunction, damages, costs and other relief. In October
2002, the Florida court approved consolidation of the two lawsuits filed in
Florida into a single action. In October 2002, the parties in the Florida
lawsuits entered into a Memorandum of Understanding, which provided for an
agreement-in-principle to settle the class action lawsuits. The Memorandum of
Understanding provided for the parties to enter a joint stipulation and such
other documentation as may be required to obtain final approval of the Florida
Court. The Memorandum of Understanding specifies the terms of the settlement to
be:
o the per share consideration for the merger shall be $1.41;
o the merger shall require the approval by the majority of the
outstanding shares of PRTS common stock entitled to vote at the
special meeting including shares owned or controlled by the
Acquisition Group and it also shall require that a majority of the
shares owned by Non-Acquisition Group Stockholders are not voted
against the merger; and
o the defendants may, at their sole discretion, terminate the proposed
settlement in the event PRTS stockholders who own five percent (5%)
of the shares of PRTS common stock, in aggregate, elect to opt-out
of the settlement.
In November 2002, the parties in the Florida lawsuits agreed to dismiss the
Florida lawsuits and to pursue a class action settlement in Delaware. The
parties are currently drafting a Joint Stipulation of Settlement which will
contain substantially the same terms of settlement as the October Memorandum of
Understanding . The settlement of the class action lawsuits is subject to the
final approval of the Delaware Court. If approved by the Delaware Court, the two
lawsuits filed in Delaware will be dismissed with prejudice, and the settlement
of the class action lawsuits will release the defendants in all such actions
from further liability relating to the merger. Partsbase anticipates that the
hearing to settle the class action lawsuits will take place in the Delaware
Court during the first quarter of 2003.
17
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This proxy statement contains certain forward-looking statements. Because
these forward-looking statements are being made by us in connection with a going
private transaction, the safe harbor created by Section 21E of the Exchange Act
does not apply to these statements. Such forward-looking statements involve
risks and uncertainties and include, but are not limited to, statements
regarding future events and our plans, goals and objectives. Such statements are
generally accompanied by words such as "intend," "anticipate," "believe,"
"estimate," "expect" or similar terms. Our actual results may differ materially
from such statements. Factors that could cause or contribute to such differences
include, without limitation, the following:
o our plans, strategies, objectives, expectations and intentions are
subject to change at any time at its discretion; and
o other risks and uncertainties indicated from time to time in our
filings with the Securities and Exchange Commission (the "SEC").
Although we believe that the assumptions underlying our forward-looking
statements are reasonable, any of the assumptions could prove inaccurate and,
therefore, we cannot make any assurances that the results contemplated in such
forward-looking statements will be realized. The inclusion of such
forward-looking information should not be regarded as a representation by PRTS
or any other person that the future events, plans or expectations contemplated
by PRTS will be achieved. Furthermore, past performance is not necessarily an
indicator of future performance. Except for our ongoing obligations to disclose
material information as required by the federal securities laws, we undertake no
obligation to release publicly any revisions to any forward-looking statements
to reflect events or circumstances after the date of this proxy statement or to
reflect the occurrence of unanticipated events.
18
SELECTED FINANCIAL INFORMATION
The following selected historical consolidated financial data as of and for
the years ended December 31, 2001, 2000, 1999, 1998 and 1997 has been derived
from our audited consolidated financial statements. The unaudited selected
consolidated financial information presented below, as of and for the nine
months ended September 30, 2002, is from our unaudited condensed consolidated
financial statements. The selected consolidated financial data set forth below
should be read along with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and notes
thereto contained in our Annual Report on Form 10-K for the year ended December
31, 2001 and our Quarterly Report on Form 10-Q for the quarterly ended September
30, 2002, which are attached to this proxy statement as Appendix D and Appendix
E, respectively, and are deemed to be a part hereof. Please note that historical
results are not necessarily indicative of the results to be expected in the
future.
Consolidated Statements of Operations Data
Nine Months For The Years Eneded December 31,
ended -----------------------------------------------------------------
September 30, 2002 2001 2000 1999 1998 1997
------------------ ------------- ----------- ---------- --------- ---------
Net revenues $6,678,587 $ 5,619,121 $ 4,097,585 $ 362,224 $ 3,504 $ 2,861
-------------- ------------ ------------- ------------ ---------- ---------
Cost of revenues 5,558,768 4,451,631 6,140,741 1,412,532 43,462 104,041
Stock-based compensation expense --- 247,506 2,308,440 1,799,139 --- ---
-------------- ------------ ------------- ------------ ---------- ---------
Total cost of revenues 5,558,768 4,699,137 8,449,181 3,211,671 43,462 104,041
-------------- ------------ ------------- ------------- ---------- ---------
Gross profit (loss) 1,119,819 919,984 (4,351,596) (2,849,447) (39,958) (101,180)
-------------- ------------ ------------- ------------- ---------- ---------
Operating expenses:
General and administrative expenses 3,713,783 7,224,266 8,920,354 1,293,091 108,163 90,452
Stock-based compensation expense 1,090 72,931 1,944,398 899,821 --- ---
Litigation and other related costs 150,000 457,500 --- --- --- ---
Relocation expenses and
abandonment costs 281,906 --- --- --- --- ---
-------------- ------------ ------------- ------------- ---------- ---------
Total operating expenses 4,146,779 7,754,697 10,864,752 2,192,912 108,163 90,452
-------------- ------------ ------------- ------------- ---------- ---------
Operating loss (3,026,960) (6,834,713) (15,216,348) (5,042,359) (148,121) (191,632)
Privatization expenses 506,092 --- --- --- --- ---
Other income (expense), net 336,958 1,222,480 1,762,367 (870,675) --- ---
-------------- ------------- ------------- ------------- ---------- ---------
Net loss before value of preferred stock
beneficial conversion feature (3,196,094) (5,612,233) (13,453,981) (5,913,034) (148,121) (191,632)
Value of preferred stock beneficial
conversion feature --- --- --- (1,902,375) --- ---
-------------- ------------- -------------- ------------- ---------- ---------
Net loss attributable to common
stockholders $(3,196,094) $(5,612,233) $(13,453,981) $(7,815,409) $(148,121) $(191,632)
============== ============= ============= ============= ========== ==========
Basic and diluted net loss per share $(0.23) $(0.40) $(1.03) $(0.84) $--- $---
============== ============== ============= ============= ========== ==========
Weighted average of common shares
outstanding 13,996,665 14,108,895 13,053,755 9,251,250 --- ---
============== ============== ============= ============= ========== ===========
19
Consolidated Balance Sheet Data
As of December 31,
September 30, ----------------------------------------------------------------------
2002 2001 2000 1999 1998 1997
--------------- -------------- ------------- ------------- ---------- -----------
Cash and cash equivalents $ 22,594,237 $ 23,851,593 $ 23,045,491 $ 735,276 $ --- $ ---
Investments at amortized cost
(current portion) --- 900,073 7,139,052 --- --- ---
Working capital (deficiency) 20,791,955 22,762,318 27,652,259 (687,172) (19,044) (1,709)
Total assets 26,538,738 29,163,770 37,281,553 4,729,295 6,084 7,848
Accumulated deficit (30,024,986) (26,828,892) (21,216,659) (7,762,678) (411,659) (263,538)
Total stockholders' equity
(deficiency) 23,243,305 26,439,487 32,347,901 1,541,916 (19,044) 6,139
20
SPECIAL MEETING
---------------
DATE, TIME AND PLACE
This proxy statement is furnished in connection with the solicitation of
proxies by our Board of Directors for a special meeting of common stockholders
to be held on ________, 2003 at _______ _.m. local time, at 905 Clint Moore
Road, Boca Raton, Florida 33487, or at any adjournment of the special meeting.
Shares of our common stock represented by properly executed proxies received by
us will be voted at the special meeting or any adjournment of the special
meeting in accordance with the terms of such proxies, unless revoked.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
The purpose of the special meeting is to vote upon a proposal to approve
the merger and the merger agreement. If the merger and the merger agreement are
approved by our stockholders and the other conditions to the merger are
satisfied or waived, HAC will merge with and into PRTS and each share of our
common stock currently held by our stockholders will be converted into $1.50 in
cash to be issued by us in payment of the merger consideration, other than
shares owned by the Acquisition Group and shares as to which appraisal rights
have been validly exercised. The merger agreement, as amended is attached to
this proxy statement as Appendix A. See also "The Merger Agreement" - beginning
on page 63 of this proxy statement. The Special Committee and the Board have
approved the merger and the merger agreement and recommend a vote FOR adoption
and approval of the merger and the merger agreement.
Representatives of our independent auditors are not expected to be present
at the special meeting.
THE BOARD OF DIRECTORS, ACTING ON THE UNANIMOUS RECOMMENDATION OF THE
SPECIAL COMMITTEE, HAS APPROVED THE TERMS OF THE MERGER AGREEMENT AND THE
PROPOSED MERGER. THE BOARD OF DIRECTORS, BASED IN PART ON THE UNANIMOUS
RECOMMENDATION OF THE SPECIAL COMMITTEE, RECOMMENDS THAT YOU VOTE FOR THE
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER.
RECORD DATE, OUTSTANDING VOTING SECURITIES AND VOTING RIGHTS
The Board has set the close of business on ______________2002 as the record
date (the "Record Date") for determining stockholders of the Company entitled to
notice of and to vote at the special meeting. As of the Record Date, there were
______ holders of record of PRTS common stock, and 14,012,302 shares of PRTS
common stock outstanding, 9,000,000 of which were owned by the Acquisition
Group, and an additional 1,371,200 of which will be voted by the Acquisition
Group, together representing approximately 74.01% of the total number of shares
entitled to vote at the special meeting. The Acquisition Group has indicated
that it intends to vote all of foregoing shares of PRTS common stock "FOR" the
adoption and approval of the merger agreement and the transactions contemplated
by the merger agreement at the special meeting. Other than Mr. Hammond, none of
our directors or officers have informed us whether they currently intend to vote
any PRTS shares owned or controlled by them for or against the merger or the
merger agreement, nor have any of them made a recommendation, individually,
either in support of or opposed to the merger or the merger agreement.
Each outstanding share of PRTS common stock entitles its holder to one vote
on all matters properly coming before the special meeting. Any stockholder
entitled to vote may vote either in person or by properly executed proxy. A
majority of the outstanding shares of common stock entitled to vote, represented
in person or by proxy, will constitute a quorum at the special meeting.
Abstentions and broker non-votes (i.e., shares held by brokers in "street name",
voting on certain matters due to discretionary authority or instructions from
the owner, but not voting on other matters due to lack of authority to vote on
such matters without instructions from the owner) are counted for the purpose of
establishing a quorum at the special meeting.
21
Required Votes
The merger agreement provides that the merger must be approved by two
separate votes:
1. the affirmative vote by the holders of at least a majority of the
outstanding shares of PRTS common stock, and
2. a majority of the shares of PRTS common stock held by Non-Acquisition
Group Stockholders are not voted against the merger and the merger
agreement.
Approximately 74.01% of the outstanding shares of our common stock are
beneficially owned or voted by the Acquisition Group, who have indicated that
they will vote all such shares in favor of the merger and the merger agreement.
The Acquisition Group beneficially owns or has voting control over a sufficient
number of shares of our common stock to approve the merger and the merger
agreement under the first voting requirement.
Because the first voting requirement on the merger and merger agreement is
based upon the total number of outstanding shares of our common stock, the
failure to submit a proxy card (or to vote in person at the special meeting) or
the abstention from voting by a stockholder (including broker non-votes) will
have the same effect as a vote "Against" the merger and merger agreement.
Because the second voting requirement on the merger and the merger agreement is
based upon the votes actually cast "Against" the proposal by the Non-Acquisition
Group Stockholders, the failure to submit a proxy card (or to vote in person at
the special meeting) or the abstention from voting by a stockholder (including
broker non-votes) will have the effect as a "FOR" the merger on the outcome of
the second voting requirement.
APPRAISAL RIGHTS
Holders of PRTS common stock who do not vote in favor of the merger and who
perfect their appraisal rights under Delaware law will be entitled to receive
from the surviving corporation in the merger a cash payment in the amount of the
"fair value," determined in accordance with Delaware law, of such shares. After
the merger, such shares will not represent any interest in the surviving
corporation, other than the right to receive such cash payment. You will be able
to avail yourself of your appraisal rights only (i) if you do not vote in favor
of the merger and (ii) if you follow precisely the procedures set forth herein.
If you wish to exercise your appraisal rights or wish to preserve your right to
do so, you should review carefully the procedures of Section 262 of the Delaware
General Corporation Law, a copy of which is attached hereto as Appendix C, and
seek the advice of legal counsel. See "Special Factors--Appraisal Rights." (page
61)
PROXIES; REVOCATION OF PROXIES
Shares that are entitled to vote and are represented by a proxy properly
signed and received at or prior to the special meeting, unless subsequently
properly revoked, will be voted in accordance with the instructions indicated
thereon. If a proxy is signed and returned without indicating any voting
instructions, shares represented by the proxy will be voted for the proposal to
approve and adopt the merger agreement and the merger. The Board is not
currently aware of any business to be acted upon at the special meeting other
than as described in this proxy statement.
If you have given a proxy, you may revoke it by:
o on or before the business day prior to the special meeting,
delivering a later dated, signed proxy card or a written revocation
of such proxy to Mark Weicher, Chief Financial Officer, at our
executive offices at 905 Clint Moore Road, Boca Raton, Florida
33487;
22
o delivering a later dated, signed proxy card or a written revocation
to us at the special meeting;
o attending the special meeting and voting in person; or
o if you have instructed a broker to vote your shares, following the
directions received from your broker to change those instructions.
Revocation of the proxy will not affect any vote previously taken.
Attendance at the special meeting will not in itself constitute the
revocation of a proxy; to revoke you must vote in person at the
meeting.
EXPENSES OF PROXY SOLICITATION
We will bear the expenses in connection with the solicitation of proxies.
Upon request, we will reimburse brokers, dealers and banks, or their nominees,
for reasonable expenses incurred in forwarding copies of the proxy material to
the beneficial owners of shares of PRTS common stock which such persons hold of
record. Solicitation of proxies will be made principally by mail. Proxies may
also be solicited in person, or by telephone or facsimile, by our officers and
regular employees. Such persons will receive no additional compensation for
these services, but will be reimbursed for any transaction expenses incurred by
them in connection with these services. Proxies will not be solicited via the
Internet.
ADJOURNMENTS
Although it is not expected, the special meeting may be adjourned for the
purpose of soliciting additional proxies. Any adjournment of the special meeting
may be made without notice, other than by an announcement made at the special
meeting, by approval of the holders of a majority of the outstanding shares of
voting stock present in person or represented by proxy at the special meeting,
whether or not a quorum exists. PRTS is soliciting proxies to grant
discretionary authority to vote in favor of adjournment of the special meeting.
In particular, discretionary authority is expected to be exercised if the
purpose of the adjournment is to provide additional time to solicit votes to
approve and adopt the merger agreement and the merger.
THE BOARD OF DIRECTORS RECOMMENDS THAT PRTS STOCKHOLDERS VOTE IN FAVOR OF
THE PROPOSAL TO GRANT DISCRETIONARY AUTHORITY TO ADJOURN THE MEETING. No proxies
marked "AGAINST" the proposal to adopt and approve the merger agreement will be
voted in favor of a motion to adjourn or postpone the special meeting for the
purpose of soliciting further proxies in favor of adoption and approval of the
merger agreement.
PLEASE DO NOT SEND IN STOCK CERTIFICATES AT THIS TIME. IN THE EVENT THE
MERGER IS COMPLETED, PRTS WILL DISTRIBUTE INSTRUCTIONS REGARDING THE PROCEDURES
FOR EXCHANGING EXISTING PRTS STOCK CERTIFICATES FOR THE MERGER CONSIDERATION.
THE PARTIES TO THE MERGER
-------------------------
PARTSBASE, INC.
PRTS, a Delaware corporation, is an online provider of Internet
business-to-business e-commerce services for the aviation industry. Our global
e-commerce market place, sometimes referred to as our "e-marketplace" or "our
solution," provides our subscribers in more than 115 countries with the ability
to buy and sell new, used and overhauled aviation parts and products in
efficient, competitive and cost-effective matter. Since October 2001, we have
provided, for a fee, registered nurses to our hospital clients to supplement
their staff through RNpartners, Inc, a Florida corporation wholly owned by PRTS.
Hospitals generally obtain supplemental staffing from local temporary (per diem)
agencies. Our common stock is quoted on the Nasdaq National Market under the
symbol "PRTS". The address and telephone number of our principal executive
offices are:
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PartsBase, Inc.
905 Clint Moore Road
Boca Raton, Florida 33487
Telephone: (561) 953-0700
ROBERT A. HAMMOND, JR.
Robert A. Hammond, Jr. is the Chairman of the Board of Directors, Chief
Executive Officer, President, Secretary and Treasurer of PRTS (with which he has
been associated since its inception in 1998), and the Chairman of the Board of
Directors and the Chief Executive Officer of Hammond I and HAC. As of the Record
Date, Mr. Hammond or his affiliates owned 9,000,000 shares of PRTS common stock,
which represents approximately 64.23% of our outstanding common stock. Mr.
Hammond also owns 100% of Hammond I. The business address and telephone number
of Mr. Hammond are the same as the Company's.
HAMMOND I, INC.
The principal activity of Hammond I, a Florida corporation, is the
acquisition and ownership through its wholly owned entities and other
affiliates, of the common stock of PRTS. Mr. Hammond is its sole director,
officer and stockholder and is also Chief Executive Officer, President, and
Chairman of the Board of Directors. As of the Record Date, Mr. Hammond and his
affiliates owned 9,000,000 shares of our outstanding common stock, which
represents approximately 64.23% of our outstanding common stock. The address and
telephone number of Hammond I's principal executive offices are the same as the
Company's.
HAMMOND ACQUISITION CORP.
HAC is a Delaware corporation organized on May 15, 2002, wholly-owned by
Hammond I and formed solely for the purpose of effecting the transactions
contemplated by the merger and has not engaged in any business except in
furtherance of this purpose. Mr. Hammond is its sole director, officer and
stockholder and is also Chief Executive Officer, President and Chairman of the
Board of Directors. The address and telephone number of HAC's principal
executive offices are the same as the Company's.
For additional information, see page 55 ("Special Factors - Interests of
Certain Persons in the Merger").
SPECIAL FACTORS
---------------
BACKGROUND OF THE MERGER
Generally
---------
We originally incorporated as a Texas corporation in 1999 as PartsBase.com,
Inc. Prior to such time, we commenced operations in April 1996 as a division of
Aviation Labs. In June 2001 at our annual stockholders' meeting, the
stockholders voted to change our name to PartsBase, Inc. and to reincorporate in
Delaware. PRTS' core business is as an online provider of Internet
business-to-business e-commerce services for the aviation industry. Our global
e-marketplace provides a means to buy and sell new, used and overhauled aviation
parts in an efficient, competitive, and cost-effective manner.
In September 2000, we initiated and subsequently completed a buyback of
500,000 shares of our outstanding common stock at prevailing market prices in an
effort to stimulate interest in our common stock. In May 2001, we initiated a
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second buyback program of an additional 500,000 shares of our common stock at
prevailing market prices for the same reasons. Neither buyback program improved
the market for our common stock.
In September 2001, we incorporated in Florida, RNpartners, Inc., a
wholly-owned subsidiary, as a provider of critical care registered nurses for
temporary assignment to hospitals in Miami/Dade, Hillsborough, Orange, Palm
Beach and Broward counties of the State of Florida. RNpartners commenced
operations in October 2001.
In August 2001, we received notice from the Nasdaq National Market warning
that our common stock may be delisted because it failed to maintain a minimum
bid price of $1 over the last 30 consecutive trading days and failed to maintain
a minimum market value of the public float of $5,000,000. We were provided 90
calendar days, or until November 12, 2001, to regain compliance. On September
27, 2001, Nasdaq announced an across-the-board moratorium on minimum bid
requirements and public float requirements for continued listing on Nasdaq. On
February 15, 2002, we again received notice from the Nasdaq National Market
warning that our stock may be delisted because it failed to maintain a minimum
bid price of $1 over the last 30 consecutive trading days and failed to maintain
a minimum market value of public float of $5,000,000. On May 15, 2002, we
regained compliance with the Nasdaq Market Place Rule to maintain a minimum
market value of the public float of $5,000,000 and a minimum bid price of $1.00
and as a result Nasdaq National Market withdrew its delisting notification. We
believe that had Mr. Hammond not made offers to purchase our shares of common
stock, we may not have regained compliance with the Nasdaq Market Place Rules.
From time to time over the past two years, we received informal inquiries
initiated by both a competitor and an operator of a non-aviation related
e-commerce marketplace as to the possibility of purchasing our aviation
e-commerce marketplace. The Board of Directors considered the inquiries and
deemed that any formal discussions with and any potential due diligence by the
competitor could place the Company at a competitive disadvantage in the
marketplace. In addition, the Board of Directors deemed that a preliminary
material difference of opinion existed in the valuation of the Company proposed
by the inquiries and opted not to pursue the inquiries further.
During the latter part of 2001 and the first quarter of 2002, at Board of
Directors' meetings held prior to the Acquisition Group's offer, the Board
informally discussed the possibility of declaring a partial liquidating
dividend. The Board did not formally address the matter because the Board felt
at the time that the various cost reduction programs then recently implemented
by management were beginning to show results in reducing losses and could
ultimately result in the Company turning profitable in the foreseeable future,
with a corresponding beneficial effect upon the market price of the Company's
stock.
We believe that the public market has not responded to our positive actions
to reduce costs. Our actions included a reduction in the number of employees,
the implementation of a less costly commission policy, a reduction in senior
management compensation, and a substantial decrease in occupancy costs. These
actions resulted in decreased operating expenses. We believe these efforts did
not achieve their desired results because although they diminished our losses,
we have yet to attain profitability. In addition, despite our efforts, our
common stock has remained very thinly traded and provides little liquidity for
our stockholders. In addition, because of the low trading volume and illiquidity
of our common stock, we have been unable to utilize our common stock effectively
as a source of financing.
Events Leading Up to the Signing of the Merger Agreement
--------------------------------------------------------
On April 7, 2002, Mr. Hammond presented to the Company a written proposal
for a "going private" cash out merger that would pay to the stockholders of
PRTS, other than the Acquisition Group, $1.02 per share and would result in the
acquisition of all shares of PRTS capital stock other than shares held or
controlled by the Acquisition Group. Mr Hammond informed us that his proposal
was motivated by, among other considerations:
o A slower than anticipated adoption of the business model by the
aviation and aerospace community resulting in sluggish revenue
growth;
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o His belief that the finite size of the aerospace and aviation
community would not generate the revenues required to increase the
market capitalization of the Company; and
o Informal communications from various stockholders over time to
develop a strategy to maximize stockholder value in the event the
market did not respond to the actions taken by the Company.
All members of the Special Committee and Board of Directors, respectively,
were present at each Board of Directors meeting referenced below, with the
exception of Mr. Hammond, who was only present at the July 11, 2002 meeting of
the Board of Directors, and Mr. Van Hare, who was not present at the October 11,
2002 Board of Directors meeting.
At an April 9, 2002 meeting of the Board of Directors, the Board of
Directors concluded that it would be open to such a going private proposal. The
Board of Directors' determination to evaluate the going private proposal was
based on:
o our small public float and limited institutional following;
o our low trading volume;
o limited research coverage from securities analysts;
o our inability, at the time, to cause our common stock to trade above
the $1.00 minimum bid price on the Nasdaq National Market
notwithstanding our efforts undertaken as described above; and
o the Board of Directors' belief that there was little likelihood that
the liquidity of our common stock would improve in the future.
At the April 9, 2002 meeting, the Board of Directors concluded that Mr.
Hammond's proposal would involve a transaction in which Mr. Hammond had
interests that are in addition to, or different from, the interests of the
Unaffiliated Stockholders. Accordingly, the Board created the Special Committee
and appointed Pierre Narath, Edward McCartin, and Thomas Van Hare to serve as
members. None of Messrs. Narath, McCartin or Van Hare is an employee of the
Company or an employee of Mr. Hammond or any of his affiliates. The Special
Committee was authorized to review, evaluate and recommend to the Board what
actions, if any, should be taken with respect to Mr. Hammond's proposal and to
engage in negotiations with Mr. Hammond with respect to the proposal and to
consider strategic alternatives that might be available to PRTS. The Board
authorized the Special Committee to engage such third party advisors, including
legal counsel and financial advisors, as the Special Committee deemed
appropriate.
The Board of Directors agreed to pay to each member of the Special
Committee $25,000 for his services as a member of the Special Committee and to
reimburse the members for their out of pocket expenses incurred in the
performance of their duties on the Special Committee.
In determining whether to form an independent committee, the Board took
into consideration Mr. Narath's beneficial ownership of 40,000 shares of our
common stock and 20,000 options and Mr. Van Hare's beneficial ownership of
10,000 options; Mr. McCartin does not have any beneficial ownership of shares of
our common stock or options. The Board determined that Messrs. Narath and Van
Hare's beneficial ownership of our common stock would not prevent them from
providing independent advice on behalf of the Unaffiliated Stockholders in
connection with their service on the Special Committee. The Special Committee
elected Mr. Narath its Chairman and thereafter engaged vFinance as its financial
advisor and Epstein Becker & Green, P.C. ("EBG") as its legal counsel. vFinance
was selected as the Special Committee's financial advisor because of its (i)
expertise and experience; (ii) perceived ability to meet the Special Committee's
requirements; and (iii) lack of any previous business relationship with PRTS or
Mr. Hammond. EBG was selected as the Special Committee's legal counsel because
of its corporate securities experience and because it had not previously
represented either PRTS or Mr. Hammond.
26
On April 10, 2002, we issued a press release announcing that we had
received the proposal from Mr. Hammond and disclosed the proposed terms and the
creation of the Special Committee to review the proposal and to negotiate with
the Acquisition Group.
On April 16 and 17, 2002, we were served with two of the four purported
class action lawsuits. The lawsuits alleged that the Company's directors
breached their fiduciary duty to the plaintiffs in the purported class; sought
to enjoin PRTS from entering into the transactions proposed by Mr. Hammond; and
sought to recover unspecified damages resulting from the alleged breach of
fiduciary duties.
On April 24, 2002, we received a proposal from AirOperations.com, a
wholly-owned subsidiary of AirOperations International Corp. (collectively,
"AirOperations.com"), to acquire all of the outstanding shares of Common Stock
of PRTS at a price of $1.22 per share, or to pay the same aggregate
consideration to PRTS to acquire all of the assets of PRTS. Later that day, we
issued a press release announcing that we had received the AirOperations.com
proposal, setting forth the proposed terms and that it had been referred to the
Special Committee to review, ascertain its validity and to negotiate with
AirOperations.com on behalf of the Company.
On April 26, 2002, the Special Committee met to discuss the proposals
received from the Acquisition Group and AirOperations.com as well as the
purported class action lawsuits. The Special Committee determined to enter into
confidentiality agreements with AirOperations.com and any other third parties
interested in discussing a possible transaction regarding PRTS. The Special
Committee determined to meet with the Acquisition Group regarding its proposal
as well as to determine its interest in a possible sale of PRTS to a third
party, since Mr. Hammond owned or controlled approximately 65% of the
outstanding common stock of PRTS. The Special Committee asked vFinance to begin
the process of valuing PRTS in order to assess the fairness of any offer
received by PRTS.
On April 30, 2002, the Special Committee met to receive status reports from
its members and vFinance. The Special Committee decided to engage in further
discussions with the Acquisition Group and AirOperations.com. Mr. Narath also
reported that he expected to receive a proposal from a third party regarding the
possible acquisition of the Company's e-marketplace assets, rather than PRTS as
a whole.
On May 1, 2002, legal counsel for the Acquisition Group, Adorno & Yoss, P.
A. ("AY"), delivered to EBG, on behalf of the Special Committee, a proposed
agreement and plan of merger in connection with the Acquisition Group's offer to
acquire all of the outstanding shares of Common stock not owned or controlled by
the Acquisition Group. Later that day, Leonard Sokolow and Richard Rosenblum,
both of vFinance, and Pierre Narath met with Jose Bared, the President of
AirOperations.com, and Kevin Fitzgerald, its financial advisor, to ascertain
AirOperations.com's financial strength and its ability to consummate its offer.
Mr. Bared provided Mr. Narath with a letter from Republic Bank, indicating its
willingness to provide financing for AirOperations.com's offer.
On May 6, 2002, Messrs. Bared, Fitzgerald and Elias Rodriguez, Chief
Financial Officer of AirOperations.com, met with Messrs. Narath, Rosenblum and
Hammond at PRTS' offices to discuss in further detail AirOperations.com's offer.
Additionally, AirOperations.com provided Mr. Narath with a due diligence list
requesting pertinent financial and operational data about PRTS which was subject
to an executed confidentiality agreement.
On May 9, 2002, we were served with the third of the four purported class
action lawsuits.
On or about May 9, 2002, Mr. Narath met with Mr. Hammond and urged Mr.
Hammond to increase the price he was offering to pay for the shares of PRTS held
by the Unaffiliated Stockholders. Mr. Hammond and Mr. Narath also discussed the
status of the Company's competitive position and the effect of the downturn in
the aviation and aerospace markets on the Company's business.
On May 10, 2002, the Special Committee met to receive status reports from
its members, vFinance and EBG.
27
During May, we provided due diligence materials to AirOperations.com.
From May through August 2002, EBG and AY negotiated the terms of proposed
merger agreement between PRTS and the Acquisition Group. These negotiations
included various discussions regarding the ability of the Unaffiliated
Stockholders to influence the outcome of a vote on the merger agreement. The
initial draft of the merger agreement prepared by AY would have required only
the vote of a majority of the outstanding PRTS shares, which would have meant
that only Mr. Hammond's vote would have been necessary to approve the merger.
The Special Committee insisted that it would require a meaningful vote on the
part of the Unaffiliated Stockholders as a condition to the Special Committee
recommending any transaction with the Acquisition Group, and proposed that the
merger agreement include a provision requiring the approval of the merger by a
majority of the PRTS shares held by the stockholders unaffiliated with the
Acquisition Group. After numerous discussions regarding this issue, the Special
Committee and the Acquisition Group agreed that the merger agreement would
include a provision that the closing of the merger would be subject to the
condition that a majority of the PRTS shares held by the Non-Acquisition Group
Stockholders not be voted against the merger.
On May 15, 2002, AirOperations.com notified vFinance that its offer for
$1.22 would remain open while AirOperations.com continued its due diligence
review of PRTS.
On May 16, 2002, the Special Committee met. vFinance reported on the status
of discussions with AirOperations.com and the due diligence review being
undertaken by AirOperations.com. EBG summarized the status of the outstanding
purported class action litigation. The Special Committee also reviewed a letter
from a purported stockholder proposing that PRTS declare a special dividend
rather than entering into a transaction with the Acquisition Group. vFinance
noted that a liquidation analysis for PRTS would be included as part of its
evaluation report. EBG reported on the status of negotiations with AY regarding
a draft merger agreement with the Acquisition Group.
On May 29, 2002, PRTS received a letter from AirOperations.com reaffirming
its offer of $1.22 per share for all of the outstanding shares of PRTS common
stock.
On May 30, 2002, the Special Committee met to receive status reports from
Mr. Narath and vFinance, and to discuss further the proposal made by
AirOperations.com. The Special Committee determined that Mr. Narath should speak
with Mr. Hammond regarding the proposal from AirOperations.com.
On May 31, 2002, the Special Committee received a letter from Mr. Hammond
increasing the Acquisition Group's offer to $1.25 per share for all of the
outstanding shares of PRTS common stock not owned by or controlled by the
Acquisition Group, which offer would expire on June 7, 2002.
On June 3, 2002, the Special Committee met to receive updates from its
members and vFinance. The Special Committee determined to give AirOperations.com
until June 7, 2002 to respond to the increased offer from the Acquisition Group.
On June 3, 2002, Mr. Narath spoke with Kevin Fitzgerald, financial advisor
to AirOperations.com, who advised Mr. Narath that AirOperations.com would
respond to the Special Committee prior to June 6. In addition, on June 3, 2002
vFinance sent a letter to AirOperations.com asking if AirOperations.com was
interested in continuing discussions regarding the acquisition of the
outstanding shares common stock of PRTS at a price in excess of the $1.25 per
share offered by the Acquisition Group.
On June 5, 2002, the Special Committee received a letter from
AirOperations.com increasing its offer to $1.30 per share for all of the
outstanding shares of PRTS common stock.
28
On June 6, 2002, Messrs. Narath, and Rosenblum spoke with Mr. Bared,
President of AirOperations.com and Kevin Fitzgerald regarding
AirOperations.com's revised offer. Mr. Narath asked AirOperations.com to provide
comments before June 11, 2002 to a proposed form of merger agreement to be
supplied by EBG. Later that day, the Special Committee met to receive updates
from its advisors, vFinance and EBG. vFinance reported that AirOperations.com
had increased its offer from $1.22 per share to $1.30 per share for all of the
outstanding shares of PRTS common stock. EBG reported on the status of
negotiations with AY regarding the proposed merger agreement with the
Acquisition Group. The Special Committee discussed the possibility of including
a provision in the merger agreement which would provide the holders of the
outstanding shares of PRTS common stock not owned or controlled by Mr. Hammond
with some influence over the outcome of any vote on a merger agreement with the
Acquisition Group. The Special Committee determined to provide a draft merger
agreement to AirOperations.com for comment by AirOperations.com, to enable the
Special Committee to better compare the offers between the Acquisition Group and
AirOperations.com.
On June 7, 2002, EBG delivered a draft merger agreement to
AirOperations.com and its financial advisor, Kevin Fitzgerald. Later that day,
the Special Committee met to receive updates from its advisors, vFinance and
EBG. The Special Committee discussed requiring a provision in any agreement with
the Acquisition Group, which would provide the holders of the outstanding shares
of PRTS common stock not owned or controlled by the Acquisition Group with some
influence over the outcome of any vote on a merger agreement with the
Acquisition Group. The Special Committee met for a second time on June 7, 2002
to review the status of negotiations with AirOperations.com and the Acquisition
Group regarding their respective offers. EBG reported that AY had conveyed to
EBG that Mr. Hammond was not interested in selling his stock to
AirOperations.com at $1.30 per share and would not vote in favor of the
AirOperations.com transaction at any stockholder meeting. The Special Committee
determined to give AirOperations.com until June 11 to respond to the Special
Committee's request for comments to the proposed merger agreement with
AirOperations.com. On this date, Mr. Narath also suggested to Mr. Hammond that
he extend the deadline set forth in his offer letter.
At the June 7, 2002 Special Committee meeting, Mr. Rosenblum reported that
he had a telephone conversation with Kevin Fitzgerald, the financial advisor to
AirOperations.com, regarding the draft merger agreement which had been sent to
AirOperations.com. Mr. Narath informed the Special Committee that the Special
Committee received a letter from Harold Van Arnem, offering to purchase all of
the outstanding shares of PRTS common stock at a price of $1.30 per share. EBG
informed the Special Committee that it had received an e-mail from Kevin
Fitzgerald advising that legal counsel for AirOperations.com was reviewing the
proposed merger agreement and would provide comments on the proposed agreement
in the near future.
On June 11, 2002, AY reported to EBG that Mr. Hammond, upon being informed
about the offer by the Special Committee, spoke with Mr. Van Arnem and told Mr.
Van Arnem that Mr. Hammond was not interested in selling his shares of PRTS
common stock at $1.30 per share.
On June 12, 2002, the Special Committee met to discuss the status of the
outstanding offers from the Acquisition Group, AirOperations.com and Mr. Van
Arnem. vFinance reported to the Special Committee that the Acquisition Group's
offer of $1.25 per share fell below the range of prices which vFinance believed
would be fair from a financial standpoint to the Unaffiliated Stockholders. The
Special Committee determined to set the close of business on June 14, 2002 as
the deadline by which all three potential acquirers should submit their best and
final proposals and also indicate what comments, if any, they had to the form of
merger agreement provided to them by the Special Committee. The Special
Committee also discussed the idea that any proposal recommended by the Special
Committee to the Board of Directors should be made subject to settlement of all
outstanding purported class action suits on terms acceptable to PRTS and any
successful bidder.
On or about June 12, 2002, Mr. Narath discussed with Mr. Hammond the
possibility of Mr. Hammond increasing his proposed purchase price per share.
29
On June 13, 2002, EBG provided to Drew Levitt, legal counsel to Mr. Van
Arnem, a proposed form of merger agreement and advised Mr. Levitt that the
Special Committee had established a deadline of 5:00 p.m. Eastern Time on
Friday, June 14, 2002 for each interested party to submit its best and final
offer, together with the merger agreement that the party would be prepared to
sign without further changes.
On June 13, 2002, EBG had telephone conference with AY to advise AY of the
Special Committee's June 14 deadline.
On June 14, 2002, the Special Committee received a letter form Mr. Van
Arnem in which Mr. Van Arnem increased his offer to purchase all of the
outstanding shares of PRTS common stock not owned or controlled by Mr. Hammond
to a range of $1.50 to $1.75 per share, with the actual price to be based on the
results of Mr. Van Arnem's due diligence review of PRTS. Mr. Van Arnem
separately increased his offer to purchase all of the shares of PRTS common
stock owned by Mr. Hammond to $1.75 per share. Also on June 14, 2002, PRTS
entered into a confidentiality agreement with Mr. Van Arnem. Later that day, the
Special Committee received a letter from Mr. Hammond in which the Acquisition
Group increased its offer to purchase all of the outstanding shares of PRTS
common stock not owned and controlled by the Acquisition Group to $1.31 per
share. The Acquisition Group's offer was conditioned upon settlement of all
outstanding purported class action lawsuits and a vote of only a majority of all
outstanding shares being required for approval of a proposed merger agreement.
In addition, on June 14, 2002, the Special Committee received a letter from
AirOperations.com in which AirOperations.com increased its offer to purchase all
of the outstanding shares of PRTS common stock to $1.41 per share. The letter
stated that AirOperations.com saw no material issues with the form and content
of the proposed merger agreement but would want to add a termination fee to the
merger agreement. On June 14, 2002, EBG asked Mr. Levitt to provide the Special
Committee with a financial statement or some other evidence that Mr. Van Arnem
had reasonable basis to believe that he could obtain the financing necessary to
complete his proposed acquisition of all of the outstanding shares of PRTS
common stock.
During June and July 2002, PRTS provided due diligence materials to Mr. Van
Arnem and his representatives.
On June 17, 2002, the Special Committee met to review the outstanding
proposals from the Acquisition Group, AirOperations.com and Mr. Van Arnem. The
Special Committee determined that it would be in the best interest of the
stockholders of PRTS to continue discussions with all three interested parties.
On or about June 18, 2002, Messrs. Narath and Rosenblum discussed the
AirOperation.com offer with Mr. Hammond and whether this offer was made as part
of a roll-up of various aviation businesses.
On June 19, 2002, the Special Committee met to discuss procedures for
moving forward with discussions with the three interested bidders. The Special
Committee determined to require each bidder to deposit $200,000 as a refundable,
good faith deposit to be held by EBG as escrow agent no later than June 24,
2002, and to advise the three bidders that any bidder which failed to make such
a deposit would be treated by the Special Committee as having withdrawn its bid.
From June 19, 2002 through June 24, 2002, EBG negotiated the terms of the
deposit escrow agreements with legal counsel for the three bidders.
On June 20, 2002, PRTS was served with the fourth of the four purported
class action lawsuits.
On June 24, 2002, EBG received an e-mail from Mr. Levitt setting forth an
additional proposal from Mr. Van Arnem. Pursuant to Mr. Levitt's e-mail, Mr. Van
Arnem, as an alternative to his offer to acquire all of the outstanding shares
PRTS common stock, offered to acquire all of the assets related to the Company's
e-marketplace, including goodwill, cash, customers, contracts, and other assets.
The proposed purchase price was $5,000,000, which could be adjusted downward to
reflect results from this business for the period ending June 30, 2002.
30
On June 24, 2002, the Special Committee received an executed escrow
agreement from Mr. Hammond. On June 25, 2002, EBG received Mr. Hammond's
$200,000 good faith deposit.
On June 24, 2002, EBG received a letter from Juan Diaz, legal counsel for
AirOperations.com. Mr. Diaz's letter stated that AirOperations.com did not
object to depositing $200,000 as a good faith refundable deposit, but would
require that Mr. Diaz serve as escrow agent.
On June 25, 2002, vFinance delivered to the Special Committee a draft
valuation analysis of PRTS. This draft report set forth the methodology used by
vFinance to value PRTS, as well as the activities undertaken by vFinance in the
course of preparing its valuation. The information set forth in the report was
substantially similar to the information included in vFinance's final report
delivered to the Special Committee and the Board of Directors on August 26, 2002
and summarized in "Opinion Of Special Committee's Financial Advisor".
On June 25, 2002, the Special Committee received a signed escrow agreement
from Mr. Van Arnem. On June 26, 2002, EBG received Mr. Van Arnem's $200,000
deposit.
On June 25, 2002, EBG received a letter from Mr. Diaz stating that
AirOperations.com was prepared to move forward with a mutually agreeable
acquisition agreement and advised EBG that AirOperations.com had delivered a
check in the amount of $200,000 made payable to Mr. Diaz's attorney trust
account, to be held by Mr. Diaz. On June 25, 2002, EBG sent a letter to Mr. Diaz
advising Mr. Diaz that the deposit of $200,000 by AirOperations.com into Mr.
Diaz's trust account did not meet the requirements of the Special Committee. EBG
further advised Mr. Diaz that Mr. Hammond and Mr. Van Arnem had each signed the
escrow agreement and deposited $200,000 with EBG as escrow agent, and that if
AirOperations.com did not execute the same escrow agreement and deliver a
$200,000 deposit by June 26, 2002, the Special Committee, in accordance with its
guidelines established for all interested parties, would consider the proposal
made by AirOperations.com to be withdrawn. EBG reiterated this position in a
second letter to Mr. Diaz dated June 26, 2002. On June 26, 2002, EBG received a
letter from Mr. Diaz again stating that AirOperations.com was going to have the
$200,000 deposit held by Mr. Diaz. On June 26, 2002, EBG sent a third letter to
Mr. Diaz stating that the Special Committee required that all deposits by
prospective bidders be held by EBG.
On June 27, 2002, the Special Committee met to review the status of the
three outstanding bidders. EBG reported that it had received deposits and
executed escrow agreements from Mr. Hammond (on behalf of the Acquisition Group)
and Mr. Van Arnem, but that AirOperations.com had failed to deliver a signed
escrow agreement or a deposit to EBG. Mr. Diaz informed EBG that the reason
AirOperations.com had refused to sign the escrow agreement was that it wanted to
have Mr. Diaz, rather than EBG, serve as escrow agent. This was unacceptable to
the Special Committee. According to its previously announced policy, the Special
Committee determined to treat AirOperations.com as having withdrawn its proposal
to acquire the outstanding shares of PRTS common stock, and directed EBG to
convey this decision to counsel for AirOperations.com. Mr. Narath reported on
his attempts to contact Mr. Van Arnem and also reported that Mr. Van Arnem and
Mr. Hammond had a direct discussion regarding Mr. Van Arnem's offers. Mr. Narath
reported that Mr. Hammond informed Mr. Van Arnem that Mr. Hammond did not
consider Mr. Van Arnem's offer for Mr. Hammond's PRTS shares to be sufficient
given Mr. Hammond's majority interest in PRTS. The Special Committee discussed
Mr. Van Arnem's two outstanding offers to acquire all of the outstanding shares
of PRTS common stock and to acquire the e-marketplace assets.
On June 27, 2002, EBG sent a letter to Mr. Diaz advising Mr. Diaz that
since AirOperations.com had decided not to execute an escrow agreement and
deposit $200,000 with EBG as a good faith, refundable deposit, the Special
Committee had considered the proposal made by AirOperations.com to be withdrawn.
On July 1, 2002, the Special Committee received a letter from AY stating
that the Acquisition Group intended to withdraw its offer to acquire all of the
outstanding shares of PRTS common stock not owned or controlled by the
Acquisition Group unless PRTS and the Acquisition Group entered into a
definitive merger agreement by July 8, 2002.
31
On July 3, 2002, the Special Committee met to review the status of ongoing
negotiations with the Acquisition Group and Mr. Van Arnem, and Mr. Van Arnem's
due diligence review of PRTS. The Special Committee reviewed with Berman Rennert
Vogel & Mandler, P.A. ("BRVM"), legal counsel to PRTS and Mark Weicher, the
Chief Financial Officer of PRTS, some of the information to be delivered to Mr.
Van Arnem. The Special Committee determined that Messrs. McCartin and Narath
would call Mr. Hammond to continue negotiations with the Acquisition Group
regarding two outstanding issues, the stockholder vote that would be required to
approve any proposed merger agreement with Mr. Hammond, and the proposal to
require the settlement of the outstanding purported class action litigation as a
condition to the closing of any transaction.
At some point between July 3 and July 8, 2002, Mr. Narath discussed with
Mr. Hammond the stockholder vote issue. During this conversation, Mr. Hammond
indicated that he wanted settlement of this class action to be a pre-condition
to closing.
On July 8, 2002, in a telephone conversation with Mr. Narath, Mr. Hammond
agreed to extend his July 8, 2002 deadline to July 10, 2002.
On July 9, 2002, EBG, BRVM and Mr. Weicher had a telephonic meeting with
Mr. Levitt, legal counsel to Mr. Van Arnem, and Andy Plyler, a business advisor
to Mr. Van Arnem and a former employee of PRTS, to continue the process of
providing due diligence material to Mr. Van Arnem.
On July 10, 2002, EBG sent an e-mail to Mr. Levitt asking that Mr. Van
Arnem provide to the Special Committee by the close of business on July 12,
2002, any final changes to Mr. Van Arnem's outstanding offers, together with any
comments or changes to the proposed merger agreement previously delivered by EBG
to Mr. Levitt. Mr. Levitt responded to EBG by e-mail suggesting a deadline for
Mr. Van Arnem's final proposal of July 19, 2002.
On July 10, 2002, the Special Committee met to discuss the status of
negotiations with the Acquisition Group and Mr. Van Arnem. In addition, EBG sent
an e-mail to Mr. Levitt asking that Mr. Van Arnem provide to the Special
Committee, no later than 9:00 a.m. Monday, July 15, 2002, any final changes to
Mr. Van Arnem's outstanding offers together with any comments or changes to the
proposed merger agreement previously provided to Mr. Levitt. The Special
Committee also determined that Messrs. McCartin and Narath would call Mr.
Hammond to request that he extend the Acquisition Group's offer through the
close of business July 15, 2002 so the Special Committee could evaluate the
offers from both Mr. Van Arnem and the Acquisition Group. In addition, the
Special Committee determined to recommend to the Board of Directors that the
Board authorize BRVM to commence settlement discussions with legal counsel for
the plaintiffs in the various purported class action suits.
On July 11, 2002, the Board of Directors met to authorize BRVM to begin
settlement discussions regarding the four outstanding purported class action
lawsuits.
On July 11, 2002, EBG received messages from Mr. Levitt, in which Mr. Van
Arnem amended his offer to acquire all of the outstanding shares of PRTS common
stock by offering $1.50 per share for all of the outstanding shares including
those owned or controlled by Mr. Hammond.
On or about July 12, 2002, Mr. Van Hare met with Mr. Hammond regarding the
status of the offer made by Mr. Van Arnem. Mr. Narath, subsequently on July 12,
2002, also discussed with Mr. Hammond the revised offer from Mr. Van Arnem, and
Mr. Hammond indicated that he was not willing to sell his shares to Mr. Van
Arnem for a price of $1.50 per share, because Mr. Hammond believed that his
majority stake in PRTS was worth in excess of what had been offered.
On July 13, 2002, Mr. Levitt communicated to EBG that he believed his
comments on the proposed merger agreement would be minor.
32
On July 15, 2002, the Special Committee received a letter from Atlas and
Marathon, two New York-based investment groups. In the letter, Atlas and
Marathon stated their intention to oppose the previously announced offers of the
Acquisition Group and AirOperations.com, based on their belief that the sale of
parts of PRTS on a liquidation basis would provide a higher return to investors.
Also on July 15, 2002, Atlas and Marathon filed a Schedule 13-D Statement with
the SEC reporting that they collectively beneficially owned 1,471,200 shares of
PRTS common stock, representing approximately 10.5% of the outstanding shares of
PRTS common stock. In the Schedule 13-D Statement, Atlas and Marathon stated
their intention to oppose the Acquisition Group's and AirOperations.com's
previously announced proposals to acquire all of the outstanding shares of PRTS
common stock at prices of $1.25 and $1.30 per share, respectively.
On July 16, 2002, the Special Committee met to discuss the Schedule 13-D
Statement filing and letter from Atlas and Marathon, including the suggestion to
consider the sale of portions of the business coupled with liquidation or a cash
distribution to the stockholders of PRTS. The Special Committee determined that
Mr. Narath, together with vFinance, would contact Atlas and Marathon to discuss
the issues raised in their letter, and directed EBG to contact Mr. Levitt to
determine if Mr. Van Arnem's offer to purchase the e-marketplace assets was
still outstanding.
On July 17, 2002, EBG contacted Mr. Levitt to determine whether Mr. Van
Arnem's proposal to acquire the e-marketplace asserts was still outstanding and
to determine Mr. Van Arnem's availability to meet with members of the Special
Committee.
On July 18, 2002, vFinance met with Mario Cibelli of Marathon and Richard
Jacinto of Atlas to discuss the concerns raised in Atlas' and Marathon's
Schedule 13-D Statement filing. Mr. Narath participated telephonically in this
meeting.
On July 19, 2002, EBG received an e-mail from Mr. Levitt stating that Mr.
Van Arnem was still interested in a purchase of the e-marketplace, assets
including all accounts receivable and $1,500,000 in cash. In exchange for these
assets, Mr. Van Arnem proposed a purchase price of $4,000,000 of which $500,000
would be paid at closing; $1,000,000 on December 31, 2002; $1,000,000 on the
first anniversary of the closing; and $1,500,000 on December 31, 2003. Also, on
July 19, 2002, the Special Committee met to discuss the revised offer from Mr.
Van Arnem to purchase the Company's e-marketplace assets, and to discuss the
meeting among Mr. Narath, vFinance, Mr. Cibelli and Mr. Jacinto. The Special
Committee requested vFinance to include in its valuation analysis the
possibility of selling portions of the PRTS business. The Special Committee also
asked vFinance to contact a certain firm engaged in operating e-business
networks which allow buyers and sellers in various industries to conduct
business through the internet, and which firm had previously indicated an
interest in purchasing the Company's e-marketplace assets (hereinafter referred
to as "Company X"), and AirOperations.com, to inform them that the Special
Committee was considering the impact of a possible sale of the e-marketplace
assets and determine what interest, if any, those parties would have in
acquiring that business. On July 19, 2002, vFinance sent an e-mail to Mr. Levitt
seeking additional information regarding Mr. Van Arnem's revised offer to
purchase the e-marketplace assets. On July 19, 2002, Mr. Levitt responded to
vFinance with further information regarding Mr. Van Arnem's revised offer.
vFinance was contacted by Company X's financial advisor, RBC Capital Markets,
and discussed with RBC Capital Markets, Company X's interest in a possible
acquisition of the Company's e-marketplace assets. Later that day, vFinance
spoke with Kevin Fitzgerald, financial advisor to AirOperations.com, who
indicated that AirOperations.com might be interested in making an offer for the
e-marketplace assets if that business generated positive cash flow. Also, on
July 19, 2002, Mr. Narath sent an e-mail to Paul Fulchino, the President of
Aviall, Inc. ("Aviall"), an operator of an online provider of Internet
business-to-business e-commerce services for the aviation industry, inquiring
whether Aviall had an interest in acquiring all of PRTS or the e-marketplace
assets.
On July 24, 2002, the Special Committee met. Mr. Narath reported on his
discussions with Company X, Aviall and AirOperations.com regarding the possible
acquisition of the Company's e-marketplace business. The Committee then
33
discussed with vFinance the status of vFinance's financial analysis of the
possible sale of the e-marketplace business followed by a liquidation of PRTS.
On July 29, 2002, the Special Committee met to discuss the outstanding
offers from Mr. Van Arnem and the Acquisition Group. The Special Committee
received a presentation from BRVM regarding the status of negotiations with
counsel for the plaintiffs in the purported class action litigation. The Special
Committee discussed vFinance's analysis of the possible sale of the
e-marketplace business. Mr. Narath reported on his discussions with Mr. Hammond
regarding a possible increase in the price offered by the Acquisition Group for
all of the outstanding shares of PRTS common stock not owned or controlled by
the Acquisition Group. The Special Committee determined that Mr. Narath should
continue negotiations with Mr. Hammond.
Between July 29 and August 1, Mr. Narath had discussions with Mr. Hammond,
during which he suggested to Mr. Hammond that he increase the proposed purchase
price per share.
On August 1, 2002, the Special Committee received a letter from Company X
in which Company X proposed to acquire the e-marketplace assets of PRTS,
including all accounts receivable. Company X proposed a cash purchase price of
$3 - $4 million, with the actual price to be determined following due diligence.
The Company X offer stated that an undetermined portion of the purchase price
would be held in escrow following any closing. The Company X offer was also
contingent upon execution of an agreement by Mr. Hammond agreeing to vote shares
owned or controlled by him in favor of the Company X proposal, as well as
certain other conditions.
On August 2, 2002, vFinance delivered to the Special Committee a draft
analysis of the value of the Company's e-marketplace business on a stand-alone
basis. This analysis reviewed the balance sheet assets and the subscription
revenues associated with the e-marketplace business.
Between August 2 and August 9, 2001, Messrs. Rosenblum, Narath and Fulchino
had a telephone conversation, during which Mr. Fulchino indicated his
familiarity with the Company and that, if Aviall were inclined to make an offer
to purchase the Company, it would be for less then cash value.
On August 9, 2002, the Special Committee was informed that a consultant
engaged by the plaintiff's counsel in the purported class action litigation
concluded that based upon publicly available information, the value of the
outstanding shares of PRTS common stock was no less than $1.41 per share.
On August 13, 2002, the Special Committee met to discuss the status of the
settlement discussions regarding the outstanding purported class action
litigation and the proposal received from Company X. The Special Committee
determined to discuss with Mr. Hammond his willingness to consider offers for
the e-marketplace assets from Mr. Van Arnem and Company X.
On August 14, 2002, Messrs. Narath, Rosenblum and Calicchia met with Mr.
Jacinto. During this meeting they discussed the appropriate valuation of the
Company and the possibility of Atlas and Marathon supporting a transaction with
the Acquisition Group if it would increase the proposed purchase price per
share.
On August 15, 2002, Messrs. Narath and Rosenblum met with Mr. Hammond. They
relayed to him their discussions the day before with Mr. Jacinto.
On August 19, 2002, the Special Committee received a letter from Mr.
Hammond increasing the Acquisition Group's offer to $1.41 per share for all of
the outstanding shares of PRTS common stock not owned or controlled by the
Acquisition Group.
34
On August 20, 2002, the Special Committee met to review the status of the
settlement discussions regarding the purported class action lawsuits. The
Special Committee discussed the revised offer for $1.41 per share from the
Acquisition Group for all of the outstanding shares of PRTS common stock not
owned or controlled by the Acquisition Group. The Special Committee noted that
since Acquisition Group's offer was contingent upon a settlement of the
outstanding purported class action litigation, the Special Committee determined
to defer further discussion of Acquisition Group's offer. Mr. Narath and
vFinance reported on their discussions with Atlas and Marathon and noted that
Atlas and Marathon indicated that they would support a price of $1.41 per share
for all the outstanding shares of PRTS common stock, subject to certain
contingencies.
From August 20 through August 26, 2002, EBG and AY negotiated provisions of
the draft merger agreement.
On August 23, 2002, the Special Committee received a letter from Mr.
Hammond stating that in his capacity as a stockholder of PRTS, Mr. Hammond would
oppose and vote against any offer currently being considered by the Special
Committee other than the Acquisition Group's own offer, including but not
limited to outstanding offers from Company X and Mr. Van Arnem to purchase the
Company's e-marketplace business.
On August 26, 2002, vFinance delivered a valuation analysis of PRTS to the
Special Committee and Board of Directors. This report set forth the methodology
used by vFinance to value PRTS, as well as the activities undertaken by vFinance
in the course of preparing its valuation and fairness opinion. The information
set forth in the report is summarized in "Opinion Of Special Committee's
Financial Advisor".
On August 26, 2002, the Special Committee met. The Committee reviewed the
terms of the tentative settlement of the purported class action litigation. The
Special Committee then reviewed the outstanding offers from the Acquisition
Group, Company X and Mr. Van Arnem. The Special Committee noted that none of the
proposals, with the exception of the Acquisition Group's proposal, could result
in a completed transaction, given Mr. Hammond's written communication to the
Special Committee that Mr. Hammond, in his as capacity as majority stockholder
of PRTS, would vote against any competing transaction currently being considered
by the Special Committee. The Special Committee also discussed the report
prepared by vFinance. vFinance summarized the report and delivered its oral
opinion that the Acquisition Group's proposed purchase price of $1.41 per share
for all of the outstanding shares of PRTS common stock not owned or controlled
by the Acquisition Group was fair, from a financial point of view, to the
stockholders of PRTS other than Mr. Hammond. The Special Committee, after
considering the matters, then voted to recommend to the Board of Directors that
the Board of Directors approve the proposed merger agreement with the
Acquisition Group and recommend that the PRTS stockholders approve the merger
agreement.
On August 26, 2002, the Board of Directors of the Company met and received
a report and recommendation from the Special Committee regarding the Acquisition
Group's offer to purchase all of the outstanding shares of PRTS common stock not
owned or controlled by the Acquisition Group for $1.41 per share. vFinance
reviewed its financial analysis and its opinion that the Acquisition Group's
offer was fair, from a financial point of view, to the Unaffiliated
Stockholders. EBG reviewed the activities of the Special Committee since its
formation. EBG also reviewed for the Board of Directors the terms and conditions
of the proposed merger agreement with the Acquisition Group, which had
previously been distributed to the Board of Directors. BRVM advised the Board of
Directors with respect to the fiduciary duties of the Directors. The Board of
Directors discussed the terms of the merger agreement, and BRVM, EBG and
vFinance responded to questions from the Directors. After considering the
matters presented to the Board of Directors, the Board of Directors, other than
Mr. Hammond, who was not present at the meeting, unanimously resolved that the
terms of the merger were advisable, and fair to and in the best interest of, the
stockholders of PRTS other than Mr. Hammond; approved the merger agreement; and
determined to recommend to the stockholders of PRTS that the merger agreement
and the transactions contemplated by the merger agreement be approved and
adopted.
On August 26, 2002, vFinance delivered its written opinion to the Board of
Directors that the merger agreement was fair, from a financial point of view, to
the stockholders of PRTS other than Mr. Hammond.
35
On August 26, 2002, PRTS, the Acquisition Group entered into the merger
agreement. On August 26, 2002, PRTS issued a press release announcing the
execution of the merger agreement.
Certain Events Following the Signing of the Merger Agreement
------------------------------------------------------------
The following describes certain events that occurred following the
execution of the merger agreement on August 26, 2002.
On August 30, 2002, Mr. Narath received a telephone call from Paul
Fulchino, the President of Aviall, requesting that Mr. Narath contact the
Special Committee's counsel so that Mr. Fulchino, counsel to Aviall, Mr. Narath
and counsel to the Special Committee could have a conference call. Later that
day, Mr. Narath and EBG had a conference call with Mr. Fulchino and Jeffrey
Murphy, in-house counsel to Aviall. During that conversation, Mr. Fulchino
stated that Aviall wished to submit an offer to purchase PRTS and that he would
fax the written proposal to Mr. Narath and EBG.
On August 30, 2002, the Special Committee received an unsolicited letter
from Aviall, in which Aviall offered to acquire all of the outstanding shares of
PRTS common stock at a price between $1.55 and $1.65 per share. Aviall stated
that it was prepared to begin due diligence. Aviall's offer was subject to the
negotiation of a definitive acquisition agreement and the settlement or
dismissal of the purported class action litigation. Aviall sent copies of this
letter to Atlas, Marathon and counsel for the plaintiffs in the purported class
action litigation. Later that day, PRTS sent a letter to Mr. Hammond and AY
notifying them that PRTS had received an unsolicited written proposal from
Aviall with respect to a competing transaction (as defined in the merger
agreement) which could reasonably be expected to result in a superior proposal
(as defined in the merger agreement), and advising them that PRTS may enter into
discussions or negotiations with Aviall regarding its proposal.
On August 30, 2002, the Special Committee and Board of Directors received a
letter from Mr. Hammond stating that in his capacity as a stockholder of PRTS,
he would oppose and vote against the proposal made by Aviall. Mr. Hammond
verbally informed Mr. Narath that he would vote against the Aviall proposal
because Mr. Hammond believed that: (i) his majority interest in PRTS was worth
in excess of what was offered; and (ii) negotiating with Aviall would have a
deleterious effect on the competitive position of PRTS because it would require
disclosure of otherwise proprietary information to a major competitor.
On September 6, 2002, the Special Committee met to discuss the offer from
Aviall to acquire all of the outstanding shares of PRTS common stock at a price
between $1.55 and $1.65 per share. The Special Committee noted the significant
range in Aviall's offer and the fact that Aviall's offer could not result in a
completed transaction without Mr. Hammond voting in favor of it, and discussed
the possible impact of Aviall's offer on the outstanding purported class action
litigation. The Special Committee discussed Aviall's request to begin a due
diligence review of PRTS.
On September 6, 2002, the Board of Directors, other than Mr. Hammond, who
did not attend the meeting, met to receive a report from the Special Committee
and to discuss the Aviall proposal. The Board of Directors discussed Aviall's
request to begin a due diligence review of PRTS.
On September 6, 2002, EBG sent a letter to Aviall on behalf of the Special
Committee acknowledging receipt of Aviall's August 30, 2002 proposal and stating
that the Special Committee was considering the proposal.
On September 6, 2002, Haynes and Boone, LLP, counsel to Aviall (sometimes
referred to as "HB"), sent to EBG a copy of a complaint filed by Inventory
Locator Service, LLC ("ILS"), a subsidiary of Aviall, against PRTS in the United
States District Court for the District of Tennessee. The complaint alleged that
PRTS had improperly gained access to ILS's database and used such information to
solicit ILS customers. The complaint alleged violations of the Computer Fraud
and Abuse Act, tortuous interference with ILS's business relations, and
misappropriation of ILS's trade secrets, and sought injunctive relief and
36
unspecified damages. Later that day, PRTS received a letter from Aviall
demanding the right to inspect and copy the Company's stockholder list and
information related to the beneficial ownership of the Company's common stock,
as well as the Company's certificate of incorporation and bylaws.
On September 9, 2002, the Special Committee met to discuss the Aviall
proposal to acquire all of the outstanding shares of PRTS common stock at a
price between $1.55 and $1.65 per share. The Special Committee determined to
provide due diligence materials to Aviall upon the execution and delivery of a
nondisclosure agreement, and to require Aviall to submit a definitive proposal
in writing, at a fixed price, and containing no further due diligence or other
conditions, no later than September 20, 2002.
On September 10, 2002, EBG sent a letter to Aviall stating that the Special
Committee was prepared to provide due diligence materials to Aviall upon
Aviall's execution of a nondisclosure agreement provided by EBG. The letter from
EBG also set forth the Special Committee's requirement that Aviall submit a
definitive written proposal at a fixed price with no further due diligence or
other conditions no later than September 20, 2002. The letter also enclosed a
copy of the merger agreement between PRTS and the Acquisition Group and asked
that any proposal made by Aviall include specific references to any changes
Aviall would require to the form of merger agreement in the event Aviall entered
into a definitive merger agreement with PRTS.
On September 11 and 12, 2002, EBG and HB negotiated the terms of a
nondisclosure agreement between PRTS and Aviall.
On September 11, 2002, HB told EBG that Aviall was prepared to begin due
diligence but was reluctant to do so unless Mr. Hammond was aware of Aviall's
proposal and had indicated that he was open to discussions with Aviall.
On September 11, 2002, EBG sent a letter to HB noting that the Special
Committee had advised Mr. Hammond of Aviall's offer and the Special Committee
had determined to provide due diligence materials to Aviall. The letter also
noted that while the Special Committee did not speak for Mr. Hammond, Mr.
Hammond had advised the Special Committee that in his capacity as a stockholder
of PRTS, he was opposed to the current Aviall proposal. The letter further noted
that the Special Committee was prepared to continue the due diligence process
with Aviall and consider any offer Aviall might make. The letter further noted
that under the terms of the merger agreement between PRTS and Mr. Hammond, the
ability of a competitive offeror to complete a proposed transaction was one of
the factors that the Special Committee and Board of Directors were required to
consider, and that Aviall might wish to contact Mr. Hammond directly to discuss
its offer with Mr. Hammond in his capacity as a PRTS stockholder.
On September 12, 2002, HB sent a letter to EBG stating that Aviall was
moving forward with its due diligence based on the following assumption: that if
Aviall's proposal (i) reflected a cash price per share for each outstanding
share of PRTS Common stock in excess of the $1.41 provided for in the merger
agreement with Mr. Hammond, (ii) was not subject to any financing or due
diligence contingency, and (iii) was likely of being completed given legal,
financial and regulatory aspects of the proposal, the Special Committee and the
Board of Directors would terminate the merger agreement with Mr. Hammond and
enter into a written acquisition agreement with Aviall regardless of Mr.
Hammond's position. HB asked for an immediate notification if its assumption was
not correct. HB also returned a confidentiality agreement executed by Aviall to
EBG, and stated that HB would provide a due diligence checklist under separate
cover; that Aviall would commence its due diligence on September 13, 2002; and
that HB would contact PRTS and vFinance to coordinate the due diligence process.
On September 12, 2002, EBG sent an e-mail to HB stating that HB should not
make any assumptions about future decisions that either the Special Committee or
the Board of Directors may make. EBG pointed out that the merger agreement
defined "superior proposal" as one "likely of being completed (taking into
account all legal, financial, regulatory and other aspects of the proposal, the
person making the proposal and the expected timing to complete the
proposal...)". EBG noted that the ability of PRTS to terminate the merger
37
agreement with the Acquisition Group and to enter into an alternative agreement
also depended on determining that the alternative agreement was for a "superior
proposal", and asked for HB's opinion on how the Special Committee or Board of
Directors could conclude that a proposal opposed by Mr. Hammond in his capacity
as a stockholder could be determined to be "likely of being completed".
On September 13, 2002, HB sent a letter to EBG stating that Aviall had no
basis for knowing what the language cited by EBG in the definition of "superior
proposal" in the merger agreement between PRTS and Mr. Hammond was intended to
mean. HB stated that Aviall saw little reason to commence the due diligence
process and submit a definitive proposal unless the Special Committee obtained
Mr. Hammond's concurrence that he would proceed and be supportive of an offer by
Aviall in excess of $1.41 per share.
On September 15, 2002, Messrs. Rosenblum and Narath met with Mr. Jacinto to
discuss Atlas and Marathon's possible support of a transaction with the
Acquisition Group.
On September 18, 2002, PRTS sent a letter to HB stating that PRTS would
make available to Aviall, on September 25, 2002, stockholder information
previously requested by Aviall.
On September 19, 2002, PRTS received a letter from HB regarding the
stockholder information demanded by Aviall.
On September 21, 2002, Messrs. Rosenblum and Narath again met with Mr.
Jacinto to discuss Atlas and Marathon's possible support of a transaction with
the Acquisition Group.
On September 23, 2002, EBG received an e-mail from Cauley, Geller, Bowman &
Coates, counsel to the plaintiffs in the purported class action litigation. The
e-mail asked what steps, if any, the Special Committee was taking with regard to
the proposal by Aviall.
On September 23, 2002, EBG received an e-mail from Drew Levitt asking EBG
to explain why the Special Committee recommended Mr. Hammond's offer rather than
Mr. Van Arnem's offer.
Between September 23 and September 26, 2002, Messrs. Narath and Rosenblum
discussed with Mr. Hammond a possible increase in the proposed purchase price.
During this period, they also discussed with Mr. Jacinto, Atlas and Marathon's
support of a transaction with the Acquisition Group if it was to increase its
offer.
On September 26, 2002, the Board of Directors met twice to discuss the
status of the Aviall proposal as well as receive a report from Mr. Narath and
vFinance regarding ongoing negotiations among Mr. Hammond, Atlas and Marathon.
At the September 26, 2002 Board of Directors meeting, Mr. Narath summarized for
the Board discussions he had with representatives of Atlas and Marathon
regarding the Merger Agreement and informed the Board of Directors that Atlas
and Marathon were considering entering into an agreement with Mr. Hammond which,
in consideration for the Acquisition Group agreeing to increase the per share
consideration in the merger from $1.41 to $1.50, Atlas and Marathon would agree
to support the merger agreement and vote their shares for the merger. Mr. Narath
emphasized that he believed these discussions were preliminary. vFinance
informed the Board that the increase in the merger price to $1.50 had not caused
vFinance to change its opinion dated August 26, 2002 regarding the fairness of
the transaction covered by the merger agreement.
On September 30, 2002, the Board of Directors met to discuss what
information, if any, its members had learned regarding Atlas' and Marathon's
intent regarding the merger agreement. Mr. Narath informed the Board of
Directors that Mr. Hammond indicated to him that the Acquisition Group was
prepared to increase its offer to acquire all of the outstanding shares of PRTS
not owned or controlled by Acquisition Group from $1.41 to $1.50 if Atlas and
Marathon would each agree to vote 1,371,200 PRTS shares owned or controlled by
38
them in favor of the Merger Agreement. At the September 30, 2002 meeting, the
Board of Directors resolved to accept the $1.50 per share if offered by the
Acquisition Group.
Between October 1 and October 10, 2002, the Board was generally informed
that negotiations were taking place regarding Atlas and Marathon's support of
the merger agreement. At a Board of Directors meeting held on October 11, 2002,
Mr. Narath informed the Board of Directors that discussions regarding Atlas' and
Marathon's support of the merger agreement had terminated without an agreement
with Mr. Hammond and, accordingly, the Acquisition Group was not prepared to
increase its offer. The Board of Directors voted to ratify the merger agreement
with the Acquisition Group, which, included, among other terms, per share merger
consideration of $1.41 to be paid for all shares of PRTS other than shares owned
or controlled by the Acquisition Group.
During the latter part of November 2002, Atlas, Marathon and the
Acquisition Group renewed their discussions and on December 20, 2002 entered
into a voting agreement whereby Atlas and Marathon each agreed to grant Mr.
Hammond an irrevocable proxy to vote certain of their PRTS shares in favor of
the merger and the merger agreement in consideration for the Acquisition Group
increasing the per share consideration to be paid to each Unaffiliated
Stockholder from $1.41 to $1.50 per share.
On December __, 2002, vFinance reaffirmed as of the date of this proxy
statement its fairness opinion previously delivered to the Special Committee and
Board of Directors.
THE SPECIAL COMMITTEE
The Special Committee consists of three non-employee, non-officer directors
of PRTS, Messrs. Pierre Narath, Edward McCartin and Thomas Van Hare, none of
whom is affiliated with Mr. Hammond.
Pierre A. Narath. Mr. Narath has been a member of the Board of Directors
since March 2000. Since January 1999, Mr. Narath has served as Chairman, Chief
Executive Officer and President of Touchstone Software Corp., an OTC Bulletin
Board listed developer and publisher of utility software used to set up,
maintain and manage personal computers and networks. From May 1997 to November
1998, Mr. Narath served as Vice President of Award Software International, Inc.,
a developer and marketer of system enabling and management software for the
global computing market that was acquired by Phoenix Technologies, Inc. in 1998.
From February 1990 to May 1997, Mr. Narath served as President of Unicore
Software, Inc., a software company acquired by Touchstone Software Corp. in
1999.
Thomas C. Van Hare. Mr. Van Hare has been a member of the Board of
Directors since November 1999 and has extensive experience in commercial design
and Internet marketing. Mr. Van Hare served as General Manager (USA) for Clear
Winter, Inc., an internet systems integration company during 2001 and he was the
President and Chief Executive Officer of Capstone Internet Services, Inc., a
graphic design and marketing company, from 1994 to 2000. Prior to such time, Mr.
Van Hare served in both the Reagan and Bush Administrations in the Departments
of State and Defense, respectively, in various capacities. Mr. Van Hare is a
commercial pilot with multi-engine and instrument ratings and has extensive
search and rescue experience.
Edward McCartin. Since 1999, Mr. McCartin has been a Senior Business
Development Manager for the Electroptic Transmission Division at JDS Uniphase
Corporation. From 1997 through 1999, Mr. McCartin was Director of Sales and
Operations of Ramar Corp., a fiber optic manufacturer of transmission components
supporting the telecommunications industry. From 1985 through 1997, he served as
General Manager of Aviation Laboratories.
39
RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS; FAIRNESS OF
THE MERGER
On August 26, 2002, the Special Committee of the Board of Directors
unanimously determined that the proposed merger and the merger agreement are
fair from a financial point of view to, and in the best interests of the
Unaffiliated Stockholders. The Special Committee unanimously recommended to the
Board of Directors that the merger agreement and the merger be approved and
adopted. The Special Committee considered a number of factors, as more fully
described above under "--Background of the Merger" and as described below under
"--Reasons for the Special Committee's Determination," in determining to make
its recommendation. The Board of Directors, based in part upon the unanimous
recommendation of the Special Committee, determined that the terms of the merger
agreement and the proposed merger are fair from a financial point of view to,
and in the best interests of, the Unaffiliated Stockholders and approved the
merger agreement and the merger. The Board of Directors, based in part upon the
unanimous recommendation of the Special Committee, recommends that PRTS
stockholders vote FOR the approval and adoption of the merger agreement and the
merger.
Reasons for the Special Committee's Determination
-------------------------------------------------
In recommending approval and adoption of the merger agreement and the
merger to the Board of Directors, the Special Committee consulted with the
Company's management, as well as Special Committee's financial advisor and legal
counsel, and considered the short and long-term prospects of the Company
described below. In view of the wide variety of factors considered in connection
with the evaluation of Mr. Hammond's offer, the Special Committee did not find
it practicable to, and did not, quantify or otherwise attempt to assign relative
weights to the specific factors they considered in reaching their
recommendations. In reaching its determination, the Special Committee considered
a number of factors both for and against recommending the merger, including the
following factors which weighed in favor of the merger:
o the merger will provide the Unaffiliated Stockholders with an
opportunity to realize a substantial premium for their shares
compared to current and historical prices; specifically, the
Unaffiliated Stockholders can realize a premium of approximately (a)
108% over the $0.72 per share closing sale price of our common stock
on April 9, 2002, the last trading day prior to the announcement of
Mr. Hammond's offer; (b) 97% over the average reported closing price
of $0.76 for the twenty (20) trading days prior to Mr. Hammond's
offer; (c) 30% over the $1.15 closing sale price on August 23, 2002,
the last trading day prior to the Special Committee making its
determination; (d) 27% over the average reported closing price for
the twenty (20) trading days prior to the Special Committee making
its determination to recommend the transaction; and (e) 70% over the
average reported closing price of $0.88 for the one-year period
prior to August 26, 2002.
o PRTS stock is highly illiquid and PRTS has experienced declining
gross revenue in its aviation e-commerce marketplace ($6,293,834 in
fiscal 2000 to $5,234,073 in fiscal 2001) and continuing operating
losses for the past two fiscal years($15,216,348 in fiscal 2000 and
$6,561,936 in fiscal 2001) pertaining to its aviation e-commerce
marketplace;
o the consideration to be received by PRTS stockholders in the merger
will consist entirely of cash and eliminates any uncertainties in
valuing the merger consideration to be received by the Company's
stockholders;
o the likelihood of the consummation of the merger; the proposed
structure of the transaction as a merger, which will allow our
Unaffiliated Stockholders to receive a cash payment at a fair price
40
or to exercise appraisal rights under Delaware law if he or she does
not believe the merger consideration to be fair; the anticipated
closing date of the merger; and the availability of funds to
complete the merger;
o as a result of negotiations between the Special Committee and Mr.
Hammond, the price offered for the shares in the merger was
increased;
o the costs and factors previously identified as being associated with
remaining a public company would likely not be offset by the
benefits of providing stockholders with a liquid investment;
o the opinion of vFinance as to the fairness, from a financial point
of view, of the merger consideration to the Unaffiliated
Stockholders;
o the Special Committee's belief, based in part upon the report
delivered to the Special Committee by vFinance and summarized in
"Opinion Of Special Committee's Financial Advisor", that:
- the $1.50 per share price was within the range of the going
concern value of PRTS based upon comparisons to comparable
companies and comparable transactions;
- the $1.50 per share price was reasonably close to the estimated
liquidation value of $1.53 per share, and that the actual
liquidation value of PRTS would depend on how long PRTS
continued to operate before liquidation and a number of other
factors beyond the control of PRTS, such as potential claims
from customers and employees, and could not be precisely
determined; and
- because of the range of going concern values and the uncertain
liquidation value of PRTS, the net book value of approximately
$1.73 per share at June 30, 2002 ($1.66 per share at September
30, 2002) did not represent a measure of the value of PRTS that
was material to the Special Committee's recommendation.
o that the Company purchased an aggregate of 700,505 shares of PRTS
common stock at average prices ranging from $0.60 to $3.33 per share
during the past two years;
o the Special Committee's knowledge and review of our business,
operations, assets, financial condition, operating results and
prospects including our continuing losses from operations and
resulting decrease in cash and net book value, increasing price
competition from our competitors, and the general downturn in the
aviation and aerospace markets after the events of September 11,
2002;
o the limitations PRTS suffered and would likely continue to suffer
financially as a public company, including its limited trading
volume, lack of institutional sponsorship and lack of research
attention from analysts, all of which adversely affect the trading
market and the value of the PRTS stock;
o the Special Committee's belief that the merger agreement, including
the reimbursement of out-of-pocket expenses payable to Hammond I
(with no additional termination fee) if the merger agreement is
terminated for any of the reasons discussed on page 57 (Special
Factors - Fees and Expenses of the Merger), should not unduly
discourage superior third party offers and that PRTS, subject to
certain conditions, may enter into a superior proposal with another
party simultaneously with the termination of the merger agreement
upon reasonable notice to Hammond I of its intent to enter into such
negotiations and superior proposal;
41
o the Special Committee's belief that, after extensive negotiations by
and on behalf of the Special Committee with Hammond I and its
representatives, PRTS has obtained the highest price per share that
Hammond I is willing to pay and that further negotiation would not
result in an increase to the proposed purchase price per share (the
preliminary discussions concerning Hammond I's increasing the per
share consideration to $1.50 were conditional on Atlas and Marathon
entering into an agreement with Hammond I to support the merger
agreement, and these discussions terminated without any such
agreement);
o the Special Committee's concern that the debt and equity markets
could deteriorate further in the future, with the effect that the
per share price offered to our stockholders in the merger may not be
available in the foreseeable future; and
o Delaware law entitles the Company's stockholders who do not vote in
favor of the merger to file a written objection with the Company to
obtain the "fair value" of their shares and otherwise follow the
procedures prescribed by Delaware law, as determined by a court, if
the merger is completed.
The Special Committee also determined that the merger is procedurally fair,
despite the fact that the merger does not require the approval of at least a
majority of the Unaffiliated Stockholders, and despite the fact that no
disinterested representative, other than the Special Committee and its advisors,
was retained to act solely on behalf of the Unaffiliated Stockholders, because,
among other things:
o the Board of Directors established a Special Committee to consider
Mr. Hammond's proposal and negotiate the terms of the merger
agreement;
o the Special Committee is composed of three independent directors who
have no financial interest in the merger different from the
Unaffiliated Stockholders;
o the Special Committee was given exclusive and unlimited authority
to, among other things, evaluate, negotiate and recommend the terms
of any proposed transaction;
o the Special Committee retained and received advice from its own
independent legal counsel and financial advisor in evaluating,
negotiating and recommending the merger;
o the Special Committee reviewed the pleadings and information in
various class action law suits; and
o the merger is conditioned on a majority of the shares held by the
Non-Acquisition Group Stockholders not being voted against the
merger.
The Special Committee also considered a variety of risks and other
potentially negative factors concerning the merger. These included the
following:
o Mr. Hammond has potential conflicts of interests, including equity
interests and continued employment by the Company as the surviving
corporation;
o the fact that, while the merger consideration represents a premium
to our historical trading price, the stock market has not performed
well over the past year, particularly the ".com" companies, which
may contribute to the trading price of our common stock; and
o our current public stockholders will not have the right to
participate in our future growth, if any.
42
The Special Committee also considered Mr. Hammond's controlling equity
interest in the Company, his corresponding ability to veto any proposed
transactions requiring majority stockholder approval and the fact that Mr.
Hammond had advised the Special Committee that he and his affiliates had no
interest in selling their shares to a third party in the foreseeable future. The
Special Committee noted that this could likely deter potential strategic and
financial third party buyers and would otherwise limit the possibility that our
stockholders would be presented with an alternative method to obtain liquidity.
The Special Committee recognized that Mr. Hammond's position may have
effectively limited its ability to conclude a transaction with a party other
than Mr. Hammond. Nevertheless, the Special Committee determined to, and did,
engage in discussions directly and through its advisors with other parties that
expressed an interest in a transaction with PRTS. The Special Committee noted
that while other parties made offers that were higher than $1.50 per share, the
$1.50 per share was within the range of values from $1.28 to $1.63 that vFinance
believed would be fair to the Unaffiliated Stockholders, as were all of the
other offers received by the Special Committee. The Special Committee believed
that while a third party might be willing to offer a higher price as a control
premium in order to acquire PRTS, this fact did not make a lower offer to
acquire a minority of the shares of PRTS unfair per se, and would not by itself
constitute a reason not to recommend the merger agreement if the Special
Committee otherwise believed that the $1.50 per share price was fair, from a
financial point of view, to the Unaffiliated Stockholders.
While the Special Committee reviewed with vFinance its various financial
analyses and reviewed with the executive officers of PRTS its historical results
and discussed the Company's business prospects, the Special Committee did not
independently generate its own separate financial analysis of the merger. In
adopting the opinion of vFinance, the Special Committee noted that the per share
merger consideration offered to the Unaffiliated Stockholders is within the
average per share price range implied by three valuations in the analyses done
by vFinance. See "Special Factors - Opinion of Special Committee's Financial
Advisor" on page 46.
After considering these factors, the Special Committee concluded that the
positive factors relating to the merger outweighed the negative factors. Because
of the variety of factors considered, the Special Committee did not find it
practicable to quantify or otherwise assign relative weights to, and did not
make specific assessments of, the specific factors considered in reaching its
determination. In addition, individual members of the Special Committee may have
assigned different weights to various factors. The determination of the Special
Committee was made after consideration of all of the factors together.
Reasons for the Board of Directors' Determination
-------------------------------------------------
The PRTS Board of Directors consists of six (6) directors, three (3) of
whom serve on the Special Committee. Of the remaining directors, one is Mr.
Hammond, a member of the Acquisition Group. In reporting to the Board of
Directors regarding its determination and recommendation, the Special Committee,
with its independent legal and financial advisors participating, advised the
other members of the Board of Directors of the course of negotiations with the
Acquisition Group and its legal counsel, its review of the merger agreement and
the factors it took into account in reaching its determination that the terms of
the merger agreement, including the offer price of $1.50 per share, and the
merger are fair from a financial point of view to, and in the best interests of,
the Unaffiliated Stockholders.
In view of the wide variety of factors considered in its evaluation of the
proposed merger, the Board did not find it practicable to quantify or otherwise
assign relative weights to, and did not make specific assessments of, the
specific factors considered in reaching its determination. Rather, the Board
based its position on the totality of the information presented and considered.
In connection with its consideration of the determination by the Special
Committee, as part of its determination with respect to the merger, the Board of
Directors adopted the conclusion, and the analysis underlying such conclusion,
of the Special Committee based upon its view as to the reasonableness of that
analysis.
At a special meeting of the Board on August 26, 2002, at which all members
were present other than Mr. Hammond, who did not attend the meeting, the Board
unanimously approved the merger agreement, concluded that the merger is fair to
43
the Unaffiliated Stockholders and recommended that it be submitted to the
Company's stockholders for approval.
POSITION OF BOARD OF DIRECTORS AS TO FAIRNESS OF THE MERGER
-----------------------------------------------------------
The Board of Directors believes that the merger agreement and the proposed
merger are substantively and procedurally fair from a financial point of view
to, and in the best interests of, Unaffiliated Stockholders for all of the
reasons set forth above. Even though the merger does not require the approval of
at least a majority of the shares held by the Unaffiliated Stockholders, and
even though no disinterested representative, other than the Special Committee
and its advisors, was retained to act solely on behalf of the Unaffiliated
Stockholders, the Board believes that the fact that the Special Committee
consists of three directors of PRTS, none of whom is an officer or employee of
PRTS or has an interest in the proposed merger different from that of
Unaffiliated Stockholders generally, and the merger is conditioned on a majority
of the shares held by the Non-Acquisition Group Stockholders not being voted
against the merger, means that the merger agreement and the proposed merger are
procedurally fair to the Unaffiliated Stockholders.
In reaching these conclusions, the Board of Directors considered it
significant that:
o the historical trading activity of our common stock, including the
fact that the average daily trading volume of our common stock for
the 12 months prior to April 9, 2002 was 17,731 shares per day,
which makes it unlikely that we can issue new equity and therefore
we cannot recognize one of the benefits of being a public company;
o we have a small public float, our market capitalization was
approximately $9.8 million as of April 8, 2002, and we have limited
prospects for creating institutional interest in our stock or
coverage by analysts which makes it difficult to attract new
investor interest in us;
o our stock price has not performed well since it started trading on
the Nasdaq National Market in March 2000 until April 10, 2002, the
date of our press release regarding the Acquisition Group's initial
offer. During that period our common stock closed at a high of
$14.00 per share on March 24, 2000 and at a low of $0.40 per share
on September 25, 2001. During the 12 month trading period ended
April 9, 2002, the shares closed at a high of $1.77 per share on May
29, 2001, and at a low of $.40 per share on September 25, 2001,
which makes it unlikely that stockholders could receive a higher
price in the market for their shares;
o the $1.50 cash consideration for a single share of our common stock
represents a 82% premium over the average price for our common stock
on the Nasdaq National Market for the 12 month period ended April 9,
2002, the date before we announced we had received an offer from Mr.
Hammond and R. Hammond, L.P., and a 108% premium over the closing
price April 9, 2002, the date prior to the announcement of the
proposed merger;
o the significant costs of remaining a public company, including the
legal, accounting and transfer agent fees and expenses and printing
costs necessary to satisfy the reporting obligations of the Exchange
Act (which were approximately $300,000 in fiscal year 2001), which
will be reduced if we are a private company;
o the judgment of the Special Committee that the merger consideration
is fair from a financial point of view to our Unaffiliated
Stockholders;
44
o the Special Committee's conclusions based upon the opinion of its
financial advisor as to the fairness, from a financial point of
view, of the merger consideration to the Unaffiliated Stockholders;
o the Special Committee's belief that, based in part upon the report
delivered to the Special Committee by vFinance and summarized in
"Opinion Of Special Committee's Financial Advisor", that:
- the $1.50 per share price was within the range of the going
concern value of PRTS based upon comparisons to comparable
companies and comparable transactions;
- the $1.50 per share price was reasonably close to the estimated
liquidation value of $1.53 per share, and that the actual
liquidation value of PRTS would depend on how long PRTS
continued to operate before liquidation and a number of other
factors beyond the control of PRTS, such as potential claims
from customers and employees, which could not be precisely
determined; and
- because of the range of going concern values and the uncertain
liquidation value of PRTS, the net book value of approximately
$1.73 per share at June 30, 2002 ($1.66 per share at September
30, 2002) did not represent a measure of the value of PRTS that
was material to the Special Committee's recommendation.
o the Special Committee's belief that, after extensive negotiations by
and on behalf of the Special Committee with the Acquisition Group
and its representatives, the merger consideration payable in cash of
$1.50 per share was the highest price that the Acquisition Group
would offer and that further negotiation would not result in an
increase to the proposed purchase price per share (the preliminary
discussions concerning Hammond I's increasing the per share
consideration to $1.50 were conditional on Atlas and Marathon
entering into an agreement with Hammond I to support the merger
agreement, and these discussions terminated without any such
agreement);
o the merger will allow our Unaffiliated Stockholders an opportunity
to receive a cash payment at a fair price and provide a prompt and
orderly transfer of ownership of PRTS to the Acquisition Group; and
o the right of any of our Unaffiliated Stockholders to exercise
appraisal rights under Delaware law if he or she does not believe
the merger consideration to be fair.
The Board of Directors also considered Mr. Hammond's controlling equity
interest in the Company, his corresponding ability to veto any proposed
transactions requiring majority stockholder approval and the fact that Mr.
Hammond had advised the Special Committee that he and his affiliates had no
interest in selling their shares to a third party in the foreseeable future. The
Board of Directors noted that this could likely deter potential strategic and
financial third party buyers and would otherwise limit the possibility that our
stockholders would be presented with an alternative method to obtain liquidity.
The Board of Directors recognized that Mr. Hammond's position may have
effectively limited its ability to conclude a transaction with a party other
than Mr. Hammond. Nevertheless, the Board of Directors noted that the Special
Committee determined to, and did, engage in discussions directly and through its
advisors with other parties that expressed an interest in a transaction with
PRTS. The Board of Directors noted that while other parties made offers that
were higher than $1.50 per share, the $1.50 per share was within the range of
values from $1.28 to $1.63 that vFinance believed would be fair to the
Unaffiliated Stockholders, as were all of the other offers received by the
Special Committee. The Board of Directors believed that while a third party
might be willing to offer a higher price as a control premium in order to
acquire PRTS, this fact did not make a lower offer to acquire a minority of the
shares of PRTS unfair per se, and would not by itself constitute a reason not to
recommend the merger agreement if the Board of Directors otherwise believed that
the $1.50 per share price was fair, from a financial point of view, to the
Unaffiliated Stockholders.
45
THE BOARD OF DIRECTORS, ACTING ON THE UNANIMOUS RECOMMENDATION OF THE SPECIAL
COMMITTEE, HAS APPROVED THE TERMS OF THE MERGER AGREEMENT AND THE PROPOSED
MERGER. THE BOARD OF DIRECTORS, BASED IN PART ON THE UNANIMOUS RECOMMENDATION OF
THE SPECIAL COMMITTEE, RECOMMENDS THAT YOU VOTE FOR THE APPROVAL AND ADOPTION OF
THE MERGER AGREEMENT AND THE MERGER.
POSITION OF THE ACQUISITION GROUP AS TO THE FAIRNESS OF THE MERGER
Each of the parties comprising the Acquisition Group has concluded that the
merger is fair from a financial point of view to the Unaffiliated Stockholders
based upon the following factors: (i) their familiarity with the Company and its
prospects; (ii) the conclusions and recommendations of the Special Committee and
the Board; and (iii) the fact that vFinance issued a fairness opinion to the
Special Committee to the effect that the merger is fair to the Unaffiliated
Stockholders from a financial point of view. In reaching the conclusion that the
merger is fair to the Unaffiliated Stockholders, the Acquisition Group placed
significant reliance upon the fact that $1.50 represents a premium of
approximately 108% over the $0.72 closing sale price for the Company's common
stock on the last trading day before the Company announced the initial offer by
Mr. Hammond. Neither Mr. Hammond nor the Acquisition Group retained a financial
advisor, nor did they rely on the analysis of any other person with respect to
the merger or the merger agreement.
The Acquisition Group believes that the manner in which the merger was
considered by the Company was procedurally fair to the Unaffiliated
Stockholders, even though the merger does not require the approval of at least a
majority of the Unaffiliated Stockholders, and even though no disinterested
representative, other than the Special Committee and its advisors, was retained
to act solely on behalf of the Unaffiliated Stockholders, because (i) the
Special Committee was formed to promote and protect the interests of the
Unaffiliated Stockholders; (ii) the Special Committee was comprised solely of
directors who were neither employees of the Company nor affiliated with any
entities affiliated with Mr. Hammond; (iii) the Special Committee concluded that
the merger was substantially and procedurally fair to the Unaffiliated
Stockholders and voted in favor of the merger; (iv) the Special Committee
retained an independent financial advisor and independent legal counsel; (v) the
merger requires that a majority of the shares held by the Non-Acquisition Group
Stockholders not be voted against the merger; and (vi) the merger agreement
provides the Special Committee with the right to respond to other unsolicited
offers for the purchase of PRTS prior to the common stockholders' meeting to
which this proxy statement relates, and, subject to the payment of Hammond I's
reasonable expenses, the right to accept such offer if, in the exercise of its
fiduciary duties, the Special Committee determines that the acceptance of the
alternative offer would be in the best interest of the Unaffiliated
Stockholders.
The Acquisition Group believes that these analyses and factors considered
together provide a reasonable basis for them to believe that the merger is
substantively and procedurally fair to the Unaffiliated Stockholders, even
though no disinterested representative, other than the Special Committee and its
advisors, was retained to act solely on behalf of the Unaffiliated Stockholders.
In view of the variety of factors considered in reaching its decision, the
Acquisition Group did not find it practicable to, and did not, quantify or
otherwise assign relative weights to the specific factors considered reaching
its conclusions and recommendations. The Acquisition Group recognized that their
interests in the merger are not the same as the interest of the Unaffiliated
Stockholders and that the foregoing should not be construed as a recommendation
by the Acquisition Group to vote to approve the merger.
OPINION OF SPECIAL COMMITTEE'S FINANCIAL ADVISOR
Introduction
------------
In connection with the proposed merger, the Special Committee of the Board
of Directors engaged vFinance to render an opinion as to the fairness, from a
financial point of view, to our stockholders (other than the Acquisition Group),
of the proposal by the Acquisition Group. On August 26, 2002, at a meeting of
the Special Committee, vFinance delivered its opinion that, as of such date,
based upon and subject to the assumptions made, matters considered, and
46
limitations on its review as set forth in the opinion, the consideration to be
received in the merger is fair to the stockholders of PRTS other than the
Acquisition Group, from a financial point of view. Subsequently, vFinance
delivered its written fairness opinion. vFinance reaffirmed its fairness opinion
as of December 20, 2002, the date of this proxy statement.
THE FULL TEXT OF THE WRITTEN OPINION OF vFINANCE, DATED AS OF AUGUST 26,
2002 AND REAFFIRMED AS OF THE DATE HEREOF (THE "vFINANCE OPINION"), IS ATTACHED
AS APPENDIX B AND IS INCORPORATED BY REFERENCE. YOU ARE URGED TO READ THE
vFINANCE OPINION CAREFULLY AND IN ITS ENTIRETY FOR A DESCRIPTION OF THE
ASSUMPTIONS MADE, MATTERS CONSIDERED, PROCEDURES FOLLOWED AND LIMITATIONS ON THE
REVIEW UNDERTAKEN BY vFINANCE IN RENDERING ITS OPINION. THE SUMMARY OF THE
vFINANCE OPINION SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
No limitations were imposed by PRTS on the scope of vFinance's
investigation or the procedures to be followed by vFinance in rendering its
opinion. vFinance was not requested to and did not make any recommendation to
the Special Committee as to the form or amount of consideration received in the
merger, which, vFinance assumed, was determined through arm's-length
negotiations between parties. The vFinance opinion was for the use and benefit
of the Special Committee in connection with its consideration of the merger and
was not intended to be and does not constitute a recommendation to any
stockholder of PRTS as to how such stockholder should vote with respect to the
merger. vFinance was not requested to opine as to, and its opinion does not
address, our underlying business decision to proceed with or effect the merger.
Further, vFinance was not asked to consider, and its opinion does not address,
the relative merits of the merger as compared to any alternative business
strategy that might exist for PRTS.
In arriving at its opinion, vFinance took into account its assessment of
general economic, market and financial conditions as well as its experience in
connection with similar transactions and securities valuations generally, and,
among other things: (i) reviewed drafts of the merger agreement; (ii) reviewed
publicly available financial information and other data with respect to PRTS,
including its Annual Report on Form 10-K for the fiscal year ended December 31,
2001, its Quarterly Report on Form 10-Q for the quarters ended March 31, 2002
and June 30, 2002, the Schedule 13D, as amended, filed April 10, 2002 by Mr.
Hammond, and certain other relevant financial and operating data relating to
PRTS made available to vFinance; (iii) reviewed and analyzed certain financial
characteristics of companies that were deemed to be comparable to PRTS; (iv)
reviewed and analyzed the premium to be paid in the merger and premiums paid in
certain other transactions; (v) reviewed and discussed with representatives of
the management of PRTS certain financial and operating information furnished by
them, including financial analyses and related assumptions with respect to the
business, operations and prospects of PRTS. The Company did not prepare, or
deliver to vFinance, any financial forecasts or projections other than the
amortization of its deferred subscription revenue; (vi) considered the
historical financial results and present financial condition of PRTS; (vii)
reviewed certain publicly available information concerning the trading of, and
the trading market for, the common stock of PRTS; (viii) inquired about and
discussed the merger and other matters related thereto with PRTS management, the
Special Committee and its legal counsel; and (ix) performed such other analyses
and examinations as were deemed appropriate.
In arriving at its opinion, vFinance relied upon and assumed the accuracy
and completeness of all of the financial and other information that was used
without assuming any responsibility for any independent verification of any such
information and further relied upon the assurances of PRTS management that it is
not aware of any facts or circumstances that would make any such information
inaccurate or misleading. . In arriving at its opinion, vFinance did not make or
obtain any evaluations or appraisals of the assets and liabilities (contingent
or otherwise) of PRTS. vFinance assumed that the merger will be consummated in a
manner that complies in all respects with the applicable provisions of the
Securities Act of 1933, as amended, the Exchange Act, and all other applicable
federal and state statues, rules and regulations. In addition, it is assumed
that the merger will be a taxable event to the PRTS stockholders. The vFinance
Opinion is necessarily based upon market, economic and other conditions as they
existed on, and could be evaluated as of, August 26, 2002. Accordingly, although
subsequent developments may affect its opinion, vFinance has not assumed any
obligation to update, review or reaffirm its opinion as a result of these
subsequent developments.
47
Each of the analyses conducted by vFinance was carried out in order to
provide a different perspective on the merger, and to enhance the total mix of
information available. vFinance did not form a conclusion as to whether any
individual analysis, considered in isolation, supported or failed to support an
opinion as to the fairness, from a financial point of view, of the merger to
PRTS stockholders other than the Acquisition Group. vFinance did not place any
particular reliance or weight on any individual analysis, but instead concluded
that its analyses, taken as a whole, supported its determination. Accordingly,
vFinance believes that its analyses must be considered as a whole and that
selecting portions of its analyses or the factors it considered, without
considering all analyses and factors collectively, could create an incomplete
and misleading view of the process underlying the analyses performed by vFinance
in connection with the preparation of its opinion.
The summary of vFinance's analysis described below is not a complete
description of the analysis underlying vFinance's opinion. The preparation of a
fairness opinion is a complex process involving various determinations as to the
most appropriate and relevant methods of financial analysis and the application
of those methods to the particular circumstances and, therefore, a fairness
opinion is not readily susceptible to partial analysis or summary description.
In arriving at its opinion, vFinance made qualitative judgments as to the
relevance of each analysis and factor that it considered. Accordingly, vFinance
believes that its analysis must be considered as a whole and that selecting
portions of its analysis and factors, or focusing on information presented in
tabular format, without considering all of the analysis and factors contained in
the narrative description that follows, could result in an incomplete and
misleading view of the processes underlying its analysis and opinion.
Selected Comparable Company Analysis
------------------------------------
Market Cap Analysis. vFinance compared PRTS to companies that facilitate
e-commerce within specific industry segments, or are online databases that can
be searched and data mined. The companies utilized in this analysis were:
Autobytel, Inc., CareScience, Inc., Claimsnet.com, Inc., DagMedia, Inc.,
FreeMarkets, Inc., Neoforma, Inc., PurchasePro.com, Inc., SourcingLink.net, Inc.
Verticalnet, Inc., ViaLink Company and Vicinity Corporation.
The selected companies represent several industry segments and vary in size
in terms of market capitalization and revenues. The companies ranged in market
capitalization size from $2.2 million to $619.3 million, with a mean market
capitalization of $100 million. The majority of the companies fell within the
venue of e-commerce enabling, with no specific industry focus, while healthcare
e-commerce companies composed the next largest segment. The range of year-end
2001 revenues generated by this group varied from $1.43 million to $148 million,
with a mean of $41.6 million, as compared to the $6.0 million generated by PRTS
in 2001.
vFinance evaluated the companies using three analytical techniques:
Comparable Company Analysis, Buy-Out/Acquisition Analysis and Liquidation
Analysis.
Comparable Analysis. vFinance determined that it would not be possible to
perform the analysis using earnings or cash flow as the valuation methodology,
mainly because most of these companies are currently not generating earnings or
positive cash flow. vFinance considered multiples of each company's Market Price
and Enterprise Value to each company's Revenue, EBITDA (Earnings before
Interest, Taxes, Depreciation & Amortization), EBIT (Earnings before Interest
and Taxes) and Net Assets. Based on this analysis, the range of per share prices
for PRTS was determined to be $1.44 to $2.05 per share.
Two companies, FreeMarkets, Inc., and Neoforma, Inc. skew this analysis as
they were much larger in terms of market capitalization than the others, even
though they were similar in operating methods. When these two companies are
excluded from the analysis, the range of per share prices fell to $1.02 to $1.65
per share. Each approach has been given equal weight in vFinance's analysis.
48
Comparable Analysis: All Comparable Companies
Trading Multiples for Selected Publicly Traded Companies
Stock Market Price Price MRQ Enterprise Value to
Price % of Market to Book to TTM to TTM Debt to P/E Ratio Enterprise TTM TTM TTM
Company Ticker 6/21/02 High Value Value Rev. EBITDA Equity 2001 2002 Value Rev. EBITDA EBIT
------------------------------------------------------------------------------------------------------------------------------------
Mean 39% 1.3x 2.41x - 5.6x 0.01x n.a. n.a. 1.37x - 1.3x - 0.6x
Median 30% 1.0x 2.36x - 2.2x 0.00x n.a. n.a. 0.77x - 0.5x - 0.4x
PartsBase, Inc. PRTS 1.21 68% 16,913 0.7x 2.8x - 3.7x 0.00x n.a. n.a (6,929) -1.16x 1.5x 1.2x
Trading Multiples for Selected Publicly Traded Companies-Continued
Enterprise
Value to
Company Ticker Net Assets
-------------------------------------
Mean 0.9x
Median 0.2x
PartsBase, Inc. PRTS -4.3x
Market Price
Industry Multiples
-------------------------------------------
Data Multiple Equity Value
-------- ----------- ---------------
Revenue $(5,993) 2.41x $ 14,427
EBITDA (4,630) -5.58x $ 25,849
Mean $ 20,138|
Median $ 20,138
Enterprise Value
Industry Multiples
------------------------------------------------------------
Data Multiple EV Cash Debt Equity Value
------------------------------------------------------------
Revenue $ 5,993 1.37x $ 8,197 $ 23,842 $ - $ 32,039
EBITDA $(4,630) -1.27x $ 5,900 $ 23,842 $ - $ 29,742
EBIT $(5,610) -0.61x $ 3,401 $ 23,842 $ - $ 27,243
Book Value of
Net Assets $ 1,610 0.93x $ 1,493 $ 23,842 $ - $ 25,335
Mean $ 28,590
Median $ 28,493
COMPARABLE ANALYSIS: EXCLUDING FREEMARKETS AND NEOFORMA
Trading Multiples for Selected Publicly Traded Companies
Stock Market Price Price MRQ Enterprise Value to
Price % of Market to Book to TTM to TTM Debt to P/E Ratio Enterprise TTM TTM TTM
Company Ticker 6/21/02 High Value Value Rev. EBITDA Equity 2001 2002 Value Rev. EBITDA EBIT
------------------------------------------------------------------------------------------------------------------------------------
Mean 39% 1.1x 1.97x - 3.6x 0.00x n.a. n.a. 0.76x 0.9x 0.5x
Median 30% 0.9x 1.28x - 1.9x 0.00x n.a. n.a. 0.21x - 0.3x - 0.2x
PartsBase, Inc. PRTS 1.21 68% 16,913 0.7x 2.8x - 3.7x 0.00x n.a. n.a (6,929) -1.16x 1.5x 1.2x
Trading Multiples for Selected Publicly Traded Companies- Continued
Enterprise
Value to
Company Ticker Net Assets
-------------------------------------
Mean - 0.2x
Median - 0.2x
PartsBase, Inc. PRTS -4.3x
Market Price
Industry Multiples
-------------------------------------------
Data Multiple Equity Value
-------- ----------- ---------------
Revenue $(5,993) 1.97x $ 11,815
EBITDA (4,630) -3.63x $ 16,814
Mean $ 14,315
Median $ 14,315|
49
Enterprise Value
Industry Multiples
------------------------------------------------------------
Data Multiple EV Cash Debt Equity Value
------------------------------------------------------------
Revenue $ 5,993 0.76x $ 4,573 $ 23,842 $ - $ 28,415
EBITDA $(4,630) -1.27x $(4,320) $ 23,842 $ - $ 19,522
EBIT $(5,610) -0.61x $(2,894) $ 23,842 $ - $ 20,948
Book Value of
Net Assets $ 1,610 0.93x $ (255) $ 23,842 $ - $ 23,587
Mean $ 23,118
Median $ 22,267
Buyout Analysis. vFinance analyzed buyouts of similar sized companies in
related sectors, which included Leapnet, Inc. (INSERT DATE), eShare
Communications, Inc. (INSERT DATE), Open Market, Inc. (INSERT DATE) and Viant
Corporation (INSERT DATE). The analysis showed the transaction prices, market
capitalizations, premiums paid above the market price from the date of offer,
and the amount of cash listed on the target company's book as a percentage of
its market capitalization. The four target companies were similar to slightly
larger in size in market capitalization to PRTS. The buyouts ranged in size from
$10.8 million to $93.5 million, with two structured as all stock transactions,
one as a combination of cash and stock, and the one as all cash. Given the small
size of the sample (many e-commerce enabling companies went bankrupt, and/or
sold assets at steeply discounted prices), it was difficult to infer any
statistical trends from the data. vFinance noted that transactions occurred at
values less than the actual cash listed on the balance sheet. In those scenarios
where the enterprise value, defined as the market value of the company's equity
plus debt less the cash on the balance sheet is negative, the implication was
that the operating business should not be valued on a going concern basis.
vFinance could not ascertain if the implication was due to a flawed operating
model, ineffective management, slower than expected development of industry
fundamentals, or lack of demand for product reflective of decreased spending for
technology investments. Irrespective of the reason, the analysis indicated that
the mean premium to market price paid for the acquisitions in this sample set
was 54%, which applied to the initial market price, yielded a price of $1.11.
vFinance applied the mean percentage of balance sheet cash to offering price
(75%) and arrived at a price of $1.28, effectively making the range $1.11 to
$1.28 for their sample buyout set.
Valuation Comparison of Comparable BuyOuts
(Amounts in thousands except per share data or where noted)
------------------------------------------------------------------------------------------------------------------------------------
Premium/ % of Bal.
Price per Cash on (Discount) Sheet
Ticker Date of Value of Price per Share Prior Shares Balance Offer Cash Offering
Company Name Symbol Offer Offer (000's) Share to Offer Outstanding Sheet(mrq) Market Price
------------------------------------------------------------------------------------------------------------------------------------
PartsBase PRTS 10-Apr-02 $18,311 $ 1.31 $ 0.72 13,978 $ 23,842 82% 130%
Mean 54% 75%
Median 29% 72%
Liquidation Analysis. The following analysis assumes that the assets of the
Company are to be liquidated. vFinance assumed that current liabilities would be
paid in full, and a contingency reserve to settle outstanding leases and other
expenses would reduce the amount of cash available to stockholders to
$20,389,000. The greatest offset to cash was deferred revenue. vFinance
estimated a 50% collection rate on the accounts receivable and no recovery of
prepaid expenses.
vFinance estimated recovery on non-current assets at approximately $0.20 on
the dollar on a weighted average basis, or $464,000, with minimal amounts for
furniture and fixtures and software, and greater amounts assigned to equipment
and automobiles. No value was assigned to Restricted Cash, which backs an
50
irrevocable Letter of Credit, and other assets. vFinance estimated the total
available to PRTS stockholders to be $21,401,000, or approximately $1.53 per
share.
vFinance noted that the actual liquidation value of PRTS would depend on
how long PRTS continued to operate before liquidation and a number of other
factors beyond the control of PRTS, such as potential claims from customers and
employees, which could not be precisely determined.
Valuation: Liquidation Scenario
(Amounts in thousands except per share data or where noted)
Balance Sheet
Data Liquidation
3/31/2002 Value
--------- ------------ -------------------------------------------------------------------
Current Assets
--------------
Cash $23,843 $20,389 Calculated by taking Bal.Sheet cash @3/31/02, and subtracting total
liabilites.
A/R 1,096 548 Assumes a 50% collection rate of A/R at plus an additional $500k
for lease and other contingencies.
Prepaid Exp. 288 0 Assumes no recovery of prepaid expenses.
------
Total Current Assets $25,227
P,P&E 2,281 464 Assumes 30k for F&F, 51k for Auto, 230k for Equip, and 150k for
Software.
CD - Restricted Cash 840 0 Assumes no recovery of Restricted Cash, which secures an
Irrevocable LOC.
Other 51 0 Assumes no recovery of Other.
------
Total Assets $28,399 $21,401
$1.53 Per share
Current Liabilities
-------------------
A/P $189
Accrued & Other 457
Deferred Rev. 2,308
-----
Total Current Liabilities $2,954
Stockholder's Equity
Preferred 0
Common 14
Add. Paid in Capital 53,233
Accum. Deficit (27,802)
---------
Total Stockholder's Equity 25,445
Total Liab. & SE $28,399
Summary of Analyses and Other Evaluations
-----------------------------------------
vFinance examined three valuation methodologies, with two iterations on
Comparable Analysis, and arrived at ranges of $1.44 to $2.05 for comparables
which included large market cap competitors, $1.02 to $1.65 for comparables of
like market cap, $1.11 to $1.28 for buyout valuations, and $1.53 under a
possible liquidation scenario. The average of these methodologies was a range of
$1.28 per share to $1.63 per share, which vFinance represented to the Special
Committee as the acceptable range of offers to be considered for a possible
acquisition or going private transaction for PRTS.
Pursuant to a request by the Special Committee, and in answer to a 13-D
filing by two of the Company's largest institutional holders, which collectively
held 10.5% of the shares outstanding, vFinance was asked to arrive at a value
for the e-marketplace assets and work with the Special Committee to solicit bids
for those assets to determine if the combination of an asset sale with a
distribution of cash from the Company would result in a larger overall value
with a greater degree of certainty to stockholders rather than a sale to any one
bidder.
vFinance valued the e-marketplace assets using two methodologies: Specific
identification of e-marketplace assets, and valuation of the e-marketplace
assets based on subscription revenues. The subscription valuations were base on
a review of trailing twelve months and a forecast for a forward-looking twelve
51
months. The value arrived at for the portal based on balance sheet assets, was
$3.4 million, while the range of values based on subscription revenue was $3.6
to $4.0 million.
At the request of the Special Committee, vFinance contacted a number of
interested parties who had expressed interest in the portal assets. One bid was
submitted by Harold Van Arnem and another by Company X. The offer by Mr. Van
Arnem was stated as $4 million, but when netted against accounts receivable and
working capital givebacks, the value of the offer equaled approximately $1.5
million, and would have required that the Company hold an 18-month promissory
note. The second offer, by Company X, was valued at a range of $3 million
dollars to $4 million dollars, with no financing contingencies, but was subject
to adjustments upon completed due diligence. As such, vFinance advised the
Special Committee that in its opinion, these proposed transactions, if coupled
with a distribution of cash by the Company, would not result in in a larger
overall value with a greater degree of certainty to stockholders than would a
sale to any one bidder.
vFinance performed a variety of financial and comparative analyses for the
purpose of rendering the vFinance Opinion. While the foregoing summary describes
all material analyses and factors reviewed by vFinance with the Special
Committee of the Board, it does not purport to be a complete description of the
presentations by vFinance to the Special Committee of the Board or the analyses
performed by vFinance in arriving at the vFinance Opinion. The preparation of a
fairness opinion is a complex process and is not necessarily susceptible to
partial analysis or summary description. vFinance believes that its analyses
must be considered as a whole and that selecting portions of its analyses and of
the factors considered by it, without considering all analyses and factors,
could create a misleading view of the processes underlying the vFinance Opinion.
In addition, vFinance may have given various analyses more or less weight than
other analyses, and may have deemed various assumptions more or less probable
than other assumptions, so that the range of valuations resulting from any
particular analysis described above should not be taken to be vFinance's view of
the actual value of PRTS. In performing its analyses, vFinance made numerous
assumptions with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond the control of PRTS. The
analyses performed by vFinance are not necessarily indicative of actual values
or actual future results, which may be significantly more or less favorable than
suggested by such analyses. In addition, analyses relating to the value of
businesses or assets do not purport to be appraisals or necessarily to reflect
the prices at which businesses or assets may actually be sold. The analyses
performed were prepared solely as part of vFinance's analysis of the fairness of
the consideration to be received in the merger, from a financial point of view,
to the stockholders of PRTS other than the Acquisition Group, and were provided
to the Special Committee of the Board solely in connection with the delivery of
the vFinance Opinion.
In connection with advisory services related to the merger and the issuance
of the vFinance Opinion, vFinance has received a fee of $130,000. PRTS has
agreed to reimburse vFinance for its reasonable expenses incurred in connection
with its engagement and to indemnify vFinance and its affiliates against certain
liabilities that may arise out of the rendering of the vFinance Opinion.
vFinance is an investment banking firm that is engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
competitive biddings, secondary distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes.
PURPOSE AND STRUCTURE OF THE MERGER
The Company
-----------
The purpose of the Merger is to allow our stockholders to realize the value
of their investment in PRTS in cash at a price that represents a premium over
the market price of the Common Stock. Over the past year, we received notices
from Nasdaq regarding possible delisting of our common stock. The Board of
Directors believed that despite continuous cost reductions implemented by
management, there was no beneficial effect upon the market price of our common
stock. The Board believes that because of the limited liquidity of the shares of
the common stock and the valuation of the common stock in the public markets, we
have not been able to realize fully the benefits of our status as a public
52
company. At the same time, our status as a public company has imposed a number
of limitations on PRTS and our management in conducting our operations.
Accordingly, one of the purposes of the merger is to afford greater operating
flexibility by allowing our management to concentrate on the Company's long-term
viability instead of quarter-to-quarter performance often emphasized by the
public markets. Further, the merger is intended to enable us to use in our
operations those funds that would otherwise be expended in complying with those
requirements of the federal securities laws applicable to public companies.
Our purpose in submitting the merger to a vote of its stockholders with a
favorable recommendation at this time is to allow our stockholders an
opportunity to receive a cash payment at a fair price and provide a prompt and
orderly transfer of ownership of PRTS to the Acquisition Group.
Acquisition Group
-----------------
The Acquisition Group is engaging in the merger for the following reasons:
o PRTS during the latter part of 2001 and the first quarter of 2002
explored other strategic alternatives (including the possible sale
of assets and possible liquidating dividend) to improve its
financial viability and market performance given the financial
pressure on the Company and the valuations of similar companies in
the public markets. However, after considering these options, the
Board determined that it would study the options further in light of
the Company's attempt to attain profitability through the deployment
of cost-cutting initiatives. In April 2002, Mr. Hammond approached
the Board with his proposal to take the Company private. The Board
decided to pursue Mr. Hammond's proposal while continuing to be
mindful of the results, if any, of its attempts to attain
profitability and to secure an increased valuation in the public
markets.
o The Acquisition Group also believes that the costs incurred by PRTS
to maintain itself as a public company, including filing reports
under the Exchange Act, providing annual reports and proxy
statements to PRTS stockholders, listing its common stock on the
Nasdaq National Market, directors and officers insurance premiums,
investor relations expenses and outside board member fees (estimated
to be an aggregate of $300,000 per year), are not justified given
the size of PRTS, the thin trading market for its Common Stock and
the lack of a significant following of PRTS by research analysts.
The Acquisition Group believes these resources could be used more
effectively in the business operations of PRTS. However, the
Acquisition Group has informed us that it may cause PRTS to continue
to be a reporting company under the Securities Exchange Act of 1934,
as amended.
Mr. Hammond and the Acquisition Group were interested in a transaction that
would enable them to obtain control of PRTS. However, the Acquisition Group was
also aware that the proposed merger and the merger consideration offered by the
Acquisition Group would be publicly announced, giving any interested third party
an opportunity to discuss with the Acquisition Group or PRTS a business
combination transaction that might yield more than $1.50 per share for
Unaffiliated Stockholders. The Acquisition Group was willing to consider any
third-party proposals made to PRTS that would enable the Unaffiliated
Stockholders to realize more than $1.50 for its shares of Common Stock so long
as it was for a per share price the Acquisition Group believed was sufficient
given the Acquisition Group's majority interest.
The Acquisition Group structured the transaction as a merger to enable it
to acquire all of the common stock in a single transaction. This structure also
allows any Unaffiliated Stockholder who does not believe that the cash price of
$1.50 per share is fair to exercise appraisal rights under Delaware law. The
primary reasons for the timing of the transaction were with the competitive
disadvantages that PRTS confronted as a public company, the costs incurred by
PRTS as a public company, the lack of liquidity in PRTS common stock, the
depressed price of PRTS common stock and our inability to access the capital
markets.
53
CERTAIN EFFECTS OF THE MERGER
Upon the effective time of the merger, the Unaffiliated Stockholders will
cease to have ownership interests in PRTS or rights as PRTS stockholders.
Therefore, the current Unaffiliated Stockholders will not participate in any
future earnings or growth of PRTS and will not benefit from any appreciation in
value of PRTS. Upon completion of the merger, the Acquisition Group is expected
to own 100% of the capital stock of the surviving corporation outstanding
immediately after the merger. The Acquisition Group and any other future holders
of the surviving corporation's equity interests will be the sole beneficiaries
of the future earnings and growth of PRTS, if any.
Our common stock is currently registered under the Exchange Act and is
quoted on the Nasdaq National Market under the symbol "PRTS". After the merger,
the common stock will cease to be quoted on the Nasdaq National Market. The
Acquisition Group has informed us that it may cause PRTS to continue to be a
reporting company under the Securities Exchange Act of 1934, as amended.
At the effective time of the merger, the officers and directors of HAC
immediately prior to the effective time of the merger will become the officers
and directors of the surviving corporation. At the effective time of the merger,
the certificate of incorporation of PRTS as in effect immediately prior to the
effective time of the merger will be amended to be identical to the certificate
of incorporation of HAC (except that the name of HAC will be changed to
PartsBase, Inc.) and will become the certificate of incorporation of the
surviving corporation. The by-laws of HAC in effect immediately prior to the
effective time of the merger will become the by-laws of the surviving
corporation. None of the executive officers currently have employment agreements
with PRTS.
It is expected that, following completion of the merger, the operations of
PRTS will be conducted substantially as they are currently being conducted.
PRTS, the Acquisition Group and Mr. Hammond will continue to evaluate our
business and operations after the merger and may develop new plans and proposals
that PRTS, Hammond I, the Acquisition Group or Mr. Hammond consider to be in the
best interests of PRTS and its stockholders.
Mr. Narath, upon consummation of the merger, will receive the benefit of
$1.50 per share for each of the 40,000 shares he beneficially owns through Metro
Investments, a firm he controls. Other than Mr. Hammond and Mr. Narath, no other
officer or director will receive any compensation or benefits in connection with
the consummation of the merger.
Except for currently outstanding warrants which do not expire by their
terms, all outstanding options and warrants (including those held by our
directors and executive officers) will be canceled to the extent not exercised
prior to the effective time of the merger in exchange for an amount of cash, if
any, determined by multiplying (i) the excess, if any, of $1.50 over the per
share exercise price of the option, multiplied by (ii) the number of shares of
common stock subject to the option or warrant, net of any applicable withholding
taxes.
The following table sets forth for Mr. Hammond, Hammond I and affiliates
their interest in the net book value and net loss of PRTS, based upon the
approximate percentage of their beneficial ownership of PRTS common stock as of
September 30, 2002:
Name Ownership Percent Net Book Value (1) Net Loss (2)
---------------------------------- ----------------- ------------------ ------------
Robert A. Hammond, Jr., Hammond I,
Inc. and affiliates 64.23% $1.07 $2,052,851
---------------------------
(1) Based on PRTS stockholders' equity as of September 30, 2002.
(2) Based on PRTS net loss for the nine months ended September 30, 2002.
54
The following table sets forth for Mr. Hammond, Hammond I and affiliates
their interest in the net book value and net loss of PRTS after the merger,
based upon the approximate percentage of his expected ownership of the capital
stock of the surviving corporation outstanding immediately after the merger:
Name Ownership Percent Net Book Value (1) Net Loss (2)
---------------------------------- ----------------- ------------------ ------------
Robert A. Hammond, Jr., Hammond I,
Inc. and affiliates 100.00% $1.65 $3,196,094
-----------------------------
(1) Based on the surviving corporation's net book value of approximately
$23,243,305 as of September 30, 2002, which gives effect to the merger
as if it occurred on September 30, 2002.
(2) Based on the surviving corporation's net loss of approximately
$3,196,094 for the nine months ending September 30, 2002, which gives
effect to the merger as if it occurred on September 30, 2002.
RISKS THAT THE MERGER WILL NOT BE COMPLETED
Completion of the merger is subject to various risks, including, but not
limited to, the following:
o that more than a majority of the shares held by the Non-Acquisition
Group Stockholders will be voted against the merger;
o that PRTS will experience a circumstance, event, occurrence, change
or effect that, individually or in the aggregate has, or would
reasonably be expected to have, a material adverse effect on PRTS;
o that the parties will not have performed in all material respects
their obligations contained in the merger agreement at or before the
effective time of the merger;
o that there is material litigation or similar proceedings pending or
threatened against PRTS at the time of the closing;
o that the representations and warranties made by the parties in the
merger agreement will not be true and correct to the extent provided
in the merger agreement immediately before the effective time of the
merger; and
o that there may be brought or pending any action or proceeding that
has, or would reasonably be expected to have, a material adverse
effect on PRTS.
As a result of various risks to the completion of the merger, there can be
no assurance that the merger will be completed even if the requisite stockholder
approval is obtained. It is expected that, if PRTS stockholders do not approve
and adopt the merger agreement and the merger or if the merger is not completed
for any other reason, the current management of PRTS, under the direction of the
Board of Directors, will continue to manage PRTS as an ongoing business.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendations of the Board of Directors, PRTS
stockholders should be aware that some of our executive officers and members of
our Board of Directors have interests in the transaction that are different
from, or in addition to, the interests of PRTS stockholders generally. The Board
of Directors appointed the Special Committee, consisting solely of directors who
are not officers or employees of PRTS and who have no financial interest in the
proposed merger different from the Unaffiliated Stockholders, to evaluate,
negotiate and recommend the merger agreement and to evaluate whether the merger
is in the best interests of the Unaffiliated Stockholders other than the
55
Acquisition Group. The Special Committee was aware of these differing interests
and considered them, among other matters, in evaluating and negotiating the
merger agreement and the merger and in recommending to the Board of Directors
that the merger agreement and the merger be approved and adopted.
Robert A. Hammond, Jr. - As of August 26, 2002, Mr. Hammond beneficially
owned 9,000,000 shares of our common stock, or 64.23% of our shares. Mr. Hammond
is the sole stockholder of Hammond I, and, as a result of the completion of the
merger, Mr. Hammond will beneficially own 100% of our outstanding common stock,
and his aggregate interest in our net book value will increase from
approximately 64% to 100% (from $1.07 to $1.65 of our net book value per share
as of September 30, 2002). In addition, Mr. Hammond will have the ability to
benefit solely from our future earnings and profits, if any, and any
divestitures, strategic acquisition or other corporate opportunities that may be
pursued by us in the future.
PRTS - We will avoid a significant portion of the costs of remaining a
public company, including the legal, accounting and transfer agent fees and
expenses and printing costs necessary to satisfy the reporting obligations of
the Exchange Act (which were approximately $300,000 in fiscal year 2001).
The Special Committee; Board of Directors - Each member of the Special
Committee has received fees aggregating $25,000 from PRTS for services rendered
as a member of the Special Committee in connection with the merger plus
reimbursable expenses. All fees incurred by the Special Committe, Board of
Directors and PRTS in connection with the merger, including but not limited to
the fees and expenses of its special counsel and financial advisors which are
projected to be approximately $933,000, will be paid by PRTS. Mr. Narath, a
board member and member of the Special Committee, will receive $60,000 in merger
consideration as result of his beneficial ownership of 40,000 shares of our
common stock and 20,000 shares underlying currently exercisable stock options.
Option Holders - In connection with the merger, all outstanding options
(including those held by our directors and executive officers) will be canceled
to the extent not exercised prior to the effective time of the merger in
exchange for an amount of cash, if any, determined by multiplying (i) the
excess, if any, of $1.50 over the per share exercise price of the option,
multiplied by (ii) the number of shares of common stock subject to the option,
net of any applicable withholding taxes.
INDEMNIFICATION; DIRECTORS AND OFFICERS INSURANCE
From and after the effective time, the surviving corporation shall provide
exculpation, indemnification and advancement of expenses for all persons who had
served or are serving as officers or directors of PRTS prior to or as of the
effective time, including Mr. Hammond, on terms no less favorable than the
provisions with respect to indemnification and advancement of expenses that were
provided to such persons as of the effective time. Hammond and PRTS agree that
the directors and officers of PRTS covered by these provisions are intended to
be third party beneficiaries of these provisions and shall have the right to
enforce the obligations of the surviving corporation and under these provisions.
The surviving corporation shall maintain in effect from the effective time until
five (5) years thereafter directors' and officers' liability insurance with a
term, coverage amount and other terms and conditions as least as favorable as
those of the directors' and officers' liability insurance maintained by PRTS
immediately prior to the effective time.
FINANCING OF THE MERGER
The total amount of funds required to consummate the merger and to pay
related fees and expenses is estimated to be approximately $8.4 million. The
Acquisition Group, through the cash reserves of PRTS which will become available
immediately upon the effectiveness of the merger, has sufficient funds available
to pay the merger consideration and pay its portion of the fees and expenses
incurred in connection with the merger. The merger is not conditioned on any
financing arrangements.
56
FEES AND EXPENSES OF THE MERGER
Regardless of whether the merger is completed, in general, all fees and
expenses incurred in connection with the merger will be paid by the party
incurring those fees and expenses. Under certain circumstances described in
"Summary - The Merger Agreement - Fees, Expenses and Other Payments," PRTS will
reimburse Hammond I for its reasonable out-of-pocket expenses incurred in
connection with the merger. Fees and expenses of the merger are estimated at
this time to be as follows:
Description Amount
----------------- --------
SEC filing fees.......................................................$1,507
Financial advisor fees including reimbursable expenses..............$135,000
Legal, accounting and other professional fees.......................$575,000
Printing, proxy solicitation and mailing costs.......................$23,000
Special Committee fees including reimbursable expenses..............$100,000
Other fees...........................................................$98,237
--------
Total..........................................................$932,744
-------------------------
These expenses will not reduce the merger consideration to be received by
the Unaffiliated Stockholders.
ACCOUNTING TREATMENT OF THE MERGER
The merger will be accounted for under the purchase method of accounting
whereby the majority interest will be recorded at historical cost and the
minority interest as prescribed by Statement of Financial Accounting Standards
No. 141, Business Combinations and Emerging Issues Task Force Abstract 88-16,
Basis in Leveraged Buyout Transactions, whereby the value of the consideration
paid in the merger will be allocated based upon the estimated fair values of the
assets acquired and liabilities assumed at the effective time of the merger.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material U.S. federal income tax
consequences of the merger that are generally applicable to stockholders of
PRTS. This discussion is based on currently existing provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), existing and proposed Treasury
Regulations promulgated under the Code, and current administrative rulings and
court decisions, all of which are subject to change. Any change, which may or
may not be retroactive, could alter the tax consequences to the PRTS
stockholders.
The following discussion does not address tax issues relevant to certain
classes of taxpayers, such as banks, insurance companies, tax-exempt investors,
S corporations, entities classified as partnerships for federal income tax
purposes or taxpayers who hold PRTS shares as dealers. It does not address
issues raised for taxpayers who hold PRTS shares as part of a "straddle," a
"hedge" or a "conversion transaction" as those terms are defined under the Code.
It does not address tax consequences to warrant holders, stockholders who
acquired their shares through the exercise of employee or director stock options
or other compensation arrangements, stockholders whose stock is "qualified small
business stock" within the meaning of Section 1202 of the Code, or stockholders
subject to the alternative minimum tax. Nor does it deal with tax issues
relevant to stockholders who are neither citizens nor residents of the United
States. ALL SUCH STOCKHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING
THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER IN THEIR PARTICULAR
SITUATIONS.
Stockholders of PRTS who receive cash for their shares will recognize gain
or loss for federal income tax purposes equal to the difference between their
basis for their shares and the amount of cash received. If a stockholder holds
PRTS shares as a capital asset, the gain or loss will be capital gain or loss.
If the stockholder has held the shares for one year or less, the gain or loss
57
will be short-term gain or loss. If the stockholder has held the shares for more
than one year, the gain or loss will be long-term gain or loss.
It is intended that the merger of HAC into the Company, with the Company
continuing as the surviving corporation will constitute a reorganization within
the meaning of Section 368(a)(1)(E) of the Code. Assuming that the merger
qualifies as a reorganization within the meaning of Section 368(a)(1)(E) of the
Code, the Company will generally not recognize gain (or loss) as a result of the
merger.
It is intended that the exchange of PRTS common stock in the merger for a
continuing equity interest in PRTS by the Acquisition Group will constitute a
reorganization within the meaning of Section 368(a)(1)(E) of the Code. Subject
to the limitations and exceptions discussed above with respect to certain
classes of stockholders, and assuming that the exchange qualifies as a
reorganization within the meaning of Section 368(a)(1)(E) of the Code, the
Acquisition Group, who will not receive cash for their shares pursuant to the
merger, will generally not recognize gain (or loss) as a result of the merger.
The merger may result in state and/or local income (or other) tax
consequences to stockholders of PRTS. ALL STOCKHOLDERS ARE STRONGLY URGED TO
CONSULT THEIR TAX ADVISOR WITH RESPECT TO THEIR PERSONAL TAX CONSEQUENCES OF THE
MERGER TRANSACTION.
CONDUCT OF THE COMPANY'S BUSINESS AFTER THE MERGER
Officers of the Acquisition Group are continuing to evaluate the Company's
business, outlook, assets, practices, operations, properties, corporate
structure, capitalization, management and personnel and to consider what
changes, if any, will be desirable or necessary. Subject to the foregoing, the
Company and the Acquisition Group expect that the day-to-day business operations
of the Company following the merger will be conducted substantially as they are
currently being conducted by the Company. The Acquisition Group does not
currently intend to dispose of any assets of the Company, other than in the
ordinary course of business. Current members of the PRTS Board of Directors will
resign effective upon the closing of the merger, and the directors of HAC will
become the directors of the surviving corporation. Other than this change in the
composition of the Board, the Acquisition Group expects that, in general, all
members of the Company's current management will continue as management of the
Company after the merger.
REGULATORY APPROVALS
We are not aware of any license or other regulatory permit that appears to
be material to our business that might be adversely affected by the merger or of
any approval or other action by any federal or state governmental,
administrative or regulatory authority or agency that would be required prior to
the merger. Should any such approval or other action be required, it is our
present intention to seek such approval or action. We do not currently intend,
however, to delay the merger pending the outcome of any such action or the
receipt of any such approval (subject to our right and the right of Hammond I to
decline to proceed with the merger if any of the conditions described in "The
Merger Agreement - Conditions to the Merger" shall have occurred). There can be
no assurance that any such approval or other action, if needed, would be
obtained without substantial effort or that adverse consequences might not
result to our business, or that certain parts of our business might not have to
be disposed of or held separate or other substantial conditions complied with in
order to obtain such approval or other action or in the event that such approval
was not obtained or such other action was not taken.
LITIGATION CHALLENGING THE MERGER
In April, May and June 2002, several PRTS stockholders, individually and as
purported representatives of all of the stockholders of PRTS except the
Acquisition Group, filed a total of four purported class action lawsuits against
PRTS, the members of the Board of Directors and specified officers of PRTS. Two
of the lawsuits were filed in the Court of Chancery in the State of Delaware
58
(the "Delaware Court", and the other two were filed in the Circuit Court of the
15th Judicial Circuit in Palm Beach County, Florida (the "Florida Court"). These
lawsuits allege, among other things, that the defendants breached their
fiduciary duties to the stockholders of PRTS in connection with the merger on
the terms then proposed, that the proposed merger is unfair and that the PRTS
directors breached their fiduciary duties by failing to fully disclose material
non-public information related to the value of PRTS and by engaging in
self-dealing. Generally, each of the complaints seeks an injunction, damages,
costs and other relief. In October 2002, the Florida Court approved
consolidation of the two lawsuits filed in Florida as a single action. In
October 2002, the parties to the Florida lawsuits entered into a Memorandum of
Understanding, which provided for an agreement-in-principle to settle the class
action lawsuits. The Memorandum of Understanding provided for the parties to
enter a joint stipulation and such other documentation as may be required to
obtain final approval of the Florida Court. The Memorandum of Understanding
specifies the terms of the settlement to be:
o the per share consideration for the merger shall be $1.41;
o the merger shall require the approval by the majority of all of the
outstanding shares of PRTS common stock entitled to vote at the
special meeting including shares owned or controlled by the
Acquisition Group and it also shall require that a majority of the
Non-Acquisition Group Stockholders do not vote against the merger;
and
o defendants may, at their sole discretion, terminate the proposed
settlement in the event PRTS stockholders who own five percent (5%)
of the shares of PRTS common stock elect to opt-out of the
settlement.
In November 2002, the parties in the Florida lawsuits agreed to dismiss the
Florida lawsuits and to pursue a class action settlement in Delaware. The
parties are currently drafting a Joint Stipulation of Settlement which will
contain substantially the same terms of settlement as the October Memorandum of
Understanding . The settlement of the class action lawsuits is subject to the
final approval of the Delaware Court. If approved by the Delaware Court, the two
lawsuits filed in Delaware will be dismissed with prejudice, and the settlement
of the class action lawsuits will release the defendants in all such actions
from further liability relating to the merger. Partsbase anticipates that the
hearing to settle the class action lawsuits will take place in the Delaware
Court during the first quarter of 2003.
OTHER SECURITIES LITIGATION
In April and May 2001, the Company was served with four purported class
action lawsuits, which cases were consolidated into one action entitled, In re:
PartsBase.com, Inc. Securities Litigation, Case No.
01-8319-CIV-UNGARO-BENAGES/BROWN. The consolidated lawsuit named as defendants
the Company, certain of its current and former officers and directors, and the
underwriters of its initial public offering of securities. The consolidated
lawsuit alleged violations of Sections 11, 12(a)(2) and 15 of the Securities Act
of 1933 and alleged the Company's March 2000 registration statement
misrepresented and failed to disclose matters related to the Company's business
operations and membership sales. The complaint alleged damages of nearly $42
million. The Court certified a class consisting of purchasers of the Company's
common stock in the offering during the period from March 22, 2000 through April
25, 2000.
In September 2002, final judgment was entered by the U.S. District Court
for the Southern District of Florida dismissing the case with prejudice. The
settlement releases the defendants from further liability relating to the IPO,
however, stockholders of 119,000 shares of PRTS purchased during the period from
March 22, 2000 through April 25, 2000 opted out of the settlement, and one such
stockholder has filed a lawsuit in California State Court. To the extent such
litigation is ongoing at the time of the closing of the merger, we will seek a
waiver from the Acquisition Group as to the condition regarding there being no
material litigation or similar proceedings pending or threatened against PRTS at
59
the time of the closing seeking to restrain the consummation of the merger or
seeking damages which would result in a material adverse effect. There can be no
assurances that we will obtain such a waiver from the Acquisition Group.
EFFECTIVE TIME OF THE MERGER
The merger will be consummated and become effective at the time a
certificate of merger is filed with the Secretary of State of the State of
Delaware or such later time as specified in the certificate of merger. We refer
to this time as the "effective time". If the merger agreement is adopted by our
stockholders and the other conditions to the merger agreement are satisfied (or
waived to the extent permitted by law), we expect to complete the merger on or
about ________, 2003, and in any event, no later than five business days after
the satisfaction or waiver (to the extent permitted by law) of the other
conditions. The Acquisition Group possesses sufficient voting power to adopt and
approve the merger and the merger agreement, and has told us that it intends to
do so.
The merger agreement may be terminated prior to the effective time of the
merger by PRTS or Hammond I in certain circumstances, whether before or after
the adoption and approval of the merger agreement by our common stockholders.
See page 68 ("The Merger Agreement - Termination of the Merger Agreement").
PAYMENT OF MERGER CONSIDERATION AND SURRENDER OF STOCK CERTIFICATES
Hammond I has designated ________________________ to act as payment agent
for purposes of making the cash payments contemplated by the merger agreement.
Immediately prior to the effective time of the merger, there will be deposited
in trust with the payment agent cash in U.S. dollars in an aggregate amount
equal to the merger consideration for all PRTS stockholders other than the
Acquisition Group. The payment agent will, pursuant to irrevocable instructions,
deliver to you your merger consideration according to the procedure summarized
below.
As soon as reasonably practicable after the effective time of the merger,
the payment agent will mail to you a letter of transmittal and instructions
advising you of the effectiveness of the merger and the procedure for
surrendering to the payment agent your certificates in exchange for the merger
consideration. Upon the surrender for cancellation to the paying agent of your
certificates, together with a letter of transmittal, executed and completed in
accordance with its instructions, and any other items specified by the letter of
transmittal, the payment agent will promptly pay to you your merger
consideration. No interest will be paid or accrued in respect of cash payments
of merger consideration. Payments of merger consideration also will be reduced
by applicable withholding taxes. In the event that you have lost or misplaced a
certificate, you will have to send an affidavit of loss in lieu of the
applicable certificate along with your transmittal letter.
If the merger consideration (or any portion of it) is to be delivered to a
person other than you, it will be a condition to the payment of the merger
consideration that your certificates be properly endorsed or accompanied by
appropriate stock powers and otherwise in proper form for transfer, that the
transfer otherwise be proper and not violate any applicable federal or state
securities laws, and that you pay to the payment agent any transfer or other
taxes payable by reason of the transfer or establish to the satisfaction of the
payment agent that the taxes have been paid or are not required to be paid.
YOU SHOULD NOT FORWARD YOUR STOCK CERTIFICATES TO THE PAYMENT AGENT WITHOUT
A LETTER OF TRANSMITTAL, AND YOU SHOULD NOT RETURN YOUR STOCK CERTIFICATES WITH
THE ENCLOSED PROXY.
At and after the effective time of the merger, you will cease to have any
rights as our stockholder, except for the right to surrender your certificate in
exchange for payment of the merger consideration, or, if you exercise your
appraisal rights, the right to perfect your right to receive payment for your
shares pursuant to Delaware law, and no transfer of PRTS common will be made on
the stock transfer books of PRTS. Certificates presented to PRTS after the
effective time will be canceled and exchanged for cash as described above.
60
APPRAISAL RIGHTS
Pursuant to Delaware law, if (1) you properly file a demand for appraisal
of your PRTS common stock in writing prior to the vote taken at the special
meeting and (2) your shares of PRTS common stock are not voted in favor of the
merger, you will be entitled to appraisal rights under Section 262 of the
General Corporation Law of the State of Delaware.
Section 262 is reprinted in its entirety as Appendix C to this proxy
statement. The following discussion is not a complete statement of the law
relating to appraisal rights and is qualified in its entirety by reference to
Appendix C. This discussion and Appendix C should be reviewed carefully by you
if you wish to exercise statutory appraisal rights or you wish to preserve the
right to do so, as failure to comply with the procedures set forth in Section
262 will result in the loss of your appraisal rights.
If you make the demand described below with respect to your shares, and (i)
are continuously the record holder of your shares through the effective time of
the merger; (ii) otherwise comply with the statutory requirements of Section 262
of the General Delaware Corporation Law of the State of Delaware; (ii) do not
vote your shares of common stock in favor of the merger agreement; and (iv) do
not consent, with respect to your shares of common stock, to the merger in
writing; you shall be entitled to an appraisal by the Delaware Court of Chancery
of the "fair value" of your shares, exclusive of any element of value which
might arise from either the accomplishment or expectation of the merger,
together with a fair rate of interest, if any, as determined by the Delaware
Court of Chancery.
Under Section 262, where a merger is to be submitted for adoption and
approval at a meeting of stockholders, as in the special meeting, not less than
20 days prior to the meeting we must notify you that appraisal rights are
available and include in the notice a copy of Section 262. This proxy statement
constitutes your notice of your appraisal rights, and the applicable statutory
provisions are attached to this proxy statement as Appendix C.
As a holder of PRTS common stock, if you desire to exercise your appraisal
rights you must not vote in favor of the merger agreement or the merger and you
must deliver a separate written demand for appraisal to us prior to the vote on
the merger agreement and the merger at the special meeting. If you sign and
return a proxy without expressly directing by checking the applicable boxes on
the reverse side of the enclosed proxy card that your shares be voted against
the proposal or that an abstention be registered with respect to your shares in
connection with the proposal, you will effectively have waived your appraisal
rights as to those shares because, in the absence of express contrary
instructions, your shares will be voted in favor of the proposal. Accordingly,
if you desire to perfect appraisal rights with respect to any of your shares you
must, as one of the procedural steps involved in such perfection, either (1)
refrain from executing and returning the enclosed proxy card and from voting in
person in favor of the proposal to adopt the merger agreement or (2) check
either the "AGAINST" or the "ABSTAIN" box next to the proposal on the proxy card
or affirmatively vote in person against the proposal or register in person an
abstention with respect to the proposal.
Only a holder of record is entitled to assert appraisal rights for the
shares of our common registered in that holder's name. A demand for appraisal
must be executed by or on behalf of the holders of record and must reasonably
inform us of the holder of record's identity and that the holder of record
intends to demand appraisal of the holder's shares. If you have a beneficial
interest in shares that are held of record in the name of another person, such
as a broker, fiduciary or other nominee, you must act promptly to cause the
record holder to follow properly and in a timely manner to perfect whatever
appraisal rights are available, and your demand must be executed by or for the
record owner. If your shares are owned of record by more than one person, as in
a joint tenancy or tenancy in common, your demand must be executed by or for all
joint owners. An authorized agent, including an agent for two or more joint
owners, may execute the demand for appraisal; however, the agent must identify
the record owner and expressly disclose the fact that, in exercising the demand,
the agent is acting as agent for the record owner.
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A record owner, such as a broker, fiduciary or other nominee, who holds
shares as a nominee for others, may exercise appraisal rights with respect to
the shares held for all or less than all beneficial owners of shares as to which
the person is the record owner. In such case, the written demand must set forth
the number of shares covered by the demand. Where the number of shares is not
expressly stated, the demand will be presumed to cover all shares in the name of
such record owner.
If you elect to exercise appraisal rights, you should mail or deliver your
written demand to:
PartsBase, Inc.
905 Clint Moore Road
Boca Raton, FL 33487
Attention: Mark Weicher, Chief Financial Officer
The written demand for appraisal should specify your name and mailing
address, the number of shares owned, and that you are demanding appraisal of
your shares. A proxy or vote against the merger agreement will not by itself
constitute a demand. Within ten days after the effective date, PRTS, as the
surviving corporation, must provide notice of the effective time of the merger
to you if you have complied with Section 262.
Within 120 days after the effective date, either PRTS or you, if you have
complied with the required conditions of Section 262 and are otherwise entitled
to appraisal rights, may file a petition in the Delaware Court of Chancery, and
if you file a petition you must serve a copy on PRTS, demanding a determination
of the fair value of the shares of all stockholders demanding an appraisal. PRTS
does not have any present intention to file any such petition in the event that
a stockholder makes a proper written demand for appraisal of PRTS common stock.
Accordingly, if you desire to have your shares appraised you should initiate any
petitions necessary for the perfection of your appraisal rights within the time
periods and in the manner prescribed in Section 262. If appraisal rights are
available and if you have complied with the applicable provisions of Section
262, within 120 days after the effective date of the merger, you will be
entitled, upon written request, to receive from PRTS a statement setting forth
the aggregate number of shares not voting in favor of the merger agreement and
with respect to which we received demands for appraisal, and the aggregate
number of holders of such shares. The statement must be mailed within ten days
after the written request for the statement has been received by PRTS or within
ten days after the expiration of the period for delivery of demands for
appraisal rights whichever is later.
If a petition for an appraisal is timely filed by a holder of our shares
and a copy thereof is served upon PRTS, PRTS will then be obligated within 20
days to file with the Delaware Register in Chancery a duly verified list
containing the names and addresses of all stockholders who have demanded an
appraisal of their shares of PRTS common stock and with whom agreements as to
the value of their shares have not been reached. After notice to those
stockholders as required by the Court, the Delaware Court of Chancery is
empowered to conduct a hearing on the petition to determine those stockholders
who have complied with Section 262 and who have become entitled to appraisal
rights thereunder. If you have demanded an appraisal, the Delaware Court of
Chancery may require you to submit your certificates to the Register in Chancery
for notation on the certificates of the pendency of the appraisal proceeding;
and if you fail to comply with the direction, the Delaware Court of Chancery may
dismiss the proceedings as to you. Where proceedings are not dismissed, the
Delaware Court of Chancery will appraise the shares owned by stockholders
demanding an appraisal, determining the "fair value" of such shares, together
with a fair rate of interest, if any, to be paid upon the amount determined to
be the fair value. In such event, the Delaware Court of Chancery's appraisal may
be more than, less than, or equal to the merger consideration and stockholders
should be aware that financial advisors' opinions as to fairness from a
financial point of view are not opinions as to "fair value" under Section 262.
In determining fair value, the Delaware Court of Chancery is to take into
account all relevant factors. In relevant case law, the Delaware Supreme Court
discussed the factors that could be considered in determining fair value in an
appraisal proceeding, stating that "proof of value by any techniques or methods
which are generally considered acceptable in the financial community and
otherwise admissible in court" should be considered, and that "fair price
obviously requires consideration of all relevant factors involving the value of
a company". The Delaware Supreme Court stated that in making this determination
of fair value the court must consider market value, asset value, dividends,
62
earnings prospects, the nature of the enterprise and any other facts
ascertainable as of the date of the merger that throw light on future prospects
of the merged corporation. The Delaware Supreme Court also stated that "elements
of future value, including the nature of the enterprise, which are known or
susceptible of proof as of the date of the merger and not the product of
speculation, may be considered." Section 262, however, provides that fair value
is to be "exclusive of any element of value arising from the accomplishment or
expectation of the merger." In addition, Delaware courts have decided that the
statutory appraisal remedy, depending on factual circumstances, may or may not
be a dissenting stockholder's exclusive remedy.
The Court will also determine the amount of interest, if any, to be paid
upon the amounts to be received by persons whose shares of our common stock have
been appraised. The cost of the appraisal proceeding may be determined by the
Delaware Court of Chancery and taxed against the parties, as the Delaware Court
of Chancery deems equitable in the circumstances. Upon application of a
stockholder who has demanded an appraisal, the Delaware Court of Chancery may
order that all or a portion of the expenses incurred by any stockholder in
connection with the appraisal proceeding, including, without limitation,
reasonable attorney's fees and the fees and expenses of experts, be charged pro
rata against the value of all shares of stock entitled to appraisal.
If you have demanded appraisal in compliance with Section 262 you will not,
after the effective time of the merger, be entitled to vote for any purpose any
shares subject to your demand or to receive payment of dividends or other
distributions on your shares, except for dividends or distributions payable to
holders of record as of a date prior to the effective time of the merger. At any
time within 60 days after the effective date of the merger, you will have the
right to withdraw your demand for appraisal; after this period, you may withdraw
your demand for appraisal only with the consent of PRTS. If no petition for
appraisal is filed with the Delaware Court of Chancery within 120 days after the
effective date of the merger, your rights to appraisal shall cease. You may
withdraw your demand for appraisal by delivering to PRTS a written withdrawal of
your demand for appraisal and an acceptance of the merger, except that (1) any
attempt to withdraw made more than 60 days after the effective time of the
merger will require written approval of PRTS, and (2) no appraisal proceeding in
the Delaware Court of Chancery shall be dismissed without the approval of the
Delaware Court of Chancery, and the approval may be conditioned upon such terms
as the Delaware Court of Chancery deems just.
If you fail to comply fully with the statutory procedure set forth in
Section 262 you will forfeit your rights of appraisal and will be entitled to
receive the merger consideration for your shares.
THE MERGER AGREEMENT
--------------------
The following is a summary of the material provisions of the merger
agreement and is qualified in its entirety by the merger agreement. The full
text of the merger agreement, as amended, is included in this proxy statement as
Appendix A and is incorporated herein by reference. Stockholders are urged to
read the entire merger agreement.
GENERALLY
The Company, Hammond I, HAC and Mr. Hammond have entered into the merger
agreement. The merger agreement provides for HAC to merge with and into the
Company, which will be the surviving corporation in the merger. As a result of
the merger, the Acquisition Group will own 100% of the Company's stock, and the
separate existence of HAC will cease. Each outstanding share of common stock of
the Company issued and outstanding immediately prior to the effective time of
the merger, other than those shares held by the Acquisition Group, shall be
converted into the right to receive an amount in cash, without interest, equal
to $1.50.
EFFECTIVE TIME OF THE MERGER
The merger will be effective as soon as practicable following the
satisfaction or waiver of all conditions set forth in Article VI of the merger
agreement, including stockholder approval, and at such time as the certificate
63
of merger is duly filed with the Secretary of State of the State of Delaware or
such other time thereafter as is provided in the certificate of merger in
accordance with the Delaware General Corporation Law (the "DGCL").
In the merger, HAC's certificate of incorporation as in effect immediately
prior to the effective time shall be the certificate of incorporation of the
surviving corporation, provided that HAC's certificate of incorporation will be
amended by the Certificate of Merger to change its name to "PartsBase, Inc." As
of the completion of the merger, the bylaws of HAC will be the bylaws of the
Company.
CONVERSION OF SECURITIES
At the effective time, subject to the terms, conditions and procedures set
forth in the merger agreement, each share of common stock issued and outstanding
will be converted into the right to receive $1.50 in cash, without interest,
other than any outstanding share of common stock that is held by stockholders
who perfect their appraisal rights under the DGCL, any outstanding share of
common stock that is held by the Acquisition Group and any outstanding share of
common stock held in the Company's treasury or by any subsidiary of the Company
immediately prior to the effective time.
Each share of common stock issued and held in the Company's treasury or
held by any subsidiary of the Company immediately prior to the effective time
shall cease to be outstanding and shall be cancelled and retired without payment
of any consideration therefore. Each share of common stock held by any member of
the Acquisition Group immediately prior to the effective time shall remain
outstanding. Except for the right to receive the merger consideration, and as
set forth above, or, with respect to those shares held by stockholders who
become entitled to appraisal rights, the right to receive payment as set forth
in the DGCL, from and after the effective time, all shares, by virtue of the
merger and without any action on the part of the holders, will no longer be
outstanding and will be canceled and retired and will cease to exist.
Each share of common stock of HAC then issued and outstanding will, by
virtue of the merger and without any action on the part of HAC, become one fully
paid and nonassessable share of common stock of the surviving corporation.
STOCK OPTIONS AND WARRANTS
All outstanding stock options and warrants of the Company, whether or not
then exercisable, will be canceled at the effective time of the merger, except
for currently outstanding warrants which do not expire by their terms. The
Company may permit holders of such options or warrants to exercise them prior to
the effective time by accepting as payment therefor a portion of the number of
shares issuable upon such exercise with a value equal to the aggregate exercise
price of such options or warrants valued at the merger consideration.
REPRESENTATIONS AND WARRANTIES
The Company has made various representations and warranties in the merger
agreement to Hammond I and HAC relating to, among other matters, the Company's
and its subsidiary's organization, standing, power, and capital structure; the
Company's authority to enter into and consummate its obligations under the
merger agreement and the enforceability of the merger agreement; the required
consents and approvals of governmental entities and the absence of conflict with
the Company's governing documents and certain agreements and permits; the making
and accuracy of SEC filings (including financial statements); the accuracy of
this Proxy Statement and the Schedule 13E-3; the absence of certain material
changes since December 31, 2001 that may reasonably be expected to have a
material adverse effect on the Company and its subsidiary; the absence of
material litigation; the inapplicability of any state takeover statute or any
anti-takeover provision in the Company's certificate of incorporation or bylaws;
and the receipt by the Special Committee of the opinion of its financial
advisor, vFinance.
64
The merger agreement also contains various representations and warranties
by Mr. Hammond, Hammond I, and HAC to the Company, relating to, among other
matters, Hammond I's and HAC's organization, standing and power; Hammond I's and
HAC's corporate authority to enter and consummate their obligations under the
merger agreement and the enforceability of the merger agreement; the veracity
and completeness of information provided by them in connection with the
preparation of this Proxy Statement; and the interim operations of HAC.
Please see Article III of the merger agreement for a full statement of the
representations and warranties of the parties. The representations and
warranties terminate upon the effective time of the merger.
COVENANTS
Pursuant to the merger agreement, the Company has agreed that prior to the
effective time, the Company shall: conduct its businesses and operations only
according to its ordinary course of business, consistent with past practice, and
use reasonable best efforts to preserve intact its business organization; keep
available the services of its present officers, employees and consultants; and
maintain existing relationships with suppliers, creditors, business associates
and others having business dealings with the Company.
The Company also agrees that, except as expressly contemplated by the
merger agreement or consented to in writing by Hammond I, until the effective
time of the merger, it will not and will not permit its subsidiary to:
o declare or pay any dividends on or make other distributions in
respect of any of its own or its subsidiaries' capital stock, other
than cash dividends payable by a subsidiary to the Company or one of
its subsidiaries;
o split, combine or reclassify any of the Company's capital stock or
issue or authorize or propose the issuance of any other securities
in respect of, in lieu of or in substitution for the Company's
shares of capital stock; or
o repurchase, redeem or otherwise acquire any shares of its capital
stock or permit any subsidiary to acquire any shares of capital
stock or any securities convertible into or exercisable for any of
the Company's capital stock;
o issue, deliver or sell, or authorize or propose the issuance,
delivery or sale of, any shares of the Company's capital stock of
any class, any debt securities having the right to vote or any
securities convertible into or exercisable for or any rights,
warrants or options to acquire any such shares or debt securities
having the right to vote, or enter into any agreement with respect
to the foregoing, other than issuances of common stock pursuant to
exercises of stock options or common stock awards listed in the
Company's disclosure letter;
o amend or propose to amend the Company's certificate of
incorporation, bylaws or other governing documents;
o acquire or agree to acquire (by merger, consolidation, purchase of a
substantial equity interest in or purchase of a substantial portion
of the assets of, or by any other manner) any business or any
corporation, limited liability company, partnership, association or
other business organization or division thereof;
o other than in the ordinary course of business, otherwise acquire any
assets which are material, individually or in the aggregate, to the
Company;
65
o sell, lease, encumber or otherwise dispose of any of or agree to
sell, lease, encumber or otherwise dispose of the Company's assets,
except as disclosed in its disclosure letter and for dispositions in
the ordinary course of business and consistent with past practice
and of substantially the same character, type and magnitude as
dispositions in the past;
o incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities or warrants or
rights to acquire any of the Company's or its subsidiaries' long
term debt securities, or guarantee any long term debt securities of
others or enter into or amend any contract, agreement, commitment or
arrangement with respect to any of the foregoing, other than in
replacement for existing or maturing debt, indebtedness of any of
the Company's subsidiaries or other borrowing under existing lines
of credit in the ordinary course of business consistent with prior
practice;
o make any loans, advances or capital contributions to any person
other than a subsidiary, except for advances to Company employees
for travel or other business expenses in accordance with past
practice;
o enter into, adopt, amend (except as may be required by law) or
terminate any employee benefit plan or any agreement, arrangement,
plan or policy between the Company or any of its subsidiaries, on
the one hand, and one or more of its directors or officers, on the
other hand;
o except for normal increases in the ordinary course of business and
consistent with past practice and of substantially the same
character, type and magnitude as increases in the past that in the
aggregate, do not result in a material increase in benefits or
compensation expense to the Company or any of its subsidiaries,
increase in any manner the compensation or fringe benefits of any
director, officer or employee or pay any benefit not required by any
plan and arrangement as in effect as of the date of the merger
agreement, or enter into any contract, agreement, commitment or
arrangement to do any of the foregoing;
o enter into or renew any contract, agreement, commitment or
arrangement providing for the payment to any of the Company's or its
subsidiaries' directors, officers or employees of compensation or
benefits contingent, or the terms of which are materially altered,
upon the occurrence of any transaction contemplated by the merger
agreement;
o change the Company's methods of accounting in effect at December 31,
2001, except as required by changes in generally accepted accounting
principles as concurred by its independent auditors;
o except in the ordinary course of business and consistent with past
practice and of substantially the same character, type and magnitude
as elections made in the past, make any material tax election or
settle or compromise any material federal, state, local or foreign
income tax claim or liability or amend any previously filed tax
return in any respect; or
o take any action that would or is reasonably likely to result in any
of the conditions to the merger not being satisfied.
SPECIAL MEETING
The merger agreement provides that as promptly as practicable after the
date of the merger agreement, the Company shall call a special meeting to be
held, for the purpose of voting upon the adoption and approval of the merger and
the merger agreement.
66
INDEMNIFICATION
From and after the effective time, the surviving corporation shall provide
exculpation, indemnification and advancement of expenses for all persons who had
served or are serving as officers or directors of PRTS prior to or as of the
effective time, including Mr. Hammond, on terms no less favorable than the
provisions with respect to indemnification and advancement of expenses that were
provided to such persons as of the effective time.
CONDITIONS
Each party's respective obligation to effect the merger is subject to the
satisfaction prior to the closing date of a number of conditions, including the
following: (a) the adoption and approval of the merger agreement by the
affirmative vote of the holders of a majority of our outstanding shares entitled
to vote thereon, and a majority of the shares held by the Non-Acquisition Group
Stockholders shall not have been voted against the merger; (b) the absence of
any actual or pending temporary restraining order, preliminary or permanent
injunction or other order issued by any court of competent jurisdiction or other
legal restraint or prohibition preventing the consummation of the merger
agreement; (c) the absence of any action taken, or any statute, rule, regulation
or order enacted, entered, enforced or deemed applicable to the merger, which
makes consummation of the merger illegal; and (d) all authorizations, consents,
orders or approvals of, or declarations or filings with, and all expirations or
any terminations of waiting periods imposed by any governmental entity, which
are necessary for consummation of the merger shall have been filed, occurred or
been obtained and in full force and effect.
The obligation of the Company to effect the merger is subject to a number
of conditions, unless waived by the Company, including, without limitation, the
following: (a) the representations and warranties of Mr. Hammond, Hammond I and
HAC shall be true and correct in all respects as of the effective time as though
made on or as of such time except for those representations and warranties that
address matters only as of a particular date or only with respect to a specific
period of time which need only be true and correct in all respects as of such
date or with respect to such period of time which need only be true and correct
in all respects as of such date or with respect to such period; (b) Mr. Hammond,
Hammond I and HAC shall have performed and complied in all material respects
with all obligations under the merger agreement, and the Company shall have
received a certificate signed on behalf of Hammond I by its President and Chief
Executive Officer or by its Corporate Vice President, and by its Senior Vice
President or Chief Financial Officer or by its Corporate Vice President and
Treasurer to such effect; and (c) as of the effective time, no action suit or
proceeding shall be pending (i) seeking to restrain or prohibit the consummation
of the merger, (ii) seeking to obtain from the Company, Hammond I or HAC any
damages which would reasonably be expected to result in a Material Adverse
Effect (as defined in the merger agreement) or (iii) seeking to impose
conditions that would materially adversely impact the economic or business
benefits of the transactions contemplated in the merger agreement .
The obligations of Mr. Hammond, Hammond I and HAC to effect the merger are
subject to a number of conditions, unless waived by Mr. Hammond, Hammond I and
HAC, including the following: (a) the representations and warranties of the
Company shall be true and correct in all respects as of the effective time as
though made on or as of such time except for those representations and
warranties that address matters only as of a particular date or only with
respect to a specific period of time which need only be true and correct in all
respects as of such date or with respect to such period of time which need only
be true and correct in all respects as of such date or with respect to such
period; (b) the Company shall have performed and complied in all material
respects with all of its obligations under the merger agreement, and Hammond I
shall have received a certificate signed on the Company's behalf to such effect;
(c) the Company's stockholders asserting their appraisal rights shall constitute
less than 5% of all shares of the Company's common stock outstanding immediately
prior to the effective time; (d) there has been no action taken, or any
regulation enacted or deemed applicable to the merger by any governmental entity
which would impose requirements upon Hammond I, the surviving corporation or
their subsidiaries that would materially adversely impact the economic or
business benefits of the merger agreement or that would require Hammond I or any
of its subsidiaries to dispose of any asset that is material to Hammond I prior
67
to the effective time; (e) a material adverse effect with respect to the
Company's operations has not occurred, and no facts or circumstances arising
after August 26, 2002 have occurred which, individually or in the aggregate,
could reasonably be expected to have a material adverse effect on the Company;
(f) all proceedings to be taken on our part in connection with the merger
agreement and all documents incident to the merger agreement shall be reasonably
satisfactory to Hammond I, and Hammond I shall have received copies of all such
documents and other evidences as Hammond I may reasonably request in order to
establish the consummation of such transactions and the taking of all
proceedings in connection therewith; (g) there has been no action, suit or
proceeding instituted, pending or threatened seeking to materially restrain the
merger or seeking to obtain from the Company, Hammond I or HAC damages which
would have a materially adverse effect with respect to the Company; and (h)
except for those consents or approvals for which failure to obtain could not, in
the aggregate or individually, reasonably be expected to have a material adverse
effect on the Company, each person whose consent or approval is required in
order to permit the succession pursuant to the merger to any of the Company's or
its subsidiaries' obligations, rights or interests under any loan or credit
agreement, note, mortgage, indenture, lease, license or other agreement or
instrument, shall have been obtained and shall be in full force and effect.
TERMINATION OF THE MERGER AGREEMENT
At any time prior to the effective time, the merger agreement may be
terminated if:
o consented to by the Company and Hammond I in writing;
o the merger does not occur on or before March 31, 2003 and the
terminating party has not caused the failure of the merger by
failing to perform an obligation under the merger agreement to occur
by such date;
o a governmental entity issues a final and non-appealable permanent
injunction or action that prevents the consummation of the merger;
or
o any approval of the Company's common stockholders required for the
consummation of the merger is not obtained by reason of the failure
to obtain the required vote at special meeting.
Hammond I may terminate the merger agreement at any time prior to the
effective time if:
o there is a material breach of any representation, warranty, covenant
or agreement set forth in the merger agreement by the Company, which
is not cured within ten (10) days after written notice, or, any of
the representations or warranties set forth in the merger agreement
shall have become untrue, such that the Company would be incapable
of satisfying the conditions precedent to the merger agreement by
March 31, 2003, in each case only if Mr. Hammond did not have actual
knowledge of, and did not cause, such breach or untruth;
o the Company's Special Committee or Board of Directors shall have (a)
withdrawn, modified or changed its approval or recommendation of the
merger or merger agreement in any manner which is adverse to Hammond
I or HAC; or (b) approved or recommended to its stockholders a
competing transaction or a superior proposal or entered into an
agreement with respect thereto or have resolved to do so; or
o a tender offer or exchange offer or a proposal by a third party to
acquire the Company or its shares pursuant to a merger
consideration, share exchange, business combination, tender or
exchange offer or similar transaction is commenced or publicly
proposed which contains a proposal as to price, and the Company
68
shall have not made a recommendation to its stockholders to reject
such proposal within ten business days of its commencement or the
date such proposal becomes publicly disclosed, if sooner.
The Company may terminate the merger agreement, at any time prior to the
effective time if:
o there is a material breach by Hammond I or HAC of any of their
representations, warranties, covenants or agreements set forth in
the merger agreement, which is not cured within ten (10) days after
written notice, or, any of their representations or warranties set
forth in the merger agreement shall have become untrue, such that
Hammond I and HAC would be incapable of satisfying the conditions
precedent to the merger agreement by March 31, 2003; or
o if the Special Committee and the Board of Directors authorize the
Company to enter into a written agreement with respect to a
competing transaction that the Special Committee and the Board of
Directors have determined to be a superior proposal; provided, that
the Company may not terminate the agreement and enter into an
agreement for a competing transaction until the expiration of five
(5) business days following Hammond I's receipt of a written notice
advising it that the Company has received a superior proposal (as
such term is defined in the merger agreement) specifying the
material terms and conditions of such proposal and identifying the
person making such superior proposal. After providing Hammond I with
notice, the Company will provide a reasonable opportunity to Hammond
I during the five (5) business day period to make adjustments in the
terms and conditions of the merger agreement, which would enable
Hammond I to proceed with the merger on such adjusted terms.
Upon termination, the merger agreement will become void and there shall be
no liability or obligation on, as set forth above, the part of any party or
their respective officers or directors except as set forth therein.
AMENDMENT TO THE MERGER AGREEMENT
The merger agreement may be amended by the parties to the merger agreement
in writing, by action taken by their respective Boards of Directors and by the
Special Committee, at any time before or after the adoption and approval by the
Company's common stockholders of the merger. However, once the common
stockholders have adopted and approved the merger, no amendment shall be made to
the merger agreement which, by law, requires the further approval of
stockholders, without obtaining that further approval.
MARKETS AND MARKET PRICES OF THE COMMON STOCK
---------------------------------------------
AND RELATED STOCKHOLDER MATTERS
-------------------------------
Common Stock
------------
The table below sets forth the high and low closing prices for our common
stock (ticker symbol "PRTS"), as reported on the Nasdaq National Market through
December 16, 2002 for the fiscal quarters indicated:
69
HIGH LOW
------ ------
Year Ended December 31, 2002
----------------------------
Fourth Quarter through December 16, 2002 $1.38 $1.30
Third Quarter 1.40 1.08
Second Quarter 1.27 0.70
First Quarter 1.03 0.68
Year Ended December 31, 2001
Fourth Quarter $ 0.95 $ 0.41
Third Quarter 1.00 0.40
Second Quarter 1.77 0.79
First Quarter 2.56 1.00
Year Ended December 31, 2000
Fourth Quarter $ 3.88 1.69
Third Quarter 8.75 2.75
Second Quarter 10.88 4.25
First Quarter 14.88 9.00
On August 23, 2002, the last day on which shares of our common stock were
traded prior to our announcement of the execution of the merger agreement, the
closing price of the PRTS common stock was $1.15. On December __, 2002, the most
recent trading day prior to the date of this proxy statement, the closing price
of the PRTS common stock was $________.
Stockholders
------------
The approximate number of holders of record of our common stock as of
December __, 2002 is ______, inclusive of those brokerage firms and/or clearing
houses holding shares of common stock for their clientele (with each such
brokerage house and/or clearing house being considered as one holder).
Dividend Policy
---------------
We have never declared any cash dividends on our common stock and have no
present intention to declare or pay cash dividends on our common stock in the
foreseeable future. While there are no restrictions on our ability to declare
dividends, we anticipate that in the future, earnings will be retained to
finance our operations. Any decision as to the future declaration of dividends
on our common stock will depend on the results of operations and our financial
condition and such other factors as our Board of Directors, in its discretion,
deems relevant.
70
COMMON STOCK PURCHASES
----------------------
REPURCHASES BY PRTS
During the period January l1, 2000 to March 31, 2002, we purchased 700,505
shares of our common stock on the open market for an aggregate purchase price of
$1,148,584. The prices at which the shares were purchased ranged from $0.60 per
share to $3.33 per share. The average price per share paid during each quarter
during that period was as set forth in the following table:
Calendar Year 2000
First Quarter....................................................... *
Second Quarter...................................................... *
Third Quarter....................................................... *
Fourth Quarter...................................................$2.40
Calendar Year 2001
First Quarter....................................................$1.78
Second Quarter...................................................$1.12
Third Quarter....................................................... *
Fourth Quarter...................................................... *
Calendar Year 2002
First Quarter....................................................$0.89
Second Quarter...................................................... *
Third Quarter....................................................... *
-----------------------
*No purchases during the quarter. We have not purchased any shares of our
common stock since March 15, 2002.
PURCHASES BY PRTS EXECUTIVE OFFICERS AN DIRECTORS
Based on our records and on information provided to us by our directors and
executive officers, none of our directors or executive officers, including Mr.
Hammond, nor any associates or affiliates of any of the foregoing, have effected
any transactions involving our shares of common stock during the two years prior
to the date of this proxy statement.
71
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following table sets forth information regarding shares of PRTS common
stock beneficially owned as of the date hereof, by: (i) each person or group
known to us that beneficially owns more than five percent of our outstanding
common stock; (ii) our directors and the named executive officers listed in the
Summary Compensation Table included in the Annual Report on Form 10-K for the
year ended December 31, 2001 attached as Appendix B to this proxy statement; and
(iii) all of our executive officers and directors as a group.
Beneficial ownership is calculated in accordance with Rule 13d-3(d) under
the Exchange Act. Shares of common stock subject to options and warrants that
were exercisable on or before the date 60 days after the date hereof are deemed
outstanding for purposes of the following table with respect to the person
holding those options but were not deemed outstanding for purposes of computing
the percentage ownership of any other person. Except as noted below, we believe
each person named in the table has sole voting and investment power with respect
to the shares identified as beneficially owned by them.
Name and Address (1) Number Percent
--------------------------- -------------- -------------
Robert A. Hammond, Jr. 9,150,000 (2) 64.6%
Brian Tolley 61,039 (3) *
Pierre A. Narath 60,000 (4) *
Mark Weicher 18,000 (5) *
Thomas Van Hare 10,000 (6) *
Charles Menefee 0 *
Edward McCartin 0 *
Kenneth Corriea 0 *
Atlas II, LP (7)(8) 1,371,200 9.8%
Marathon Partners, LP (7)(9) 1,371,200 9.8%
All directors and executive
officers as group (8 persons) 9,250,039 65.72
------------------------------
* Represents less than 1% of the outstanding common stock.
(1) Except as otherwise indicated, the business address of each person
listed is c/o PartsBase.com, Inc., 905 Clint Moore Road, Boca Raton,
Florida 33487.
(2) Includes 4,500,000 shares owned by Mr. Hammond individually; 4,500,000
shares owned by R. Hammond, L.P., a limited partnership of which Mr.
Hammond is the sole general partner and of which a trust established for
the benefit of Mr. Hammond's children is a 99% limited partner; and
150,000 shares underlying stock options that are currently exercisable
or will become exercisable within 60 days of the date hereof at an
exercise price of $2.00 per share.
(3) Consists of shares underlying stock options that are currently
exercisable or will become exercisable within 60 days of the date
hereof, 45,000 of which are exercisable at $2.00 per share and
16,000 which are exercisable at $6.38 per share.
(4) Mr. Narath's address is 1538 Turnpike Street, North Andover,
Massachusetts 01845. Consists of 40,000 shares of our common stock owned
by Metro Investments, a company controlled by Mr. Narath, and 20,000
shares underlying stock options that are currently exercisable or will
become exercisable within 60 days of the date hereof at an exercise
price of $3.00 per share. Excludes 260,000 shares of common stock owned
by Touchstone Software Corp., a company of which Mr. Narath is an
officer, director and significant stockholder. Mr. Narath has no voting
or dispositive powers regarding these shares.
(5) Consists of shares underlying stock options that are currently
exercisable or will become exercisable within 60 days of the date
hereof, at an exercise price of $$2.00 per share.
(6) Consists of shares underlying stock options that are currently
exercisable or will become exercisable within 60 days of the date
hereof, at an exercise price of $$0.63 per share.
(7) Based solely on information reported by Atlas II, L.P. and Marathon
Partners, L.P. in their jointly filed Schedule 13D on July 15, 2002.
(8) 1,371,200 shares of which have shared voting power and 866,000 shares of
which have sole dispositive power.
(9) 1,371,200 shares of which have shared voting power and 605,200 of which
have sole dispositive power.
72
BUSINESS OF THE COMPANY
-----------------------
We currently operate two businesses: (i) we provide Internet
business-to-business e-commerce services for the aviation and aerospace industry
(the "Aviation e-commerce Business"); and (ii) since October 2001, we have
provided, for a fee, critical care registered nurses for temporary assignment to
hospitals located in Palm Beach County and Broward County, Florida (the "Nurse
Staffing Business"). Our Web site addresses are www.partsbase.com. and
www.rnpartners.com. The information contained on these Web sites is not a part
of this Proxy Statement.
INDUSTRY OVERVIEW
The Aviation E-commerce Business
--------------------------------
We are an online provider of Internet business-to-business e-commerce
services for the aviation industry. Our global e-commerce marketplace, sometimes
referred to as our "e-marketplace" or our "solution," provides our subscribers
in more than 115 countries with the ability to buy and sell new, used and
overhauled aviation partsand products in an efficient, competitive and
cost-effective manner. We estimate that our e-marketplace utilizes a database of
approximately 2,500 suppliers, containing over 23.5 million line items of
inventory. We believe our e-marketplace constitutes one of the largest
independent databases of inventory and information in the aviation industry.
Current members of our e-commerce marketplace include Boeing, Honeywell, Federal
Express, BE Aerospace, Fokker, Raytheon, Rolls Royce, United Airlines, Frontier
Airlines, BF Goodrich Aerospace, Saab, Lufthansa and Northrup Grumman.
The worldwide market for aviation parts and products is highly fragmented
and includes many types of suppliers, such as airlines, original equipment
manufacturers ("OEMs"), numerous independent distributors, on-site airport
maintenance providers, also known as fixed base operators, Federal Aviation
Administration certified repair and overhaul facilities, traders and brokers.
There are four types of parts, components, or supplies purchased by aviation
companies: rotables (i.e. pumps, landing gear), repairables (i.e. valves,
pistons), expendables (i.e. fasteners, bearings), and consumables (i.e. grease,
oil). Rotables constitute 80% of the value of all parts purchased, but only 20%
of the number of transactions. A typical air carrier can process 3,000 purchase
orders per day, while a typical major OEM can process 20,000 purchase orders per
day. A large commercial aircraft, such as a 747, can contain over 3 million
parts.
According to Boeing's 20-year current market outlook, the world fleet of
aircraft is projected to increase from 4,548 aircraft in 2000 to 32,955 aircraft
in 2020. Boeing estimates the total market potential during this period for
commercial aviation support services, in 2000 dollars, is $3.1 trillion, of
which $1.5 trillion will be spent on airframe and engine repair parts. The
airframe and engine repair parts market constitutes the primary focus of our
database and service offerings. In addition, management believes that as the age
of the world fleet of aircraft increases the demand for new, used and overhauled
parts and products may increase.
We provide the aviation industry with an Internet-based e-marketplace in
which this fragmented market can easily locate and procure parts from a variety
of sellers, in a cost-effective manner. The advent of the Internet has created
new opportunities for conducting business-to-business commerce, offering the
potential for organizations to streamline complex processes, lower costs and
improve productivity. Even if a company is currently using other electronic data
interchange (EDI) networks, the Internet and e-marketplace exchanges can provide
significant opportunities to save companies on transaction costs, in addition to
providing better pricing opportunities.
In February 2001, we introduced "PartsDirect", which allows aviation buyers
to solicit quotes online to purchase aircraft parts. As sellers reply to these
quotations, buyers are given an easy-to-read display of all prices offered by
potential sellers. Seller quotations are updated on a real-time basis as bids
are posted. The buyer can then generate a purchase order electronically to the
seller of his or her choice. Through PartsDirect, we seek to provide a worldwide
search capability to buyers that creates a forum in which buyers can save money
by enabling them to more quickly and efficiently locate surplus new, repaired,
or overhauled inventory. Sellers utilizing the e-marketplace will gain access to
73
an expanded customer base and have a greater opportunity to sell their
inventory. If our new technology gains acceptance in the marketplace, we intend
to begin the integration of our sites offerings, utilizing standard XML
protocols, into customers' Enterprise Resource Planning (ERP) systems. Because
of the aviation industry's enormous size and global nature, the integration
challenge of tying together these companies is one of great magnitude. Many
industry experts estimate that this is a process that will take at least two or
three years to gain traction.
In October 2001, we introduced our premium parts search functionality which
allows our subscribers to search for a part by a National Stock Number, a number
used by governmental agencies to classify aviation and aerospace parts, and
return a list of all the companies that carry the standard manufacturers' part
number. We seek to facilitate the process for buyers of aviation and aerospace
parts to locate these parts and provide them with the applicable OEM's of such
parts so as to decrease lead times for procurement and maintain optimum
inventory levels of such parts.
In January 2002, we launched "Parts2Find" which enables subscriber sellers
who specialize in hard to find aviation and aerospace parts to retrieve all
requests for parts (numbers) for a given day that were not found in our database
by member "would-be" buyers and contact them, should they have access to such
parts. We believe this functionality enhances the value of our website by
simultaneously facilitating the procurement process for both subscriber buyers
and sellers by providing an additional resource for parts and incremental
revenue opportunities.
The Nurse Staffing Business
---------------------------
Services Provided. Since October 2001, we have provided, for a fee,
registered nurses to our hospital clients to supplement their staff. Hospitals
generally obtain supplemental staffing from local temporary (per diem) agencies.
Per diem staffing, which has historically comprised the majority of the
temporary healthcare staffing industry, involves the placement of locally-based
healthcare professionals on short-term assignments, such as daily shift work, on
an as-needed (per diem) basis. Hospitals often give minimal advance notice of
their per diem assignments, and require a quick turnaround from their staffing
agencies, generally less than 24 hours. Per diem agencies select from a local
highly skilled labor pool and provide pre-screened candidates to their hospital
clients.
Nurses / Hospital Client Base / Industry. We provide medical nurses,
surgical nurses and specialty nurses, all of whom are registered nurses, in a
wide range of specialties for assignments in Broward County and Palm Beach
County, Florida. We place our qualified nurse professionals with hospitals and
hospital networks. The majority of our assignments are in acute-care hospitals,
including teaching institutions, trauma centers and community hospitals.
We offer our registered nurse professionals local placement opportunities
and provide supplemental staffing solutions to our hospital clients, all of whom
are currently located in South Florida. In January 2002, we had approximately
800 open orders with our hospital clients in our service area. Our number of
hospital clients has grown from approximately 5 in November 2001 to 22 active
hospital clients as of March 2002. As of December 2001, two clients comprised
approximately 41% of our nurse staffing business revenues; no other single
client, including affiliated groups, comprised more than 10% of our registered
nurse employees on assignment or 10% of our nurse staffing business revenues.
In 2000, total healthcare expenditures in the United States were estimated
at $1.3 trillion, representing approximately 13% of the U.S. gross domestic
product, and had grown approximately 8% over 1999 according to the Centers for
Medicare & Medicaid Services. Over the next decade, an aging U.S. population and
advances in medical technology are expected to drive increases in hospital
patient populations and the consumption of healthcare services. As a result,
total healthcare expenditures are projected to increase by approximately $1.3
trillion during the next decade.
Within the healthcare staffing sector, temporary staffing has emerged as an
increasingly utilized method to efficiently deliver healthcare services. In the
mid-1990s, several factors prompted the increased usage of temporary staffing at
hospitals. A principal factor was cost containment. Managed care, Medicare,
74
Medicaid and competitive pressures created renewed emphasis on cost containment.
Among other responses, this led acute-care hospitals to redesign their staffing
models to reduce their levels of fixed staffing and to include a variable
staffing component.
The temporary healthcare staffing industry accounted for $7.2 billion in
revenues in 2000 and this amount is projected to increase by 21%, to $8.7
billion, in 2001 according to estimates by The Staffing Industry Report, an
independent staffing industry publication. Approximately 70% of the temporary
healthcare staffing industry is comprised of nurse staffing and approximately
30% is comprised of allied health, physicians and other healthcare
professionals. Temporary healthcare staffing has experienced strong historical
growth since 1996, growing at a compound annual growth rate of 13%, but this
growth has accelerated to approximately 15% over the past two years. Within the
temporary healthcare staffing industry, we believe that critical care nurse
staffing is one of the fastest growing segments.
Demand and Supply Drivers
-------------------------
Since the mid-1990s, changes in the healthcare industry prompted a
permanent shift in staffing models that led to an increased usage of
supplemental staffing at hospitals. The supply of professionals choosing
supplemental healthcare as a short-term or long-term career option has also
grown alongside increased demand for supplemental healthcare professionals. We
believe that this expanded demand and supply pattern will continue, particularly
in the critical care temporary nurse staffing sector, because of the following
drivers:
Demand Drivers:
o Demographics and Advances in Medicine and Technology. As the U.S.
population ages and as advances in medicine result in longer life
expectancy, it is likely that chronic illnesses and hospital
populations will continue to increase. We believe that these factors
will increase the demand for both temporary and permanent nurses. In
addition, advances in healthcare technology have increased the
demand for specialty nurses who are qualified to operate advanced
medical equipment or perform complex medical procedures associated
with critical care.
o Shift to Flexible Staffing Models. Nurse wages comprise the largest
percentage of hospitals' labor expenses. Cost containment
initiatives and a renewed focus on cost-effective healthcare service
delivery continue to lead many hospitals and other healthcare
facilities to adopt flexible staffing models that include reduced
permanent staffing levels and increased utilization of flexible
staffing sources, such as temporary staff nurses.
o Nursing Shortage. Most regions of the United States are experiencing
a shortage of nurses. The American Hospital Association estimates
that up to 126,000 position vacancies currently exist for registered
nurses. This represents approximately 10% of the hospital-based
nursing workforce. The Journal of the American Medical Association
has reported that the registered nurse workforce is expected to be
20% below projected requirements by 2020. Faced with increasing
demand for and a shrinking supply of nurses, hospitals are utilizing
more temporary nurses to meet staffing requirements. Factors
contributing to the current and projected declining supply of nurses
include:
o Decreasing Number of Entrants To Nursing School And New Nursing
Graduates. According to the American Association of Colleges of
Nursing, enrollment in all basic nursing education programs
(baccalaureate, associate or diploma) has fallen each year since
1995 by approximately 5%.
o Nurses Leaving Patient Care Environments for Less Stressful and
Demanding Careers. Career opportunities for nurses have expanded
beyond the traditional bedside role. Pharmaceutical companies,
75
insurance companies, HMOs and hospital service and supply companies
increasingly offer nurses attractive positions which involve less
demanding work schedules and physical requirements.
o Aging Nurse Population. The average age of a registered nurse is
estimated to be 45.2 years old, an increase of 8.4% since 1988. By
2010, 40% of the nurse population is expected to be older than 50,
as compared to 29% of nurses that were older than 50 as of March
2000. As a growing number of nurses retire, the nursing shortage is
likely to worsen.
o Seasonality. Hospitals in areas that experience significant seasonal
fluctuations in population, such as Florida during the winter
months, must be able to efficiently adjust their staffing levels to
accommodate the change in demand. Many of these hospitals utilize
temporary healthcare professionals to satisfy these seasonal
staffing needs.
o Family and Medical Leave Act. The adoption of the Family and Medical
Leave Act in 1993, which mandates 12-week job-protected maternity
and dependent care leave, continues to create temporary nursing
vacancies at healthcare facilities. Approximately 94% of the
registered nurses working at healthcare facilities in the United
States are women.
o State Legislation Requiring Healthcare Facilities to Utilize More
Nurses. In response to concerns by consumer groups over the quality
of care provided in healthcare facilities and concerns by nursing
organizations about the increased workloads and pressures placed
upon nurses, several states have passed or introduced legislation
that is expected to increase the demand for nurses.
o Minimum Nurse-To-Patient Ratios. California passed legislation in
1999 (effective January 2002) that requires the establishment of
minimum nurse-to-patient ratios throughout all hospitals. Other
states have already adopted, and several are now considering,
similar legislation.
o Elimination of Mandatory Overtime. Many healthcare facilities
require their permanent staff to work overtime to cover staffing
shortages. Maine and Oregon recently passed legislation that limits
mandatory overtime for nurses, and similar legislation has already
been introduced in several other states.
Supply Drivers:
o Traditional Reasons for a Healthcare Professional to Work on a
Supplemental Assignment. Supplemental assignments allow healthcare
professionals to explore new areas of the United States, work at
prestigious hospitals, learn new skills, build their resumes and
avoid unwanted workplace politics that may accompany a permanent
position. Other benefits to supplemental healthcare professionals
include professional development opportunities, competitive wages
and flexible work schedules. All of these opportunities have been
constant supply drivers, bringing a growing number of new healthcare
professionals into accepting temporary assignments.
o Word-Of-Mouth Referrals. New applicants are most often referred to
supplemental nurse staffing companies by current or former
employees. Growth in the number of healthcare professionals that
have accepted temporary assignments, as well as the increased number
of hospitals that utilize temporary healthcare professionals,
creates more opportunities for referrals.
o More Nurses Choosing Supplemental Assignments Due to the Nursing
Shortage. In times of nursing shortages, nurses with permanent jobs
76
feel more secure about their employment prospects. They have a
higher degree of confidence that they can leave their permanent
position to join the supplemental healthcare professional workforce
and have the ability to return to a permanent position in the
future. Additionally, during a nursing shortage, permanent staff
nurses are often required to assume greater responsibility and
patient loads, work mandatory overtime and deal with increased
pressures within the hospital. Many experienced and critical care
nurses consequently choose to leave their permanent employer, and
look for a more flexible and rewarding position as a supplemental
healthcare professional.
BUSINESS STRATEGY
The Aviation E-commerce Business
--------------------------------
Our goal is to become one of the leading aviation industry e-commerce
marketplaces. In order to capitalize on the continued expansion of the market
for aviation parts and products, our technology takes advantage of the growth,
pervasiveness, low costs and community building nature of the Internet as a
basis for e-commerce for the broad, highly fragmented aviation industry. It is
our belief that the value of an e-marketplace grows substantially as each new
member brings additional parts, products, information and buying power to the
community.
Our technology has been designed to streamline the procurement cycle for
our subscribers. We enable subscribers to source, bid parts and products, and
eventually manage their order payment online. Our target members are primarily
businesses that buy and sell aviation parts, supplies and components in a global
marketplace. Our current members vary from small businesses to Fortune 500
companies such as Boeing, BF Goodrich Aerospace, Honeywell, and Federal Express.
We have designed our e-marketplace to meet the needs of these customers and
their industry. With a standard Internet connection, a Web browser and a
PartsBase subscription, each of our e-marketplace subscribers can immediately
participate as both a buyer and a seller.
Our e-marketplace is designed to provide advantages over traditional
procurement processes, including:
o Reduced procurement costs;
o More efficient pricing and improved access to sellers for buyers;
o Ability to locate the most geographically desirable parts;
o Expanded distribution opportunities for sellers; and
o Ease of use and better access to information.
Our current Web site features include:
o Online buying and selling options utilizing advanced parts search
features, inventory listings, requests for quotations ("RFQs"), and
Purchase Order generation;
o Member access to detailed information regarding current
transactions;
o Procurement controls providing members with the ability to monitor
corporate purchasing; and
o Community-building information such as industry job and aircraft
sales listings, as well as links to members and other industry Web
sites.
Our objective is to establish our e-marketplace as the preferred aviation
industry business-to-business e-commerce solution. The key elements of our
strategy include:
o Achieving growth through adding additional functionalities so as to
generate additional sources of revenues;
o Strengthening the PartsBase brand;
o Increasing the number of subscribers and market penetration;
77
o Establishing and expanding strategic sales and marketing
relationships;
o Expanding international presence; and
o Attracting and retaining members with new content, features and
services.
The successful implementation of our strategy will be subject to many risks
and will depend on many factors, including but not limited to the continued
growth and acceptance of e-commerce in the aviation industry as a whole, and the
acceptance of our business model in particular. We may be adversely affected by
a variety of risks and difficulties.
The Nurse Staffing Business
---------------------------
Our goal is to expand our temporary nurse staffing operations first
throughout Florida and ultimately throughout the United States. The key
components of our business strategy include:
o Expanding Our Network of Registered Nurse Professionals. Through our
recruiting efforts in South Florida, we continue to expand our
network of registered nurse professionals. As of March 2002, we
currently have a network of approximately 300 registered nurses,
approximately 75 of whom are placed by us with our hospital clients
continuously. We have exhibited growth in our registered nurse
employee base over the past three months primarily through referrals
from our current and former employees, as well as through
advertising and direct mailings. While we expect these methods to
continue to gain momentum, we are implementing creative ways to
attract additional registered nurse professionals. An example of
this strategy would be our internet recruitment tools such as the
RNpartners.com website, which is a known nurse community site on the
Internet.
o Strengthening and Expanding Our Relationships with Hospitals and
Healthcare Facilities. We seek to continue to strengthen and expand
our relationships with our hospital clients, and to develop new
relationships. Because we possess a network of registered nurses, we
are well positioned to offer our hospital clients effective
solutions to meet their supplemental staffing needs particularly in
the critical care area.
o Leveraging Our Business Model and Large Hospital and Healthcare
Facility Client Base to Increase Productivity. We seek to increase
our productivity through our recruiting strategy, network of
registered nurses, established hospital client's relationships,
proprietary information systems, innovative marketing and
recruitment programs, training programs and centralized
administrative support systems. Our recruiting strategy allows a
recruiter in any of our offices to take advantage of all of our
placement opportunities. In addition, our information systems and
support personnel permit our recruiters to spend more time focused
on our supplemental healthcare professionals' needs and placing them
on appropriate assignments in hospitals in their specialized
disciplines.
SALES AND MARKETING
The Aviation E-commerce Business
--------------------------------
We market through a direct inside and outside sales force. Since our
potential members fall within a defined market segment, we are able to identify
and target the purchasing decision-makers and potential users who will influence
the decision to adopt our e-commerce solution.
Our sales and marketing approach is designed to help buyers and sellers
understand both the business and technical benefits of our e-marketplace, and to
promote adoption through one-on-one education and training.
78
Our sales and marketing programs are designed to educate our target market,
create awareness and attract members to our e-marketplace. To achieve these
goals, we intend to take advantage of the community offered by our existing
membership base and engage in marketing activities such as trade shows, speaking
engagements and Web site marketing.
We provide member service support from 6:00 a.m. to 8:00 p.m., Eastern
Standard Time, Monday through Friday. Our customer support department is
responsible for day-to-day contact with members and responds to questions from
members through e-mail and a toll-free number. This department is responsible
for retaining and increasing use by existing members and is an important aspect
of member satisfaction. Our customer support and service personnel handle
general member inquiries and technical questions. We have automated some of the
tools used by our customer support and service staff, such as tracking screens
that let our support staff tracks a transaction through a variety of information
sources.
Our sales and marketing group consisted of approximately 43 individuals as
of September 30, 2002, all of whom are located at our Boca Raton, Florida
headquarters.
The Nurse Staffing Business
---------------------------
We believe that nursing professionals are attracted to us because of our
sizeable and diverse offering of work assignments and our service and
relationship-oriented approach. We also market ourselves through a combination
of a web site, print advertising, direct mail, printed marketing material and,
most importantly, through personal word-of-mouth referrals from current and
former employees. We also operate RNpartners.com, a nurse community website that
caters to the professional and personal lives of nurses and offers nursing news
and updates, links to other Internet sites, discounted products and services,
and career opportunities including an online application process. Currently, our
four recruiters are actively working with a pre-screened pool of approximately
300 registered nurses in an effort to place them with one of our hospital
clients.
SCREENING/QUALITY MANAGEMENT
Through our quality management department, we screen each candidate prior
to their employment and we continue to evaluate each registered nurse after they
are placed to ensure adequate performance as well as to determine feasibility
for future placements. Our internal processes are designed to ensure that each
registered nurse has the appropriate experience, credentials and skills for the
assignments that they accept. Our screening and quality management process
includes three principal stages:
o Initial Screening. Each new registered nurse candidate who submits
an application with us must meet certain criteria, including
appropriate prior work experience and proper educational and
licensing credentials. We independently verify each applicant's work
history and references. Our clinical skills checklists, developed
for each specialty area, are used by our hospital clients' hiring
managers as a basis for evaluating candidates and conducting
interviews, and for facilitating the selection of a registered nurse
who can meet the hospital client's specific needs.
o Assignment Specific Screening. Once an assignment is accepted by a
supplemental healthcare professional, our quality management
department tracks the necessary documentation and license
verification required for the registered nurse to meet the
requirements set forth by us, the hospital and, when required, the
applicable state board of health or nursing. These requirements may
include obtaining copies of specific health records, drug screening,
criminal background checks and certain certifications or continuing
education courses.
79
o Ongoing Evaluation. We continually evaluate our registered nurse
professionals' performance through a verbal and written evaluation
process. We receive these evaluations directly from our hospital
clients, and use the feedback to determine appropriate future
assignments for each registered nurse.
SALES AND MARKETING TO HOSPITALS AND HEALTHCARE FACILITIES
Our client service directors market our services to prospective hospital
clients, and supervise ongoing contract management of existing clients in their
territory. The number of our hospital and healthcare facility clients that we
serve has grown from approximately 5 in November 2001 to 39 active clients as of
September 30, 2002 . All of our registered nurse assignments are at acute-care
hospitals located in Hillsborough, Miami-Dade, Orange, Broward and Palm Beach
counties of Florida.
ACCOUNT MANAGEMENT
Once hospital contracts are obtained by our registered nurse area sales
managers, our four hospital account coordinators are responsible for soliciting
and receiving orders from these clients and working with our recruiters to fill
those orders with qualified registered nurse professionals. An "order" is a
request from a client hospital for a registered nurse to fill an assignment.
Hospital account coordinators regularly call and solicit orders from our
clients, who also submit orders via the Internet and by fax. Our average number
of orders for upcoming assignments has increased significantly during the past
three months. The combination of an increasing number of open orders and a
greater number of nurses choosing supplemental staffing assignments benefits us
by providing us with numerous assignments to offer and an increasing supply of
new registered nurse professionals to hire. In March 2002, we have over 1,885
open customer orders in South Florida (the area encompassing Broward and Palm
Beach counties). Our growth in open orders can be attributed to factors
including:
o Continuing increased demand for registered nurses;
o Our extensive network of registered nurse employees; and
o Our increased number of hospital client relationships.
Because hospitals often list their orders with multiple service providers,
open orders may also be listed with our competitors. An order will generally be
filled by the company that provides a suitable candidate first, highlighting the
need for a network of registered nurses and integrated operating and information
systems to quickly and effectively match hospital client needs with appropriate
registered nurses.
PLACEMENT
Orders are entered into our information network and are made available to
the recruiters at all of our offices. Our recruiters provide our hospital
coordinators with the personnel profiles of the registered nurse who have
expressed an interest in a particular assignment. The hospital coordinator
approves the profiles to be sent to the hospital client and confirms the
assignments with the hospital. Our recruiters seek to develop and maintain
strong and long-lasting relationships with our registered nurses. Each recruiter
manages a group of approved registered nurse employees and works to understand
the unique needs and desires of each individual registered nurse. The recruiter
will present open order assignments to a registered nurse, request that the
personnel profile be submitted for assignment, arrange a telephone interview
with assistance from the coordinators and generally facilitate each assignment.
We share orders among our various offices to increase placement opportunities
for our registered nurse employees.
REGISTERED NURSE PAYROLL
80
We pay our registered nurse employees only to the extent they accept
placement and actually work at one of our hospital clients. We perform all
payroll services for our registered nurse employees. Providing payroll services
is a value-added and convenient service that hospitals increasingly expect from
their supplemental staffing sources. To provide convenience and flexibility to
our hospital clients, we accommodate several different payroll frequencies. This
enables our hospital clients to integrate management of supplemental registered
nurse staff scheduling and overtime with their permanent staff. Consistent
accuracy and timeliness of making payroll payments is essential to the retention
of our registered nurses. Our internal payroll service group currently receives
and processes timesheets for approximately 75 registered nurse employees,
weekly. Payroll is typically processed daily after the completion of each pay
period, heightening the importance of having adequately trained and skilled
payroll personnel and appropriate operating and information systems. We process
our payroll internally so as to minimize costs and provide a higher degree of
flexibility in accommodating our registered nurse professional workforce as
opposed to processing externally through a payroll processing service. Our
payroll service group offers our registered nurse professionals the ability to
be paid daily upon receipt of an approved time sheet from our hospital clients.
REGISTERED NURSE BENEFITS
In our effort to attract and retain highly qualified professionals, we
offer a variety of benefits to our registered nurse employees. These benefits
include:
o 24-Hour Management and Clinical Support. It is our goal to always be
available to our registered nurses. Registered nurse employees with
emergencies can be connected 24 hours per day with a clinical
liaison or recruitment manager to help resolve their problem.
o Hospital Billing. To accommodate the needs of our hospital clients,
we bill all of our registered nurse professionals on a payroll
contract basis. Under a payroll contract, the registered nurse is
our employee for payroll and benefits purposes. Under this
arrangement, we bill our hospital clients at an hourly rate that
effectively includes reimbursement for recruitment fees, wages and
benefits for the registered nurse professional, and employer taxes.
Overtime and holiday hours worked are typically billed at a premium
rate. We in turn pay the registered nurse's wages and benefits which
are calculated on an hourly basis. Providing payroll services is a
value-added and convenient service that hospitals increasingly
expect from their supplemental nurse staffing sources.
o Daily Pay. Our local branch offices have the capability to produce
payroll checks for our registered nurse employees the very same day
their time sheets are verified and approved. This is an attractive
benefit to registered nurses who, if working for another staffing
firm, may be forced to wait for the payroll cycle to be completed
before they can receive their paychecks.
o Information Systems. Our primary management information and
communications systems are centralized and controlled in our
corporate headquarters and are utilized in each of our staffing
offices. Our financial systems are primarily centralized at our
corporate headquarters and our operational reporting is standardized
at all of our offices. We use an internal system to facilitate
payroll for our corporate employees and our temporary healthcare
professionals. We are in the process of developing a proprietary
Windows-based, interactive information system that will be an
important tool in maximizing our productivity and accommodating our
recruiting strategy. The system will be custom-designed for our
business model, including integrated processes for registered nurse
professional and hospital contract management, matching of
supplemental healthcare professionals to available assignments,
registered nurse professional file submissions for placements,
quality management tracking, controlling compensation packages and
managing hospital contract and billing terms. Our system will
provide our staff with fast, detailed information regarding
individual registered nurses and hospital clients. The system will
also provide a platform for interacting and transacting with
81
registered nurse employees and hospital facility clients via the
Internet. The initial features of this system became functional
during the latter part of the second quarter of 2002.
COMPETITION
The Aviation E-commerce Business
--------------------------------
The market for business-to-business e-commerce and Internet ordering and
purchasing is new and rapidly evolving, and competition is intense and expected
to increase significantly in the future. We believe that companies in our
Internet business-to-business e-marketplace compete based on:
o Ease of use of technology;
o Breadth and depth of product and service offerings;
o Pricing of products and services;
o Quality and reliability of the Internet purchasing solution; and
o Quality and scope of customer service and support.
We currently compete almost solely in the market for aviation parts and
products and face competition from three main areas within this market: other
start-up businesses that have formed exchanges with e-commerce offerings,
existing aerospace companies, or groups of companies that have formed exchanges,
and traditional manufacturers, suppliers and distributors of aviation parts that
have developed e-commerce initiatives that are designed to facilitate commerce
between one buyer and multiple sellers.
Because of the rapidly evolving nature of e-commerce, it is difficult to
objectively estimate the number of companies that compete directly against us.
We believe that currently, our primary competitor is the Inventory Locator
Service Inc., a subsidiary of Aviall, Inc. Additional competition is expected
during 2002 from buy side exchanges formed by major domestic and foreign
carriers, and sell side exchanges formed by large aerospace OEM's.
Current and potential competitors may be able to devote significantly
greater resources to marketing and promotional campaigns, and may adopt more
aggressive pricing policies or may try to attract users by offering services for
free and devote substantially more resources to product development than us.
Increased competition may result in reduced operating margins, loss of market
share and diminished value in our brand, any of which could materially and
adversely affect our business, financial condition and results of operations.
New technologies and the expansion of existing technologies may increase
the competitive pressures on us by enabling competitors to offer a similar but
lower-cost service. We cannot assure you that we will be able to compete
successfully against current and potential competitors. Further, as a strategic
response to changes in the competitive environment or otherwise, we may, from
time to time, make pricing, service or marketing decisions or acquisitions that
could materially and adversely affect our business, financial condition and
results of operations.
The Nurse Staffing Business
---------------------------
The nurse staffing industry is highly competitive. We compete with national
firms and local and regional firms. We compete with these firms to attract
registered nurses with critical care skills as temporary healthcare
professionals and to attract hospital clients. We compete for temporary
healthcare professionals on the basis of the quantity, diversity and quality of
assignments available, compensation packages, and the benefits that we provide
to a temporary healthcare professional while they are on an assignment. We
compete for hospital clients on the basis of the quality of our temporary
healthcare professionals, the timely availability of our professionals with
requisite skills, the quality, scope and price of our services, and the
geographic reach of our services. Continuing nursing shortages and factors
82
driving the demand for nurses over the past several years have made it
increasingly difficult for hospitals to meet their critical care staffing needs.
We are focused on attaining a critical mass of available nursing candidates via
substantial word-of-mouth referral networks and seek to establish RNpartners as
a recognizable brand name, thereby enabling us to attract a consistent flow of
new applicants. We believe we can also more easily provide payroll services
billing, which is cash flow intensive, to healthcare providers. Some of our
competitors in the temporary healthcare staffing sector include American Mobile
Nurse, Interim Healthcare Services, Nursefinders and Starmed.
INTELLECTUAL PROPERTY
We rely on a combination of trademark and copyright law, trade secret
protection and confidentiality and/or license agreements with our employees,
customers and business partners to protect our proprietary rights in products,
services, know-how and information. We have a federal trademark registration for
"PartsBase" and "PartsBase.com." We may seek additional trademarks, copyrights
and patents in the future. Our means of protecting our proprietary rights in the
United States or abroad may not be adequate and competitors may independently
develop similar technology. We cannot be certain that our services do not
infringe patents or other intellectual property rights that may relate to our
services. Like other technology and Internet-based businesses, we face the risk
that we will be unable to protect our intellectual property and other
proprietary rights, and the risk that we will be found to have infringed the
proprietary rights of others.
GOVERNMENT REGULATION
The Aviation E-commerce Business
--------------------------------
Both domestic and foreign entities regulate the parts and products sold on
our Web site. The Federal Aviation Administration (the "FAA") is charged with
regulating the manufacture, repair and operation of all aircraft and aircraft
equipment operated in the United States. The FAA monitors safety by promulgating
regulations regarding proper maintenance of aircraft and aircraft equipment.
Similar regulations exist in foreign countries. Regulatory agencies specify
maintenance, repair and inspection procedures for aircraft and aircraft
equipment. Certified technicians in approved repair facilities on set schedules
must perform these procedures. All parts must conform to prescribed regulations
and be certified prior to installation on any aircraft. Although we are not
currently subject to any governmental regulation regarding the parts and
products sold on our Web site, we may in the future become subject to FAA or
other regulatory requirements.
The Nurse Staffing Business
---------------------------
The healthcare industry is subject to extensive and complex federal and
state laws and regulations related to professional licensure, conduct of
operations, payment for services and payment for referrals. Our business,
however, is not directly impacted by or subject to the extensive and complex
laws and regulations that generally govern the healthcare industry. The laws and
regulations which are applicable to our hospital and healthcare facility clients
could indirectly impact our business to a certain extent, but because we provide
services on a contract basis and are paid directly by our hospital and
healthcare facility clients, we do not have any direct Medicare or managed care
reimbursement risk. Florida requires state registration for businesses that
employ and/or assign healthcare personnel to provide healthcare services on-site
at hospitals and other healthcare facilities. We are currently registered in
Florida. All of the supplemental registered nurses that we employ are required
to be individually licensed under state law. We take reasonable steps to ensure
that our employees possess all necessary licenses in all material respects.
83
EMPLOYEES
The following details information regarding our employees as of September
30, 2002 for our aviation e-commerce business and our nurse staffing business:
Employees
---------
Aviation E-commerce Business:
Sales and marketing 43
Corporate finance, IT and administration 17
---
Total 60
---
Nurse Staffing Business:
Registered Nurses 103
Sales and Marketing 25
Administration 5
---
Total 133
---
Registered nurses are considered our employees upon completing one
twelve-hour shift at one of our hospital clients. None of our employees are
represented by a labor union. We have not experienced any work stoppages, and we
consider our relationship with our employees to be good.
PROPERTIES
We are currently obligated under three separate lease agreements with
separate unaffiliated third parties for approximately 6,600 square feet of
office space in Boca Raton, Florida (the "Boca Raton Lease"), approximately
1,000 square feet of office space in Fort Lauderdale, Florida (the "Fort
Lauderdale Lease") and approximately 1,260 square feet of office space in West
Palm Beach, Florida (the "West Palm Beach Lease"). We are obligated to pay
approximately (i) $8,700 monthly through February 2003 under the Boca Raton
Lease; (ii) $900 monthly through November 2004 under the Fort Lauderdale Lease;
and (iii) $1,700 monthly under the West Palm Beach Lease. We may terminate the
West Palm Beach Lease prior to November 2004 in either December 2002 or December
2003 upon payment of 50% of the remaining rent due through November 2004. Our
corporate headquarters are located in our Boca Raton, Florida office. We use our
Fort Lauderdale and West Palm Beach offices as satellite service offices for our
Nurse Staffing Business.
INDEPENDENT AUDITORS
--------------------
Deloitte & Touche, LLP has served as our independent auditors since 1997.
The consolidated balance shaeets as of December 31, 2001 and 2000 and the
consolidated statements of operations, stockholders' equity and cash flows for
each of the fiscal years ended December 31, 2001, 2000 and 1999, respectively,
included in the Annual Report on Form 10-K for the year ended December 31, 2001
attached as Appendix D to this proxy statement have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports, which is included
and incorporated by reference in this proxy statement. It is not expected that
representatives of Deloitte & Touche, LLP will be present at the special
meeting.
OTHER MATTERS FOR ACTION AT THE SPECIAL MEETING
-----------------------------------------------
Our Board of Directors is not aware of any matters to be presented for
action at the special meeting other than described herein and does not intend to
bring any other matters before the special meeting; however, if other matters
which are unknown a reasonable time before the solicitation of proxies should
come before the special meeting, it is intended that the holders of proxies
solicited hereby will vote thereon in their discretion.
STOCKHOLDER PROPOSALS
---------------------
84
If the merger is completed, there will be no public participation in any
future meetings of stockholders of PRTS. However, if the merger is not
completed, PRTS stockholders will continue to be entitled to attend and
participate in PRTS stockholders' meetings. If the merger is not completed, PRTS
will inform its stockholders, by press release or other means determined
reasonable by PRTS, of the date by which stockholder proposals must be received
by PRTS for inclusion in the proxy materials relating to the annual meeting,
which proposals must comply with the rules and regulations of the SEC then in
effect.
WHERE YOU CAN FIND MORE INFORMATION
-----------------------------------
We are subject to the informational filing requirements of the Exchange Act
and, in accordance therewith, are required to file periodic reports, proxy
statements and other information with the SEC relating to our business,
financial condition and other matters. Information as of particular dates
concerning our directors and officers, their remuneration, the principal holders
of our securities and any material interest of such persons in transactions with
us is required to be disclosed in periodic reports filed with the SEC. Such
reports, proxy statements and other information should be available for
inspection at the public reference facilities maintained by the SEC at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such materials
may also be obtained by mail, upon payment of the SEC's customary fees, by
writing to its principal office at 450 Fifth Street, N.W., Washington, D.C.
20549. These materials filed by us with the SEC are also available to the
website of the SEC at www.sec.gov.
Because the merger is a "going private" transaction, the Company, HAC,
Hammond I and Mr. Hammond have filed with the SEC a Rule 13e-3 Transaction
Statement on Schedule 13e-3 under the Exchange Act with respect to the merger.
This proxy statement does not contain all of the information set forth in the
Schedule 13e-3 and the exhibits thereto. Copies of the Schedule 13e-3 and the
exhibits thereto are available for inspection and copying at our principal
executive offices during regular business hours by any of our stockholders, or a
representative who has been so designated in writing, and may be inspected and
copied, or obtained by mail, by written request directed to Mark Weicher,
PartsBase, Inc., 905 Clint Moore Road, Boca Raton, Florida 33487; telephone
(551) 953- 0700, extension 2702, or from the SEC as described above.
INFORMATION INCORPORATED BY REFERENCE
-------------------------------------
The SEC allows us to "incorporate by reference" information into this proxy
statement, which means that we can disclose important information by referring
you to another document filed separately with the SEC. The following documents
previously filed by us with the SEC are incorporated by reference in this proxy
statement and are deemed to be a part hereof.
o Our Annual Report on Form 10-K for the year ended December 31, 2001
(included at Appendix D); and
o Our Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2002 (included at Appendix E).
However, any references in these documents to the Private Securities
Litigation Reform Act and "safe harbor" protection for forward-looking
statements are specifically not included in this proxy statement.
Any statement contained in a document incorporated by reference in this
proxy statement shall be deemed to be modified or superseded for all purposes to
the extent that a statement contained in this proxy statement modifies or
85
replaces the statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute part of this proxy
statement.
We undertake to provide by first class mail, without charge upon receipt of
any written or oral request, to any person to whom a copy of this proxy
statement has been delivered, a copy of any or all of the documents referred to
above which have been incorporated by reference in this proxy statement, other
than exhibits to the documents, unless the exhibits are specifically
incorporated by reference therein. If you would like to request documents from
us, please do so at least five business days before the date of the special
meeting in order to receive timely delivery of such documents prior to the
special meeting. Requests for copies should be directed to Mark Weicher,
PartsBase, Inc., 905 Clint Moore Road, Boca Raton, Florida 33487; telephone
(561) 953-0700 extension 2702.
No persons have been authorized to give any information or to make any
representations other than those contained, or incorporated by reference, in
this proxy statement, and if given or made, such information or representations
must not be relied upon as having been authorized by us or any other person. You
should rely only on the information contained in this proxy statement to vote
your shares at the special meeting. We have not authorized anyone to provide you
with information that is different from what is contained in this proxy
statement. This proxy statement is dated December ___, 2002.
You should not assume that the information contained in this proxy
statement is accurate as of any date other than that date, and the mailing of
this proxy statement to stockholders does not create any implication to the
contrary. This proxy statement does not constitute an offer to sell or to buy,
or a solicitation of an offer to sell or to buy, any securities, or the
solicitation of a proxy, in any jurisdiction to or from any person to whom it is
not lawful to make any offer or solicitation in such jurisdiction.
OTHER BUSINESS
--------------
We know of no other business to be acted upon at the Special Meeting.
However, if any other business properly comes before the Special Meeting, it is
the intention of the persons named on the enclosed proxy card and to vote on
such matters in accordance with their best judgment. The prompt return of your
proxy will be appreciated and helpful in obtaining the necessary note.
Therefore, whether or not you expect to attend the Special Meeting, please sign
the proxy and return it in the enclosed envelope.
By Order of the Board of Directors,
/s/ Robert H. Hammond, Jr.
--------------------------
Robert H. Hammond, Jr.
86
APPENDIX A
Agreement and Plan of Merger, as Amended
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
This First Amendment to Agreement and Plan of Merger (the "Amendment") is
made and entered into as of this day of December,20 2002, by and among Hammond
I, Inc., a Florida corporation ("Hammond I"); Hammond Acquisition Corp., a
Delaware corporation and wholly-owned subsidiary of Hammond I ("Merger Sub");
Robert A. Hammond, Jr. ("Hammond"); and PartsBase, Inc., a Delaware corporation
(the "Company").
WHEREAS, Hammond I, Merger Sub, Hammond and the Company have entered into
an Agreement and Plan of Merger dated as of August 26, 2002 (the "Agreement");
and
WHEREAS, the parties desire to amend the Agreement in the manner set forth
in the Amendment;
NOW, THEREFORE, the parties agree as follows:
1. Section 2.1(a) of the Agreement shall be amended by deleting the
reference to "$1.41" and replacing it with the price of "$1.50".
2. Section 7.1(b) of the Agreement shall be amended by deleting the phrase
"January 31, 2003" and substituting therefor the phrase "March 31,
2003".
3. Section 7.1(c) of the Agreement shall be amended by deleting the phrase
"January 31, 2003" and substituting therefor the phrase "March 31,
2003".
4. Section 7.1(e) of the Agreement shall be amended by deleting the phrase
"January 31, 2003" and substituting therefor the phrase "March 31,
2003".
All other provisions of the Agreement shall remain in full force and
effect. This Amendment shall be governed by and construed in accordance with the
laws of the State of Delaware without regard to the principles of conflicts of
laws thereof. This Amendment may be executed in this or more counterparts, all
of which shall be considered one and the same agreement.
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IN WITNESS WHEREOF, Hammond I, Inc., Merger Sub, Hammond and the Company
have caused this Agreement, to be signed by their respective officers thereunto
duly authorized.
HAMMOND I, INC.
By:/s/ Robert A. Hammond Jr.
-------------------------
Name: Robert A. Hammond Jr.
Title: President
HAMMOND ACQUISITION CORP.
By:/s/ Robert A. Hammond Jr.
-------------------------
Name: Robert A. Hammond Jr.
Title: President
PARTSBASE, INC.
By: /s/ Mark Weicher
-----------------
Name: Mark Weicher
---------------
Title: Chief Financial Officer
ROBERT A. HAMMOND, JR.
/s/ Robert A. Hammond Jr.
-------------------------
Robert A. Hammond, Jr.
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AGREEMENT AND PLAN OF MERGER
DATED AS OF AUGUST 26, 2002
AMONG
HAMMOND I, INC., HAMMOND ACQUISITION CORP.,
ROBERT A. HAMMOND, JR.
AND PARTSBASE, INC.
TABLE OF CONTENTS
Page
----
ARTICLE I THE MERGER.................................................... 2
1.1 The Merger...................................................... 2
1.2 Closing......................................................... 2
1.3 Effective Time of the Merger.................................... 2
1.4 Effects of the Merger........................................... 2
1.5 Certificate of Incorporation; Bylaws............................ 3
1.6 Directors; Officers............................................. 3
ARTICLE II CANCELLATION OF THE CAPITAL STOCK OF THE COMPANY
AND PAYMENT WITH RESPECT THERETO............................ 3
2.1 Effect on Capital Stock......................................... 3
2.2 Delivery of Merger Consideration................................ 4
2.3 Stock Options and Warrants with
Respect to Company Common Stock............................... 6
ARTICLE III REPRESENTATIONS AND WARRANTIES.............................. 6
3.1 Representations and Warranties of the Company................... 6
3.2 Representations and Warranties of Hammond,
Hammond I, Inc. and Merger Sub................................ 11
ARTICLE IV COVENANTS RELATING TO CONDUCT OF BUSINESS.................... 13
4.1 Covenants of Company............................................ 13
4.2 Covenants of Hammond, Hammond I, Inc. and Merger Sub............ 16
4.3 Competing Transactions.......................................... 16
ARTICLE V ADDITIONAL AGREEMENTS......................................... 17
5.1 Preparation of the Proxy Statement and Schedule 13E-3........... 17
5.2 Stockholders' Meeting........................................... 17
5.3 Legal Conditions to Merger...................................... 18
5.4 Brokers or Finders.............................................. 18
5.5 Shareholder Lists............................................... 19
5.6 Shareholder Litigation.......................................... 19
5.7 Communication to Employees...................................... 19
ARTICLE VI CONDITIONS PRECEDENT......................................... 19
6.1 Conditions to Each Party's Obligation To Effect the Merger...... 19
6.2 Conditions to Obligations of Hammond, Hammond I, Inc. and
Merger Sub.................................................... 20
6.3 Conditions to Obligations of Company............................ 21
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ARTICLE VII TERMINATION AND AMENDMENT................................... 22
7.1 Termination..................................................... 22
7.2 Effect of Termination........................................... 23
7.3 Fees, Expenses and Other Payments............................... 23
7.4 Amendment....................................................... 24
7.5 Extension; Waiver............................................... 25
ARTICLE VIII GENERAL PROVISIONS......................................... 25
8.1 Survival of Representations, Warranties and Agreements........... 25
8.2 Notices.......................................................... 25
8.3 Certain Definitions.............................................. 26
8.4 Interpretation................................................... 27
8.5 Counterparts..................................................... 28
8.6 Entire Agreement; No Third Party Beneficiaries;
Rights of Ownership............................................ 28
8.7 Governing Law; Consent to Jurisdiction........................... 28
8.8 Severability; No Remedy in Certain Circumstances................. 28
8.9 Publicity........................................................ 29
8.10 Assignment....................................................... 29
8.11 Adjustment....................................................... 29
EXHIBIT A Certificate of Incorporation of Merger Sub..................... 31
EXHIBIT B Bylaws of Merger Sub........................................... 34
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AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of August 26,
2002, among Hammond I, Inc., a Florida corporation ("Hammond I, Inc."), Hammond
Acquisition Corp., a Delaware corporation and a wholly-owned Subsidiary of
Hammond I, Inc. ("Merger Sub"), Robert A. Hammond, Jr. ("Hammond") and
PartsBase, Inc., a Delaware corporation (the "Company").
RECITALS
WHEREAS, Hammond I, Inc. together with its affiliates, including Hammond,
are the beneficial owners of 9,150,000 shares of Common Stock, par value $.001
per share, of the Company (the "Company Common Stock"), which represents
approximately 64.7% of the outstanding shares of Company Common Stock (not
including outstanding shares held by the Company in its treasury or by its
Subsidiaries).
WHEREAS, Hammond I, Inc. has proposed that Hammond I, Inc. acquire (the
"Acquisition") all of the issued and outstanding shares of the Company's Common
Stock not beneficially owned (within the meaning of Rule 13d-3 of the Exchange
Act (as defined below)) (the "Shares") by Hammond I, Inc., Merger Sub, Hammond
or any other Affiliate (as hereinafter defined), other than the Company, of
Hammond I, Inc. (collectively, the "Acquisition Group").
WHEREAS, in furtherance of the Acquisition, it is proposed that Merger Sub
shall be merged with and into the Company, with the Company continuing as the
surviving corporation (the "Merger"), in accordance with the General Corporation
Law of the State of Delaware (the "DGCL") and upon the terms and subject to the
conditions set forth herein.
WHEREAS, a special committee of the Board of Directors of the Company (the
"Board"), consisting entirely of non-management directors of the Company who are
not Affiliates (as defined below) of the Acquisition Group (the "Independent
Committee"), was established for, among other purposes, the purpose of
evaluating the Acquisition and making a recommendation to the Board with regard
to the Acquisition.
WHEREAS, the Independent Committee has received the opinion of vFinance
Investments, Inc. (the "Independent Advisor"), an independent financial advisor
to the Independent Committee, which was selected by it, that, as of August 26,
2002, the consideration to be received by the holders of Shares pursuant to the
Merger is fair to such holders from a financial point of view.
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WHEREAS, the Independent Committee, has, after consultation with the
Independent Advisor and Epstein Becker & Green, P.C., independent legal counsel
selected by the Independent Committee, and in light of and subject to the terms
and conditions set forth herein, (i) determined that (x) the Merger
Consideration (as defined below), is fair to the holders of Shares and (y) the
Merger is advisable and in the best interests of the Company and the holders of
Shares; (ii) approved, and declared the advisability of, this Agreement and
(iii) determined to recommend that the Board and the stockholders of the Company
vote to adopt this Agreement.
WHEREAS, the Board, based on the unanimous recommendation and approval of
the Independent Committee, has, in light of and subject to the terms and
conditions set forth herein, (i) determined that (x) the Merger Consideration
(as defined below), is fair to the holders of Shares and (y) the Merger is
advisable and in the best interests of the Company and the holders of Shares;
(ii) approved, and declared the advisability of, this Agreement and (iii)
determined to recommend that the stockholders of the Company vote to adopt this
Agreement. The Board also has consulted with Epstein Becker & Green, P.C., as
counsel for the Independent Committee.
WHEREAS, the respective boards of directors of Hammond I, Inc. and Merger
Sub have approved this Agreement; and Hammond I, Inc. as the sole stockholder of
Merger Sub, has adopted this Agreement.
WHEREAS, the Company, Hammond I, Inc. and Merger Sub desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various conditions to the Merger.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants, representations, warranties and agreements contained herein, the
parties hereto agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. Upon the terms and subject to the conditions set forth in
this Agreement, and in accordance with the DGCL, Merger Sub shall be merged with
and into the Company at the Effective Time. At the Effective Time, the separate
existence of Merger Sub shall cease, and the Company shall continue as the
surviving corporation (the "Surviving Corporation") and shall continue under the
name "PartsBase, Inc."
1.2 Closing. Unless this Agreement shall have been terminated pursuant to
Section 7.1 and subject to the satisfaction or waiver of the conditions set
forth in Article VI, the closing of the Merger (the "Closing") will take place
as promptly as practicable (and in any event within five business days)
following satisfaction or waiver of the conditions set forth in Article VI (the
"Closing Date"), at the offices of Adorno & Yoss, P.A., 350 East Las Olas
Boulevard, Suite 1700, Fort Lauderdale, Florida 33301, unless another date, time
or place is agreed to in writing by the parties hereto.
1.3 Effective Time of the Merger. As soon as practicable following the
satisfaction or waiver of the conditions set forth in Article VI, the Surviving
Corporation shall file a certificate of merger conforming to the requirements of
Subchapter IX of the DGCL (the "Certificate of Merger") with the Secretary of
State of the State of Delaware and make all other filings or recordings required
by the DGCL in connection with the Merger. The Merger shall become effective at
such time as the Certificate of Merger is duly filed with the Secretary of State
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of the State of Delaware, or such other time thereafter as is provided in the
Certificate of Merger in accordance with the DGCL (the "Effective Time").
1.4 Effects of the Merger. The Merger shall have the effects set forth in
this Agreement and in the applicable provisions of the DGCL.
1.5 Certificate of Incorporation; Bylaws.
(a) The certificate of incorporation of Merger Sub which is attached as
Exhibit A hereto, as in effect immediately prior to the Effective Time, shall be
the certificate of incorporation of the Surviving Corporation until thereafter
changed or amended as provided therein or by applicable law; provided that
Article I of the certificate of incorporation of the Surviving Corporation shall
be amended by the Certificate of Merger to read as follows: "The name of the
corporation is: PartsBase, Inc."
(b) The bylaws of Merger Sub which are attached as Exhibit B hereto
shall be the bylaws of the Surviving Corporation until thereafter changed or
amended as provided therein or by applicable law.
1.6 Directors; Officers.
(a) The directors of Merger Sub at the Effective Time shall be the
directors of the Surviving Corporation, until the earlier of their resignation
or removal or until their respective successors are duly elected and qualified,
as the case may be.
(b) The officers of Merger Sub at the Effective Time shall be the
officers of the Surviving Corporation, until the earlier of their resignation or
removal or until their respective successors are duly elected and qualified, as
the case may be.
ARTICLE II
CANCELLATION OF THE CAPITAL STOCK OF THE COMPANY
AND PAYMENT WITH RESPECT THERETO
2.1 Effect on Capital Stock. At the Effective Time, by virtue of the
Merger, and without any action on the part of the holder thereof:
(a) subject to Section 2.1(e), each Share issued and outstanding
immediately prior to the Effective Time, shall be converted into the right to
receive an amount in cash, without interest, equal to $1.41 (the "Merger
Consideration") in the manner provided in Section 2.2 hereof;
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(b) each share of Company Common Stock issued and held in the Company's
treasury or held by any Subsidiary of the Company immediately prior to the
Effective Time, shall, by virtue of the Merger, cease to be outstanding and
shall be cancelled and retired without payment of any consideration therefor;
(c) each share of Company Common Stock held by any member of the
Acquisition Group immediately prior to the Effective Time shall remain
outstanding;
(d) each share of common stock, par value $.001 per share, of Merger
Sub ("Merger Sub Common Stock") issued and outstanding immediately prior to the
Effective Time shall be converted into and become one fully paid and
nonassessable share of common stock of the Surviving Corporation; and
(e) notwithstanding anything in this Agreement to the contrary, to the
extent provided by the DGCL, Hammond I, Inc. will not make any payment of Merger
Consideration with respect to Shares held by any person (a "Dissenting
Stockholder") who elects to demand appraisal of such Dissenting Stockholder's
Shares and duly and timely complies with all the provisions of the DGCL
concerning the right of holders of Shares to require appraisal of their shares
("Dissenting Shares"), but such Dissenting Stockholders shall have the right to
receive such consideration as may be determined to be due such Dissenting
Stockholders pursuant to the laws of the State of Delaware. If, after the
Effective Time, a Dissenting Stockholder withdraws such Dissenting Stockholder's
demand for appraisal or fails to perfect or otherwise loses such Dissenting
Stockholder's right of appraisal, in any case pursuant to the DGCL, such
Dissenting Stockholder's Shares will be deemed to be converted as of the
Effective Time into the right to receive the Merger Consideration pursuant to
Section 2.1(a). The Company will give Hammond I, Inc. (i) prompt notice of any
demands for appraisal of Dissenting Shares received by the Company and (ii) the
opportunity to participate in all negotiations and proceedings with respect to
any such demands. The Company will not, without the prior written consent of
Hammond I, Inc., make any payment with respect to, or enter into any
negotiations or discussions or a binding settlement agreement or make an offer,
written or oral, to settle, any such demands.
2.2 Delivery of Merger Consideration.
(a) Payment Agent. As of the Effective Time, Hammond I, Inc. shall
deposit, or shall cause to be deposited, with a bank or trust company designated
by Hammond I, Inc. (the "Payment Agent"), and reasonably acceptable to the
Company, for the benefit of the holders of Shares, for payment in accordance
with this Article II through the Payment Agent, the Merger Consideration to be
paid in respect of all Shares (such funds deposited with the Payment Agent, the
"Payment Fund"). If requested in writing by Hammond I, Inc., the Payment Fund
shall be made available by the Company to the Payment Agent from Company
available cash.
(b) Payment Procedures. Within five (5) business days after the
Effective Time, the Payment Agent shall mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented Shares (the "Certificates"), the following documents: (i) a letter
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of transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Payment Agent and shall be in such form and have such other
provisions as Hammond I, Inc. may reasonably specify); and (ii) instructions for
use in effecting the surrender of the Certificates in exchange for payment with
respect thereto. Upon surrender of a Certificate for cancellation to the Payment
Agent together with such letter of transmittal, duly executed, the holder of
such Certificate shall be entitled to receive in exchange therefor the Merger
Consideration payable with respect to the Shares represented by such Certificate
pursuant to the provisions of this Article II, and the Certificate so
surrendered shall forthwith be cancelled. In the event that a holder has lost or
misplaced a Certificate, an affidavit of loss thereof (together with an
appropriate indemnity and/or bond if Hammond I, Inc. so requires by notice in
writing to the holder of such Certificate) satisfactory in form and substance to
the Company's transfer agent and the Payment Agent shall accompany such letter
of transmittal in lieu of the applicable Certificate. In the event of a transfer
of ownership of Shares which is not registered in the transfer records of the
Company, payment of the applicable Merger Consideration may be made to a
transferee if the Certificate representing such Shares is presented to the
Payment Agent, accompanied by all documents required to evidence and effect such
transfer and by evidence that any applicable stock transfer taxes have been
paid. Until surrendered as contemplated by this Section 2.2, each Certificate
shall be deemed at any time after the Effective Time to represent only the right
to receive upon such surrender the Merger Consideration with respect thereto as
contemplated by this Section 2.2. No interest shall accrue or be paid to any
beneficial owner of Shares or any holder of any Certificate with respect to the
Merger Consideration payable upon the surrender of any Certificate.
(c) No Further Ownership Rights in the Shares. The Merger Consideration
paid with respect to the cancellation of Shares in accordance with the terms
hereof shall be deemed to have been paid in full satisfaction of all rights
pertaining to such Shares and there shall be no further registration of
transfers on the stock transfer books of the Surviving Corporation of the Shares
which were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation for any
reason, they shall be cancelled and exchanged as provided in this Article II,
subject to applicable law in the case of Dissenting Shares.
(d) Termination of Payment Fund. Any portion of the Payment Fund which
remains undistributed to the stockholders of the Company for one (1) year after
the Effective Time shall be delivered to the Surviving Corporation, upon demand,
and any stockholders of the Company who have not theretofore complied with this
Article II shall thereafter look only to the Surviving Corporation for payment
of their claim for the Merger Consideration. Upon termination of the Payment
Fund pursuant to this subsection and upon delivery to the Surviving Corporation
of the balance thereof, the Surviving Corporation shall have the right to invest
any such amount delivered to it in its sole discretion.
(e) None of the Surviving Corporation, Hammond I, Inc. or the Payment
Agent shall be liable to any holder of a Certificate or the shares represented
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thereby for any Merger Consideration delivered in respect of such Certificate or
the shares represented thereby to a public official pursuant to any abandoned
property, escheat or other similar law.
(f) Investment of Payment Fund. The Payment Agent shall invest any cash
included in the Payment Fund as directed by the Surviving Corporation, in (i)
obligations of or guaranteed by the United States, and (ii) certificates of
deposit, bank repurchase agreements and bankers' acceptances of any bank or
trust company organized under federal law or under the law of any state of the
United States or of the District of Columbia that has capital, surplus and
undivided profits of at least $500 million or in money market funds which are
invested substantially in such investments, none of which shall have maturities
of greater than one year. Any interest or other income resulting from such
investments shall be paid to the Surviving Corporation.
(g) Withholding Rights. Hammond I, Inc. or the Payment Agent shall be
entitled to deduct and withhold from the consideration otherwise payable
pursuant to this Agreement to any holder of Certificates or Shares represented
thereby such amounts (if any) as Hammond I, Inc. or the Payment Agent is
required to deduct and withhold with respect to the making of such payment under
the Internal Revenue Code of 1986, as amended (the "Code"), or any provision of
state, local or foreign tax law. To the extent that amounts are so withheld by
Hammond I, Inc. or the Payment Agent, such withheld amounts shall be treated for
all purposes of this Agreement as having been paid to the holder of the Shares
in respect of which such deduction and withholding was made by Hammond I, Inc.
or the Payment Agent.
2.3 Stock Options and Warrants with Respect to Company Common Stock. The
Company shall take all actions necessary pursuant to the terms and provisions of
any outstanding options and warrants to acquire shares of Company Common Stock,
to cause the following: except as specifically disclosed in the Company
Disclosure Letter (as hereinafter defined), all outstanding options and warrants
to acquire shares of Company Common Stock granted under the Company Stock Option
Plans (the "Company Stock Plan") or otherwise (the "Company Stock Options") will
terminate and expire as of the Effective Time. The Company shall give written
notice to the holders of all Company Stock Options of the foregoing and each
such Company Stock Option shall thereafter be canceled. All actions required to
be taken pursuant to this Section 2.3(a) with respect to Company Stock Options
has been, or prior to the Effective Time will be, taken by the Company. The
Company may permit holders of Company Stock Options to exercise such Company
Stock Options prior to the Effective Time by accepting as payment therefor a
portion of the number of shares issuable upon such exercise with a value equal
to the aggregate exercise price of such Company Stock Options valued at the
merger consideration.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of the Company. The Company represents
and warrants to Hammond I, Inc. and Merger Sub that, except as specifically
disclosed in the letter dated the date hereof and delivered by the Company to
Hammond I, Inc. simultaneously with the execution and delivery of this Agreement
(the "Company Disclosure Letter"):
(a) Organization, Standing and Power. Each of the Company and its
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, has all
requisite power and authority and all necessary governmental approvals to own,
lease and operate its properties and assets and to conduct its business as it is
now being conducted and is duly qualified and in good corporate standing to do
business in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties and assets makes such qualification
necessary, other than in such jurisdictions where the failure so to qualify
would not, individually or in the aggregate, be reasonably expected to have a
Material Adverse Effect on the Company. The Company has made available to
Hammond I, Inc. true and complete copies of its certificate of incorporation and
bylaws and the certificate of incorporation and bylaws (or equivalent
organizational documents) of each Subsidiary of the Company, each as amended to
date. Such certificates of incorporation, bylaws or equivalent organizational
documents are in full force and effect, and neither the Company nor any
Subsidiary of the Company is in violation of any provision of its certificate of
incorporation, bylaws or equivalent organizational documents.
(b) Subsidiaries. The Company owns, directly or indirectly, all of the
outstanding capital stock or other equity interests in each of its Subsidiaries
free and clear of any claim, lien, encumbrance, security interest or agreement
with respect thereto. Other than the capital stock or other interests held by
the Company in such Subsidiaries, neither the Company nor any such Subsidiary
owns any direct or indirect equity interest in any person, domestic or foreign.
All of the outstanding shares of capital stock in each of its corporate
Subsidiaries are duly authorized, validly issued, fully paid and nonassessable
and were issued free of preemptive rights and in compliance with applicable
securities laws and regulations. There are no irrevocable proxies or similar
obligations with respect to such capital stock of such Subsidiaries and no
equity securities or other interests of any of its Subsidiaries are or may
become required to be issued or purchased by reason of any options, warrants,
rights to subscribe to, puts, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into or exchangeable for,
shares of any capital stock or any other equity interest of any such Subsidiary,
and there are no agreements, contracts, commitments, understandings or
arrangements by which any such Subsidiary is bound to issue additional shares of
its capital stock or other equity interests, or options, warrants or rights to
purchase or acquire any additional shares of its capital stock or other equity
interests or securities convertible into or exchangeable for such shares or
other equity interests.
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(c) Capital Structure.
(i) The authorized capital stock of the Company consists of
30,000,000 shares of Company Common Stock, 2,000,000 shares of Preferred Stock,
none of which are outstanding. As of the date hereof, (A) 13,977,920 shares of
Company Common Stock were outstanding, (B) 1,007,938 Company Stock Options were
outstanding, each such option entitling the holder thereof to purchase one share
of Company Common Stock, (C) 1,839,887 shares of Company Common Stock are
authorized and reserved for issuance upon the exercise of outstanding Company
Stock Options, and (D) no shares of Company Common Stock were held by the
Company in its treasury or by its Subsidiaries.
(ii) No bonds, debentures, notes or other indebtedness having the
right to vote (or convertible into or exercisable for securities having the
right to vote) on any matters on which stockholders may vote ("Voting Debt") of
the Company are issued or outstanding.
(iii) All outstanding shares of the Company's capital stock are
validly issued, fully paid and nonassessable and free of preemptive rights. All
shares of Company Common Stock subject to issuance upon the exercise of Company
Stock Options, upon issuance on the terms and conditions specified in the
instruments pursuant to which they are issuable, will be duly authorized,
validly issued, fully paid and nonassessable and free of preemptive rights.
(iv) Except for this Agreement, the Company Stock Plans, as set
forth in the Company's annual report on Form 10-K for the fiscal year ended
December 31, 2001 and as disclosed in the Company Disclosure Letter, there are
no options, warrants, calls, rights, convertible securities, subscriptions,
stock appreciation rights, phantom stock plans or stock equivalents, or other
rights, commitments or agreements of any character to which the Company or any
Subsidiary of the Company is a party or by which it is bound obligating the
Company or any Subsidiary of the Company to issue, deliver or sell, or cause to
be issued, delivered or sold, additional shares of capital stock or any Voting
Debt of the Company or of any Subsidiary of the Company or obligating the
Company or any Subsidiary of the Company to grant, extend or enter into any such
option, warrant, call, right, commitment or agreement for consideration per
share of less than the Merger Consideration. There are no outstanding
contractual obligations of the Company or any of its Subsidiaries to repurchase,
redeem or otherwise acquire any shares of capital stock of the Company or any of
its Subsidiaries.
(d) Authority.
(i) The Company has all requisite corporate power and authority to
enter into this Agreement and, subject to approval by the stockholders of the
Company, to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of the Company, other than such approval by the stockholders of the Company.
This Agreement has been duly executed and delivered by the Company and
constitutes a valid and binding obligation of the Company enforceable in
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accordance with its terms, except as affected by bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and other similar laws
relating to or affecting creditors' rights generally and general equitable
principles (whether considered in a proceeding in equity or at law). The
affirmative vote of holders of a majority of the outstanding shares of Company
Common Stock entitled to vote at a duly called and held meeting of stockholders
(the "Stockholders' Meeting") is the only vote of the Company's stockholders
necessary to approve this Agreement, the Merger and the other transactions
contemplated by this Agreement, provided that a majority of the Shares do not
vote against approval of this Agreement, the Merger and the transactions
contemplated thereby. The Independent Committee has been duly authorized and
constituted and the Board, based on the approval and recommendation of the
Independent Committee at a meeting duly called and held, has (A) determined that
(x) the Merger Consideration is fair to the holders of Shares and (y) the Merger
is advisable and in the best interests of the Company and the holders of Shares,
and (B) approved and declared the advisability of this Agreement in accordance
with the provisions of the DGCL. The Independent Committee has received the
written opinion (the "Fairness Opinion") of the Independent Advisor to the
effect that, as of the date of this Agreement the Merger Consideration to be
paid to holders of Shares is fair to such holders from a financial point of
view, and, as of the date hereof, such Fairness Opinion has not been withdrawn.
(ii) Subject to compliance with the applicable requirements of the
Exchange Act and the filing of the Certificate of Merger as contemplated by
Section 1.3, the execution and delivery of this Agreement and the Certificate of
Merger, the consummation of the transactions contemplated hereby and thereby,
and compliance of the Company with any of the provisions hereof or thereof will
not breach, constitute an ultra vires act under, or result in any violation of,
or default (with or without notice or lapse of time, or both) under, or give
rise to a right of termination, cancellation or acceleration of any obligation
or the loss of a material benefit under, or the creation of a lien, pledge,
security interest, charge or other encumbrance on assets (any such breach, ultra
vires act, violation, default, right of termination, cancellation, acceleration,
loss or creation, a "Violation") pursuant to, (x) any provision of the
certificate of incorporation or bylaws of the Company or the governing
instruments of any Subsidiary of the Company or (y) subject to obtaining or
making the consents, approvals, orders, authorizations, registrations,
declarations and filings referred to in paragraph (iii) below or in the Company
Disclosure Letter, any loan or credit agreement, note, mortgage, indenture,
lease, or other agreement, obligation, instrument, permit, concession,
franchise, license, judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to the Company or any Subsidiary of the Company or their
respective properties or assets except Violations under clause (y) which would
not be reasonably expected to have a Material Adverse Effect on the Company.
(iii) No consent, approval, order or authorization of, or
registration, declaration or filing with, any court, administrative agency or
commission or other governmental authority or instrumentality, domestic or
foreign (a "Governmental Entity"), is required by or with respect to the Company
or any Subsidiary of the Company in connection with the execution and delivery
of this Agreement and the Certificate of Merger by the Company, the consummation
by the Company of the transactions contemplated hereby and thereby, and
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compliance of the Company with any of the provisions hereof or thereof, the
failure to obtain which would be reasonably expected to have a Material Adverse
Effect on the Company, except for (A) the filing with the Securities and
Exchange Commission (the "SEC") of (1) a Proxy Statement in definitive form
relating to the meeting of the Company's stockholders to be held in connection
with the Merger, (2) a Transaction Statement on Schedule 13E-3 (as hereinafter
defined) and (3) such other filings under the Exchange Act as may be required in
connection with this Agreement and the transactions contemplated hereby, (B) the
filing of the Certificate of Merger as contemplated by Section 1.1 and
appropriate documents with the relevant authorities of states in which the
Company is qualified to do business, and (c) filings pursuant to the rules of
the NASDAQ Stock Market.
(e) SEC Documents. All the documents (other than preliminary material)
that the Company was required to file with the SEC for the past three years
including, without limitation, each report, schedule, registration statement and
definitive proxy statement filed by the Company (as such documents have since
the time of their filing been amended, the "Company SEC Documents"), have been
timely filed. As of their respective dates, (i) the Company SEC Documents
complied as to form in all material respects with the requirements of the
Securities Act of 1933, as amended (the "Securities Act") or the Exchange Act,
as the case may be, and the rules and regulations of the SEC thereunder
applicable to such Company SEC Documents, and (ii) none of the Company SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, except to the extent such statements have
been modified or superseded by later Company SEC Documents filed on a
non-confidential basis as of the date of this Agreement. The consolidated
financial statements of the Company included in the Company SEC Documents
(including, without limitation, the audited balance sheet and related statements
of operations, stockholders' equity and cash flows of the Company and its
Subsidiaries for the fiscal year ended December 31, 2001, as audited by Deloitte
& Touche, LLP (such balance sheet is referred to hereinafter as the "Balance
Sheet" and the Balance Sheet and related statements are referred to hereinafter
as the "Year-End Financial Statements")), complied in all material respects with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto, have been prepared in accordance with generally
accepted accounting principles ("GAAP") applied on a consistent basis during the
periods involved and fairly present in all material respects the consolidated
financial position of the Company and its consolidated Subsidiaries as at the
dates thereof and the consolidated results of their operations, stockholders'
equity and cash flows for the periods then ended in accordance with GAAP. As of
December 31, 2001, neither the Company nor any of its Subsidiaries had any
liabilities or obligations of any nature, whether or not accrued, contingent or
otherwise, that would be required by GAAP to be reflected on a consolidated
balance sheet of the Company and its Subsidiaries (including the notes thereto)
and which were not reflected on the Balance Sheet. Since December 31, 2001,
except as and to the extent set forth in the Company's SEC Documents and except
for liabilities or obligations incurred in the ordinary course of business
consistent with past practice and of substantially the same character, type and
magnitude as incurred in the past, neither the Company nor any of its
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Subsidiaries has incurred any liabilities or obligations of any nature, whether
or not accrued, contingent or otherwise, that would be reasonably expected to
have a Material Adverse Effect on the Company. All agreements, contracts and
other documents required to be filed as exhibits to any of the Company SEC
Documents have been so filed. No Subsidiary of the Company is required to file
any form, report or other document with the SEC.
(f) Information Supplied. None of the information included or
incorporated by reference in the Proxy Statement or the Schedule 13E-3 (other
than information concerning Hammond, Hammond I, Inc. or Merger Sub provided in
writing by Hammond I, Inc. or Merger Sub or their counsel specifically for
inclusion or incorporation by reference therein) will, at the date of mailing to
stockholders of the Company and at the time of the meeting of stockholders to be
held in connection with the Merger, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. The Proxy Statement and Schedule
13E-3 (except for information concerning Hammond, Hammond I, Inc. or Merger Sub
provided in writing by Hammond, Hammond I, Inc. or Merger Sub or their counsel
specifically for inclusion or incorporation by reference therein) will comply as
to form in all material respects with the provisions of the Exchange Act and the
rules and regulations thereunder.
(g) Absence of Certain Changes or Events. Except as contemplated by
this Agreement or as disclosed in the Company Disclosure Letter or in the
Company SEC Documents, since December 31, 2001, the Company and its Subsidiaries
have conducted their respective businesses only in the ordinary course and
consistent with prior practice and there has not been any event, occurrence,
fact, condition, change, development or effect that has had or could reasonably
be expected to have, individually or in the aggregate, a Material Adverse Effect
on the Company.
(h) Litigation. Except as set forth on the Company Disclosure Letter,
there are no material claims, actions, suits or legal or administrative
arbitrations or other proceedings or investigations ("Litigation") pending
against the Company or any of its Subsidiaries, or, to the Company's knowledge,
threatened against or affecting the Company or any of its Subsidiaries, or to
which the Company or any of its Subsidiaries is a party, before or by any
Federal, foreign, state, local or other governmental or non-governmental
department, commission, board, bureau, agency, court or other instrumentality,
or by any private person or entity. There are no existing or, to the best
knowledge of the Company, threatened material orders, judgments or decrees of
any court or other Governmental Entity which specifically apply to the Company,
any of its Subsidiaries or any of their respective properties or assets.
(i) Section 203 of the DGCL and the Certificate of Incorporation. The
Board and the Independent Committee has approved the Merger and this Agreement,
and such approval is sufficient to comply with or render inapplicable to the
Merger and this Agreement, and the transactions contemplated by this Agreement,
the provisions of Section 203 of the DGCL. No other state takeover statute or
similar statute or regulation applies or purports to apply to the Merger, this
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Agreement or the transactions contemplated by this Agreement. No provision of
the certificate of incorporation, bylaws and/or other governing instruments of
the Company or any of its Subsidiaries would restrict or impair the ability of
Hammond I, Inc. to vote, or otherwise to exercise the rights of a stockholder
with respect to, shares of the Company and any of its Subsidiaries that may be
acquired or controlled by Hammond I, Inc.
(j) Opinion of Financial Advisor. The Independent Committee has
received the opinion of the Independent Advisor dated as of August 26, 2002, to
the effect that, as of such date, the consideration to be received by the
holders of the Shares pursuant to this Agreement is fair to holders of the
Shares from a financial point of view, a signed copy of which opinion has been
delivered to Hammond I, Inc.
(k) Merger Consideration. If requested to do so in writing by Hammond
I, Inc., the Company will provide to the Payment Agent, for deposit into the
Payment Fund, funds in an amount equal to the Merger Consideration to be paid in
respect of all Shares.
3.2 Representations and Warranties of Hammond, Hammond I, Inc. and Merger
Sub. Hammond, Hammond I, Inc. and Merger Sub jointly and severally represent and
warrant to the Company as follows:
(a) Organization, Standing and Power. Each of Hammond I, Inc. and
Merger Sub is a corporation, duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, has all
requisite power and authority and all necessary governmental approvals to own,
lease and operate its properties and to carry on its business as it is now being
conducted, and is duly qualified and in good standing to do business in each
jurisdiction in which the nature of its business or the ownership or leasing of
its properties makes such qualification necessary, other than in such
jurisdictions where the failure so to qualify would not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect on Hammond
I, Inc. or Merger Sub.
(b) Authority.
(i) Hammond I, Inc. and Merger Sub have all requisite corporate
power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Hammond I, Inc. or
Merger Sub, as the case may be. This Agreement has been duly executed and
delivered by Hammond, Hammond I, Inc. and Merger Sub and constitutes a valid and
binding obligation of Hammond, Hammond I, Inc. or Merger Sub, as the case may
be, enforceable in accordance with its terms, except as affected by bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and other similar
laws relating to or affecting creditors' rights generally and general equitable
principles (whether considered in a proceeding in equity or at law).
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(ii) Subject to compliance with the applicable requirements of the
Exchange Act and the filing of the Certificate of Merger, the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby will not result in any Violation pursuant to (x) any provision of the
certificate of incorporation or bylaws of Hammond I, Inc., any provision of the
certificate of incorporation or bylaws of Merger Sub, or the governing
instruments of any other Subsidiary of Hammond I, Inc. or (y) except as
disclosed in the letter dated the date hereof and delivered by Hammond I, Inc.
to the Company simultaneously with the execution and delivery of this Agreement
(the "Hammond I, Inc. Disclosure Letter") and subject to obtaining or making the
consents, approvals, orders, authorizations, registrations, declarations and
filings referred to in paragraph (iii) below or in the Hammond I, Inc.
Disclosure Letter, any loan or credit agreement, note, mortgage, indenture,
lease, benefit plan or other agreement, obligation, instrument, permit,
concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Hammond, Hammond I, Inc., Merger Sub
or any other Subsidiary of Hammond I, Inc. or their respective properties or
assets except Violations under clause (y) above which do not or would not
reasonably be expected to have a Material Adverse Effect on Hammond I, Inc.
(iii) No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity is required by
or with respect to Hammond, Hammond I, Inc., Merger Sub or any other Subsidiary
of Hammond I, Inc. in connection with the execution and delivery of this
Agreement by Hammond, Hammond I, Inc. and Merger Sub, the consummation by
Hammond, Hammond I, Inc. or Merger Sub, as the case may be, of the transactions
contemplated hereby, and compliance by Hammond, Hammond I, Inc. and Merger Sub
with any of the provisions hereof, the failure to obtain which would reasonably
be expected to have a Material Adverse Effect on Hammond I, Inc. except for (A)
such filings under the Exchange Act as may be required in connection with this
Agreement and the transactions contemplated hereby, including the filing of the
Schedule 13E-3, and (B) the filing of the Certificate of Merger as contemplated
by Section 1.3 and appropriate documents with the relevant authorities of states
in which Hammond I, Inc. and Merger Sub are qualified to do business.
(c) Information Supplied. None of the information concerning Hammond,
Hammond I, Inc. or Merger Sub provided by or on behalf of Hammond I, Inc. or
Merger Sub specifically for inclusion or incorporation by reference in the Proxy
Statement or the Schedule 13E-3 will, at the date of mailing to stockholders and
at the times of the meetings of stockholders to be held in connection with the
Merger, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(d) Interim Operations of Merger Sub. Merger Sub was incorporated on
May 15, 2002, has engaged in no other business activities and has conducted its
operations only as contemplated hereby.
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ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
4.1 Covenants of Company. During the period from the date of this Agreement
and continuing until the Effective Time, the Company agrees as to itself and its
Subsidiaries that (except as expressly contemplated or permitted by this
Agreement or to the extent that Hammond I, Inc. shall otherwise consent in
writing):
(a) Ordinary Course. The Company and its Subsidiaries shall carry on
their respective businesses in the usual, regular and ordinary course and use
commercially reasonable efforts to preserve intact their present business
organizations, maintain their rights and preserve their relationships with
employees, officers, customers, suppliers and others having business dealings
with them. The Company and its Subsidiaries shall maintain in force all
insurance policies and Consents (as defined in Section 6.1) with respect to the
Company and its Subsidiaries and shall maintain all assets and properties of the
Company and its Subsidiaries in customary repair, order and condition,
reasonable wear and tear excepted. The Company shall not, nor shall it permit
any of its Subsidiaries to, (i) enter into any new material line of business or
(ii) incur or commit to any significant capital expenditures or any obligations
or liabilities other than capital expenditures and obligations or liabilities
incurred or committed to as disclosed in the Company Disclosure Letter. The
Company and its Subsidiaries will comply with all applicable laws and
regulations wherever its business is conducted, including without limitation the
timely filing of all reports, forms or other documents with the SEC required
pursuant to the Securities Act or the Exchange Act, except where such
noncompliance would not be reasonably expected to have a Material Adverse Effect
on the Company.
(b) Dividends; Changes in Stock. The Company shall not, nor shall it
permit any of its Subsidiaries to, nor shall the Company propose to, (i) declare
or pay any dividends on or make other distributions in respect of any of its
capital stock, other than cash dividends payable by a Subsidiary of the Company
to the Company or one of its Subsidiaries, (ii) split, combine or reclassify any
of its capital stock or issue or authorize or propose the issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
capital stock, or (iii) except as set forth on the Company Disclosure Schedule,
repurchase, redeem or otherwise acquire, or permit any Subsidiary to purchase or
otherwise acquire any shares of its capital stock or any securities convertible
into or exercisable for any shares of its capital stock.
(c) Issuance of Securities. The Company shall not, nor shall it permit
any of its Subsidiaries to, issue, deliver or sell, or authorize or propose the
issuance, delivery or sale of, any shares of its capital stock of any class, any
Voting Debt or any securities convertible into or exercisable for (including any
stock appreciation rights, phantom stock plans or stock equivalents), or any
rights, warrants or options to acquire, any such shares or Voting Debt, or enter
into any agreement with respect to any of the foregoing, other than issuances of
Company Common Stock pursuant to exercises of Company Stock Options or Company
Common Stock awards to directors listed in the Company Disclosure Letter.
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(d) Governing Documents. The Company shall not amend or propose to
amend, nor shall it permit any of its Subsidiaries to amend, their respective
certificates of incorporation, bylaws or other governing instruments.
(e) No Acquisitions. The Company shall not, nor shall it permit any of
its Subsidiaries to, (i) acquire or agree to acquire by merging or consolidating
with, or by purchasing a substantial equity interest in or a substantial portion
of the assets of, or by any other manner, any business or any corporation,
limited liability company, partnership, association or other business
organization or division thereof or (ii) other than in the ordinary course of
business, otherwise acquire or agree to acquire any assets which, in the case of
this clause (ii), are material, individually or in the aggregate, to the
Company.
(f) No Dispositions. The Company shall not, nor shall it permit any of
its Subsidiaries to, sell, lease, encumber or otherwise dispose of, or agree to
sell, lease, encumber or otherwise dispose of any of its assets (including
capital stock of Subsidiaries), except as disclosed in the Company Disclosure
Letter and for dispositions in the ordinary course of business and consistent
with past practice and of substantially the same character, type and magnitude
as dispositions in the past.
(g) Indebtedness. The Company shall not, nor shall it permit any of its
Subsidiaries to, (i) incur any indebtedness for borrowed money or guarantee any
such indebtedness or issue or sell any debt securities or warrants or rights to
acquire any long-term debt securities of the Company or any of its Subsidiaries
or guarantee any long-term debt securities of others or enter into or amend any
contract, agreement, commitment or arrangement with respect to any of the
foregoing, other than (x) in replacement for existing or maturing debt, (y)
indebtedness of any Subsidiary of the Company to the Company or to another
Subsidiary of the Company or (z) other borrowing under existing lines of credit
in the ordinary course of business consistent with prior practice and of
substantially the same character, type and magnitude as borrowings made in the
past or (ii) make any loans, advances or capital contributions to any person
other than a Subsidiary, except for advances to Company employees for travel or
other business expenses in accordance with past practice.
(h) Other Actions. The Company shall not, nor shall it permit any of
its Subsidiaries to, take any action that would, or might reasonably be expected
to, result in any of its representations and warranties set forth in this
Agreement being or becoming untrue in any material respect, or in any of the
conditions to the Merger set forth in Article VI not being satisfied, or which
would adversely affect the ability of any of them to obtain any of the Requisite
Regulatory Approvals without imposition of a condition or restriction of the
type referred to in Section 6.2(e) and the Company shall, in the event of, or
promptly after the occurrence of, or promptly after obtaining knowledge of the
occurrence of or the impending or threatened occurrence of, any fact or event
which would cause or constitute a breach of any of the representations and
warranties set forth in this Agreement, the non-satisfaction of any of the
conditions to the Merger set forth in Article VI or the failure to obtain the
Requisite Regulatory Approvals, in each case at any time after the date hereof
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and through the Closing Date, give detailed notice thereof to Hammond I, Inc.,
and the Company shall use its best efforts to prevent or promptly to remedy such
breach, non-satisfaction or failure, as the case may be.
(i) Advice of Changes; Government Filings. The Company shall confer on
a regular basis with Hammond I, Inc., report on operational matters and promptly
advise Hammond I, Inc., orally and in writing, of any material change or event
or any change or event which would cause or constitute a material breach of any
of the representations, warranties or covenants of the Company contained herein.
The Company shall file all reports required to be filed by the Company with the
SEC between the date of this Agreement and the Effective Time and shall deliver
to Hammond I, Inc. copies of all such reports promptly after the same are filed.
The Company shall cooperate with Hammond I, Inc. in determining whether any
filings are required to be made with, or consents required to be obtained from,
or fees or expenses required to be paid to, any third party or Governmental
Entity prior to the Effective Time in connection with this Agreement or the
transactions contemplated hereby, and shall cooperate in making any such filings
promptly and in seeking to obtain timely any such consents and, subject to
Hammond I, Inc.'s approval, paying any such fees or expenses. The Company shall
promptly provide Hammond I, Inc. with copies of all other filings made by the
Company with any Governmental Entity in connection with this Agreement, the
Merger or the other transactions contemplated hereby.
(j) Accounting Methods. The Company shall not change its methods of
accounting in effect at December 31, 2001, except as required by changes in GAAP
as concurred in by the Company's independent auditors.
(k) Benefit Plans. During the period from the date of this Agreement
and continuing until the Effective Time, the Company agrees as to itself and its
Subsidiaries that it will not, without the prior written consent of Hammond I,
Inc. except as set forth in the Company Disclosure Letter or contemplated by
this Agreement, (i) enter into, adopt, amend (except as may be required by law)
or terminate any employee benefit plan or any agreement, arrangement, plan or
policy between the Company or any of its Subsidiaries, on the one hand, and one
or more of its or their directors or officers, on the other hand, (ii) except
for normal increases in the ordinary course of business and consistent with past
practice and of substantially the same character, type and magnitude as
increases in the past that in the aggregate, do not result in a material
increase in benefits or compensation expense to the Company or any of its
Subsidiaries, increase in any manner the compensation or fringe benefits of any
director, officer or employee or pay any benefit not required by any plan and
arrangement as in effect as of the date hereof (including, without limitation,
the granting of stock options, stock appreciation rights, restricted stock,
restricted stock units or performance units or shares) or enter into any
contract, agreement, commitment or arrangement to do any of the foregoing, or
(iii) enter into or renew any contract, agreement, commitment or arrangement
providing for the payment to any director, officer or employee of the Company or
any of its Subsidiaries of compensation or benefits contingent, or the terms of
which are materially altered, upon the occurrence of any of the transactions
contemplated by this Agreement.
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(l) Tax Elections. Except in the ordinary course of business and
consistent with past practice and of substantially the same character, type and
magnitude as elections made in the past, the Company shall not make any material
tax election or settle or compromise any material federal, state, local or
foreign income tax claim or liability or amend any previously filed tax return
in any respect.
4.2 Covenants of Hammond, Hammond I, Inc. and Merger Sub. Except as
expressly contemplated by this Agreement, after the date hereof and prior to the
Effective Time, without the prior written consent of the Company:
(a) Other Actions. Neither Hammond, Hammond I, Inc. nor Merger Sub
shall, nor shall Hammond I, Inc. or Merger Sub permit any of their respective
Subsidiaries to, take any action that would, or might reasonably be expected to,
result in any of their or the Company's representations and warranties set forth
in this Agreement being or becoming untrue in any material respect, or in any of
the conditions to the Merger set forth in Article VI not being satisfied, or
which would adversely affect the ability of any of them or of the Company to
obtain any of the Requisite Regulatory Approvals without imposition of a
condition or restriction of the type referred to in Section 6.2(e). Without
limiting the generality of the foregoing, Hammond I, Inc. and Hammond agree to
vote all shares of Company Common Stock held by them in favor of the Merger.
(b) Government Filings. Hammond I, Inc. shall cooperate with the
Company in determining whether any filings are required to be made with, or
consents required to be obtained from, any third party or Governmental Entity
prior to the Effective Time in connection with this Agreement or the
transactions contemplated hereby, and shall cooperate in making any such filings
promptly and in seeking to obtain timely any such consents. Hammond I, Inc.
shall promptly provide the Company with copies of all other filings made by the
Hammond I, Inc. with any state or Federal Governmental Entity in connection with
this Agreement, the Merger or the other transactions contemplated hereby.
4.3 Competing Transactions. Nothing contained in this Agreement shall
prohibit the Company from, prior to the date of the Stockholder's Meeting (i)
furnishing information to, or entering into discussions or negotiations with,
any person that makes an unsolicited written, bona fide proposal to the Company
with respect to a Competing Transaction which could reasonably be expected to
result in a Superior Proposal, if, (A) the failure to take such action would be
inconsistent with the Board's and the Independent Committee's fiduciary duties
to the Company's stockholders under applicable law, and (B) prior to furnishing
such information to, or entering into discussions or negotiations with, such
person, the Company (x) provides at least two (2) business days prior notice to
Hammond I, Inc. to the effect that it is furnishing information to, or entering
into discussions or negotiations with, such person and (y) receives from such
person a fully executed confidentiality agreement, (ii) complying with Rule
14d-9 or Rule 14e-2 promulgated under the Exchange Act with regard to a tender
or exchange offer, or (iii) failing to make or withdrawing or modifying its
recommendation referred to in Section 5.2, or recommending an unsolicited, bona
fide proposal with respect to a Competing Transaction which could reasonably be
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expected to result in a Superior Proposal, following the receipt of such a
proposal, if the failure to take such action would be inconsistent with the
Board's and the Independent Committee's fiduciary duties to the Company's
stockholders under applicable law.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Preparation of the Proxy Statement and Schedule 13E-3.
(a) The Company shall as promptly as practicable prepare and file a
proxy or information statement relating to the Stockholders' Meeting (together
with all amendments, supplements and exhibits thereto, the "Proxy Statement")
with the SEC and will use its best efforts to respond to the comments of the SEC
and to cause the Proxy Statement to be mailed to the Company's stockholders at
the earliest practical time. The Company will notify Hammond I, Inc. promptly of
the receipt of any comments from the SEC or its staff and of any request by the
SEC or its staff for amendments or supplements to the Proxy Statement or for
additional information and will supply Hammond I, Inc. with copies of all
correspondence between the Company or any of its representatives, on the one
hand, and the SEC or its staff, on the other hand, with respect to the Proxy
Statement or the Merger. If at any time prior to the Stockholders' Meeting there
shall occur any event that should be set forth in an amendment or supplement to
the Proxy Statement, the Company will promptly prepare and mail to its
stockholders such an amendment or supplement. The Company will not mail any
Proxy Statement, or any amendment or supplement thereto, to which Hammond I,
Inc. reasonably objects. The Company hereby consents to the inclusion in the
Proxy Statement of the recommendation of the Board described in Section 5.2,
subject to any modification, amendment or withdrawal thereof, and represents
that the Independent Advisor has, subject to the terms of its engagement letter
with the Company, consented to the inclusion of references to its opinion in the
Proxy Statement.
(b) The Company, Hammond I, Inc., and Merger Sub shall together prepare
and file a Transaction Statement on Schedule 13E-3 (together with all amendments
and exhibits thereto, the "Schedule 13E-3") under the Exchange Act. Each of
Hammond, Hammond I, Inc. and Merger Sub shall furnish all information concerning
it, its affiliates and the holders of its capital stock required to be included
in the Schedule 13E-3 and, after consultation with each other, shall respond
promptly to any comments made by the SEC with respect to the Schedule 13E-3.
5.2 Stockholders' Meeting. Subject to the Committee's receipt of the
written opinion of the Independent Advisor dated as of the date of the mailing
of the Proxy Statement to the stockholders of the Company, that the
consideration to be received by such stockholders pursuant to this Agreement is
fair, from a financial point of view, to such stockholders (the "Updated
Fairness Opinion"), the Company shall call the Stockholders' Meeting to be held
as promptly as practicable for the purpose of voting upon the approval of this
Agreement, the Merger and the other transactions contemplated hereby. The
Company will, through its Board and the Independent Committee, recommend to its
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stockholders approval of such matters, unless the taking of such action would be
inconsistent with the Board's and the Independent Committee's fiduciary duties
to stockholders under applicable laws. The Company shall solicit from Company
stockholders entitled to vote at the Stockholders' Meeting proxies in favor of
such approval and shall take all other action necessary or, in the reasonable
judgment of Hammond I, Inc., helpful to secure the vote or consent of such
holders required by the DGCL or this Agreement to effect the Merger. The Company
shall coordinate and cooperate with Hammond I, Inc. with respect to the timing
of such meeting.
5.3 Legal Conditions to Merger. Each of the Company, Hammond and Hammond I,
Inc. shall, and shall cause its Subsidiaries to, use all reasonable best efforts
(i) to take, or cause to be taken, all actions necessary to comply promptly with
all legal requirements which may be imposed on such party or its Subsidiaries
with respect to the Merger and to consummate the transactions contemplated by
this Agreement, subject to the approval of stockholders of the Company described
in Section 6.1 (a), and (ii) to obtain (and to cooperate with the other party to
obtain) any consent, authorization, order or approval of, or any exemption by,
any Governmental Entity and of any other public or private third party which is
required to be obtained or made by such party or any of its Subsidiaries in
connection with the Merger and the transactions contemplated by this Agreement.
Each of the Company and Hammond I, Inc. will promptly cooperate with and furnish
information to the other in connection with any such burden suffered by, or
requirement imposed upon, any of them or any of their Subsidiaries in connection
with the foregoing.
5.4 Brokers or Finders. Except as disclosed to the other party in writing
prior to the date hereof, each of Hammond I, Inc. and the Company represents, as
to itself, its Subsidiaries and its affiliates, that no agent, broker,
investment banker, financial advisor or other firm or person is or will be
entitled to any broker's or finder's fee or any other commission or similar fee
in connection with any of the transactions contemplated by this Agreement,
except the Independent Advisor, whose fees and expenses will be paid by the
Company in accordance with the Company's agreement with such firm (a copy of
which has been delivered by the Company to Hammond I, Inc. prior to the date of
this Agreement), and each party agrees to indemnify the other party and hold the
other party harmless from and against any and all claims, liabilities or
obligations with respect to any other fees, commissions or expenses asserted by
any person on the basis of any act or statement alleged to have been made by
such first party or its affiliates.
5.5 Shareholder Litigation. The Company shall give Hammond I, Inc. the
opportunity to participate in the defense or settlement of any shareholder
litigation against the Company and its directors relating to the transactions
contemplated by this Agreement; provided, however, that no such settlement shall
be agreed to without the Company's and Hammond I, Inc.'s consent, which shall
not be unreasonably withheld.
5.6 Communication to Employees. The Company and Hammond I, Inc. will
cooperate with each other with respect to, and endeavor in good faith to agree
in advance upon the method and content of, all written or oral communications or
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disclosure to employees of the Company or any of its Subsidiaries with respect
to the Merger and any other transactions contemplated by this Agreement. Upon
reasonable notice, the Company shall provide Hammond I, Inc. access to the
Company's and its Subsidiaries' employees and facilities.
5.7 Indemnification; Directors' and Officers' Insurance.
(a) From and after the Effective Time, the Surviving Corporation shall
provide exculpation, indemnification and advancement of expenses for each person
who is now or has been at any time prior to the date hereof or who becomes prior
to the Effective Time, an officer or director of the Company or any of its
Subsidiaries (the "Indemnified Parties") which is the same as the exculpation,
indemnification and advancement of expenses provided to the Indemnified Parties
by the Company (including advancement of expenses, if so provided) immediately
prior to the Effective Time in its Certificate of Incorporation, Bylaws and
existing contractual agreements as in effect at the close of business on the
date hereof; provided, that such exculpation, indemnification and advancement of
expenses covers actions on or prior to the Effective Time, including, without
limitation, all transactions contemplated by this Agreement.
(b) The Surviving Corporation shall maintain in effect for a period of
five (5) years from the Effective Time "tail" directors' and officers' liability
insurance with a term, coverage amount and other terms and conditions as are at
least as favorable as those of the directors' and officers' liability insurance
presently maintained by the Company (the "Tail Policy"). The Surviving
Corporation shall provide the Company with a true and complete copy of a binder
with respect to the Tail Policy prior to the Effective Time, and shall use its
best efforts to provide to the Company a true and complete copy of the Tail
Policy as proposed to be issued prior to the Effective Time. The premium for the
Tail Policy shall be paid in full prior to the Effective Time.
ARTICLE VI
CONDITIONS PRECEDENT
6.1 Conditions to Each Party's Obligation To Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to the
satisfaction prior to the Closing Date of the following conditions:
(a) Stockholder Approval. This Agreement shall have been approved and
adopted by the affirmative vote of the holders of a majority of the outstanding
shares of Company Common Stock entitled to vote thereon and a majority of the
Shares entitled to vote thereon shall not have voted against adoption of this
Agreement.
(b) Other Approvals. All authorizations, consents, orders or approvals
of, or declarations or filings with, and all expirations or early terminations
of waiting periods imposed by, any Governmental Entity (all the foregoing,
"Consents") which are necessary for the consummation of the Merger shall have
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been filed, occurred or been obtained (all such permits, approvals, filings and
consents and the lapse of all such waiting periods being referred to as the
"Requisite Regulatory Approvals") and all such Requisite Regulatory Approvals
shall be in full force and effect.
(c) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger shall be in effect, nor shall any proceeding by any
Governmental Entity seeking any of the foregoing be pending. There shall not be
any action taken, or any statute, rule, regulation or order enacted, entered,
enforced or deemed applicable to the Merger, which makes the consummation of the
Merger illegal.
6.2 Conditions to Obligations of Hammond, Hammond I, Inc. and Merger Sub.
The obligations of Hammond, Hammond I, Inc. and Merger Sub to effect the Merger
are subject to the satisfaction of the following conditions unless waived by
Hammond, Hammond I, Inc. and Merger Sub:
(a) Representations and Warranties. The representations and warranties
of the Company set forth in this Agreement shall be true and correct in all
respects as of the Effective Time as though made on or as of such time, except
for those representations and warranties that address matters only as of a
particular date or only with respect to a specific period of time which need
only be true and correct in all respects as of such date or with respect to such
period.
(b) Performance of Obligations of Company. The Company shall have
performed and complied in all material respects with all obligations required to
be performed or complied with by it under this Agreement at or prior to the
Closing Date, and Hammond I, Inc. shall have received a certificate signed on
behalf of the Company by an officer of the Company and by the Chief Financial
Officer of the Company to such effect.
(c) Appraisal Rights. Dissenting Shares shall constitute less than 5%
of all shares of Company Common Stock outstanding immediately prior to the
Effective Time.
(d) Consents Under Agreements. The Company shall have obtained the
consent or approval of, except for those consents or approvals for which failure
to obtain such consents or approvals could not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect on the
Company, each Person (other than the Requisite Regulatory Approvals) whose
consent or approval shall be required in order to permit the succession by the
Surviving Corporation pursuant to the Merger to any obligation, right or
interest of the Company or any Subsidiary of the Company under any loan or
credit agreement, note, mortgage, indenture, lease, license or other agreement
or instrument.
(e) Burdensome Condition. There shall not be any action taken, or any
statute, rule, regulation or order enacted, entered, enforced or deemed
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applicable to the Merger, by any Governmental Entity which, in connection with
the grant of a Requisite Regulatory Approval, imposes any requirement upon
Hammond I, Inc., the Surviving Corporation or their respective Subsidiaries
which would so materially adversely impact the economic or business benefits of
the transactions contemplated by this Agreement as to render uneconomic the
consummation of the Merger, or which would require Hammond I, Inc. or any of its
Subsidiaries to dispose of any asset which is material to Hammond I, Inc. prior
to the Effective Time.
(f) Material Adverse Effect. Since the date of this Agreement, there
shall not have occurred any Material Adverse Effect with respect to the Company
and no facts or circumstances arising after the date of this Agreement shall
have occurred which, individually or in the aggregate, could reasonably be
expected to have a Material Adverse Effect with respect to the Company.
(g) Proceedings. All proceedings to be taken on the part of the Company
in connection with the transactions contemplated by this Agreement and all
documents incident thereto shall be reasonably satisfactory in form and
substance to Hammond I, Inc., and Hammond I, Inc. shall have received copies of
all such documents and other evidences as Hammond I, Inc. may reasonably request
in order to establish the consummation of such transactions and the taking of
all proceedings in connection therewith.
(h) No Action. As of the Effective Time, no action, suit or proceeding
shall be pending (i) seeking to restrain in any material respect or prohibit the
consummation of the Merger, (ii) seeking to obtain from the Company, Hammond I,
Inc. or Merger Sub any damages which would reasonably be expected to result in a
Material Adverse Effect or (iii) seeking to impose the restrictions,
prohibitions or limitations referred to in subsection (e) above, except such
actions, suits or proceedings, the settlement of which shall be effective as of
the Effective Time.
6.3 Conditions to Obligations of Company. The obligation of the Company to
effect the Merger is subject to the satisfaction of the following conditions
unless waived by the Company:
(a) Representations and Warranties. The representations and warranties
of Hammond, Hammond I, Inc. and Merger Sub set forth in this Agreement shall be
true and correct in all respects as of the Effective Time as though made on or
as of such time, except for those representations and warranties that address
matters only as of a particular date or only with respect to a specific period
of time which need only be true and correct in all respects as of such date or
with respect to such period.
(b) Performance of Obligations of Hammond, Hammond I, Inc. and Merger
Sub. Hammond, Hammond I, Inc. and Merger Sub shall have performed and complied
in all material respects with all obligations required to be performed by them
under this Agreement at or prior to the Closing Date, and the Company shall have
received a certificate signed on behalf of Hammond I, Inc. by the President and
Chief Executive Officer of Hammond I, Inc. or a Corporate Vice President of
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Hammond I, Inc., and by the Senior Vice President and Chief Financial Officer of
Hammond I, Inc. or the Corporate Vice President and Treasurer of Hammond I, Inc.
to such effect.
(c) No Action. As of the Effective Time, no action, suit or proceeding
shall be pending (i) seeking to restrain in any material respect or prohibit the
consummation of the Merger, (ii) seeking to obtain from the Company, Hammond I,
Inc. or Merger Sub any damages which would reasonably be expected to result in a
Material Adverse Effect or (iii) seeking to impose the restrictions,
prohibitions or limitations referred to in Section 6.2(e) above, except such
actions, suits or proceedings, the settlement of which shall be effective as of
the Effective Time; provided, however, that the parties hereto acknowledge that
certain other actions, suits or proceedings not of the type described in this
section may be pending as of the Effective Time.
ARTICLE VII
TERMINATION AND AMENDMENT
7.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval of the matters presented in
connection with the Merger by the stockholders of the Company:
(a) by mutual consent of Hammond I, Inc. and the Company in a written
instrument, whether or not the Merger has been approved by the stockholders of
the Company;
(b) by Hammond I, Inc. on behalf of itself, Hammond and Merger Sub,
upon a material breach of any representation, warranty, covenant or agreement on
the part of the Company set forth in this Agreement, which breach is not cured
within ten (10) days after written notice of such breach from Hammond I, Inc. to
the Company, or if any representation or warranty of the Company shall have
become untrue such that the conditions set forth in Section 6.2, would be
incapable of being satisfied by January 31, 2003 (or such later date as Hammond
I, Inc. may agree to in writing), in each case only if Hammond did not have
actual knowledge of, and did not cause, such breach or untruth;
(c) by the Company, upon a material breach of any representation,
warranty, covenant or agreement on the part of Hammond I, Inc. or Merger Sub set
forth in this Agreement, which breach is not cured within ten (10) days after
written notice of such breach from the Company to Hammond I, Inc., or if any
representation or warranty of Hammond I, Inc. or Merger Sub shall have become
untrue such that the conditions set forth in Section 6.3, would be incapable of
being satisfied by January 31, 2003;
(d) by either Hammond I, Inc. or the Company, if any permanent
injunction or action by any Governmental Entity preventing the consummation of
the Merger shall have become final and nonappealable;
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(e) by either Hammond I, Inc. or the Company if the Merger shall not
have been consummated on or prior to January 31, 2003 (or such later date as may
be agreed to in writing by the Company and Hammond I, Inc.) (other than due to
the failure of the party seeking to terminate this Agreement to perform its
obligations under this Agreement required to be performed at or prior to the
Effective Time);
(f) by either Hammond I, Inc. or the Company, if any approval of the
stockholders of the Company required for the consummation of the Merger shall
not have been obtained by reason of the failure to obtain the required vote at a
Stockholders' Meeting or at any adjournment thereof;
(g) by Hammond I, Inc., if the Independent Committee or the Board shall
have (i) withdrawn, modified or changed its approval or recommendation of this
Agreement, the Merger or any of the other transactions contemplated herein in
any manner which is adverse to Hammond I, Inc. or Merger Sub or shall have
resolved to do the foregoing; or (ii) approved or have recommended to the
stockholders of the Company a Competing Transaction or a Superior Proposal,
entered into an agreement with respect to a Competing Transaction or Superior
Proposal or shall have resolved to do the foregoing;
(h) by Hammond I, Inc., if (i) a tender offer or exchange offer or a
proposal by a third party to acquire the Company or the Shares pursuant to a
merger, consolidation, share exchange, business combination, tender or exchange
offer or similar transaction shall have been commenced or publicly proposed
which contains a proposal as to price (without regard to the specificity of such
price proposal) and (ii) the Company shall not have made a recommendation to the
stockholders of the Company to reject such proposal within 10 business days of
its commencement or the date such proposal first becomes publicly disclosed, if
sooner;
(i) by the Company, if the Independent Committee and the Board
authorize the Company to enter into a written agreement with respect to a
Competing Transaction that the Independent Committee and the Board have
determined is a Superior Proposal; provided however, that, the Company shall not
terminate this Agreement pursuant to this Section 7.1(i) and enter into an
agreement for such a Competing Transaction until the expiration of five business
days following Hammond I, Inc.'s receipt of a written notice advising Hammond I,
Inc. that the Company has received a Superior Proposal specifying the material
terms and conditions of such Superior Proposal (and including a copy thereof
with all accompanying written documentation) and identifying the Person making
such Superior Proposal. After providing such notice, the Company shall provide a
reasonable opportunity to Hammond I, Inc. during such five business day period
to agree to such adjustments in the terms and conditions of this Agreement as
would enable Hammond I, Inc. and the Company to proceed with the Merger on such
adjusted terms.
7.2 Effect of Termination. In the event of termination of this Agreement
and abandonment of the Merger by either the Company or Hammond I, Inc. as
provided in Section 7.1, this Agreement shall forthwith terminate and there
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shall be no liability or obligation on the part of Hammond I, Inc., Merger Sub,
Hammond or the Company or their respective officers or directors except with
respect to the Sections 5.5 and 7.3; provided, however, that, subject to the
provisions of Section 8.8, nothing herein shall relieve any party of liability
for any breach hereof, except that in the event of a termination of this
Agreement, no party shall have any right to the recovery of expenses except as
provided in Section 7.3.
7.3 Fees, Expenses and Other Payments.
(a) Except as otherwise provided in this Section 7.3, whether or not
the Merger is consummated, all costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby (including, without
limitation, fees and disbursements of counsel, financial advisors and
accountants) shall be borne solely and entirely by the party which has incurred
such costs and expenses (with respect to such party, its "Expenses").
(b) The Company agrees that if this Agreement shall be terminated
pursuant to:
(i) Section 7.1(f) because the Agreement and the Merger shall fail
to receive the requisite vote for approval and adoption by the stockholders of
the Company at a meeting of the stockholders of the Company called to vote
thereon, and at the time of such meeting there shall exist a proposal with
respect to a Competing Transaction which either (x) the Board or the Independent
Committee has not publicly opposed or (y) is consummated, or a definitive
agreement with respect to which is entered into, at any time during the period
commencing on the date hereof and ending twelve months after the date of
termination of this Agreement; or
(ii) Section 7.1(g), Section 7.1(h) or Section 7.1(i);
then in each such event the Company shall pay to Hammond I, Inc. an amount equal
to Hammond Inc.'s actual out-of-pocket expenses incurred in connection with this
Agreement or the transactions contemplated hereby.
(c) Any payment required to be made pursuant to this Section 7.3 shall
be made as promptly as practicable but not later than five business days after
termination of this Agreement and shall be made by wire transfer of immediately
available funds to an account designated by Hammond I, Inc., except that any
payment to be made as the result of an event described in Section 7.3(b)(i) or
clause (y) of Section 7.3(b)(i) shall be made as promptly as practicable but not
later than five business days after the date on which a Competing Transaction
shall have been consummated.
7.4 Amendment. This Agreement may be amended by the parties hereto, by
action taken or authorized by their respective Boards of Directors and the
Independent Committee, at any time before or after approval of the matters
presented in connection with the Merger by the stockholders of the Company or of
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Hammond I, Inc., but, after any such approval, no amendment shall be made which
by law requires further approval by such stockholders without such further
approval. This Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties hereto.
7.5 Extension; Waiver. At any time prior to the Effective Time, the parties
hereto, by action taken or authorized by their respective Boards of Directors
and the Independent Committee, may, to the extent legally allowed, (i) extend
the time for the performance of any of the obligations or other acts of the
other parties hereto, (ii) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered pursuant hereto and
(iii) waive compliance with any of the agreements or conditions contained
herein. Any agreement on the part of a party hereto to any such extension or
waiver shall be valid only if set forth in a written instrument signed on behalf
of such party.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Survival of Representations, Warranties and Agreements. The
representations and warranties made by the parties contained in this Agreement
and any other agreement delivered pursuant hereto or made in writing by or on
behalf of the parties shall not survive beyond the Effective Time.
8.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (with
confirmation) or mailed by registered or certified mail (return receipt
requested) to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice):
(a) if to Hammond, Hammond I, Inc. or Merger Sub, to:
Hammond I, Inc.
905 Clint Moore Road
Boca Raton, Florida 33487
Attention: Robert A. Hammond, Jr.
Facsimile: (561) 953-0787
With a copy to:
Adorno & Yoss, P.A.
350 East Las Olas Boulevard, Suite 1700
Fort Lauderdale, Florida 33301
Attention: Joel D. Mayersohn, Esq.
Facsimile: (954) 766-7800
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(b) if to the Company, to:
PartsBase, Inc.
905 Clint Moore Road
Boca Raton, Florida 33487
Attention: Chief Financial Officer
Facsimile: (561) 953-0787
With copies to:
Epstein Becker & Green, P.C.
111 Huntington Avenue
Boston, Massachusetts 02199
Attention: Paul D. Broude, Esq.
Facsimile: (617) 342-4001
8.3 Certain Definitions. For purposes of this Agreement:
(a) an "Affiliate" of any person means another person that directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with, such first person;
(b) "Beneficially Own" or "Beneficial Ownership" with respect to any
securities, means having "beneficial ownership" of such securities in accordance
with the provisions of Rule 13d-3 under the Exchange Act. Without duplicative
counting of the same securities by the same holder, securities beneficially
owned by a person include securities beneficially owned by all other persons
with whom such person would constitute a group;
(c) "Competing Transaction" shall mean any of the following (other than
the transactions contemplated by this Agreement) involving the Company: (i) any
merger, consolidation, share exchange, exchange offer, business combination,
recapitalization, liquidation, dissolution or other similar transaction
involving the Company resulting in the Company's current shareholders owning
less than a majority of the capital stock of the surviving corporation in such
transaction; (ii) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of assets representing 20% or more of the total assets of the
Company and its Subsidiaries, in a single transaction or series of transactions;
(iii) any tender offer or exchange offer for 20% or more of the outstanding
Shares or the filing of a registration statement under the Securities Act in
connection therewith; (iv) any person or group acquiring Beneficial Ownership of
15% or more, or such person or group having increased its Beneficial Ownership
beyond 15%, of the outstanding Shares; or (v) any public announcement of a
proposal, plan or intention to do any of the foregoing or any agreement to
engage in any of the foregoing;
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(d) "Group" means two or more persons acting together for the purpose
of acquiring, holding, voting or disposing of any securities, which persons
would be required to file a Schedule 13D or Schedule 13G with the SEC as a
"person" within the meaning of Section 13(d)(3) of the Exchange Act if such
persons beneficially owned a sufficient amount of such securities to require
such a filing under the Exchange Act;
(e) "Material" with respect to any entity means an event, change or
effect which is material in relation to the condition (financial or otherwise),
properties, assets, liabilities, businesses or operations of such entity and its
Subsidiaries taken as a whole;
(f) "Material Adverse Effect" means, with respect to the Company or
Hammond I, Inc., any change, event or effect shall have occurred that, when
taken together with all other adverse changes, events or effects that have
occurred would or would reasonably be expected to (i) be materially adverse to
the business, assets, properties, results of operations or condition (financial
or otherwise) of such party and its Subsidiaries taken as a whole, or (ii)
prevent or materially delay the consummation, or increase the cost to Hammond I,
Inc. or Merger Sub, of the Merger;
(g) "Person" means an individual, corporation, limited liability
company, partnership, joint venture, association, trust, unincorporated
organization or other legal entity;
(h) a "Subsidiary" of any person means another person, an amount of the
voting securities, other voting ownership or voting partnership interests of
which is sufficient to elect at least a majority of its Board of Directors or
other governing body (or, if there are no such voting interests, 50% or more of
the equity interests of which) is owned directly or indirectly by such first
person;
(i) "Superior Proposal" means any bona fide written proposal to
acquire, directly or indirectly, for consideration consisting of cash and/or
securities, all of the shares of Company Common Stock then outstanding or all or
substantially all of the assets of the Company and the assumption of the
liabilities and obligations of the Company to be followed by a pro rata
distribution of the sale proceeds to stockholders of the Company, that (i) is
not subject to any condition that the party making the proposal obtain financing
for the proposed transaction, (ii) provides holders of Company Common Stock with
per share consideration that the Independent Committee determines in good faith,
after receipt of advice of its financial advisor, is more favorable from a
financial point of view than the consideration to be received by holders of
Company Common Stock in the Merger, (iii) is determined by the Independent
Committee in its good faith judgment, after receipt of advice of its financial
advisor and outside legal counsel, to be likely of being completed (taking into
account all legal, financial, regulatory and other aspects of the proposal, the
Person making the proposal and the expected timing to complete the proposal),
(iv) does not, in the definitive agreement, contain any "due diligence"
conditions, and (v) has not been obtained by or on behalf of the Company in
violation of Section 4.3 hereof; and
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(j) Any accounting term that is used in the context of describing or
referring to an accounting concept and that is not specifically defined herein
shall be construed in accordance with GAAP as applied in the preparation of the
financial statements of the Company included in the Company SEC Documents
(including, without limitation, the Year-End Financial Statements and the
Balance Sheet).
8.4 Interpretation. When a reference is made in this Agreement to Sections
or Exhibits, such reference shall be to a Section of or Exhibit to this
Agreement unless otherwise indicated. The recitals hereto constitute an integral
part of this Agreement. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Whenever the words "include",
"includes" or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation". The phrase "made available" in this
Agreement shall mean that the information referred to has been made available if
requested by the party to whom such information is to be made available. The
phrases "the date of this Agreement", "the date hereof' and terms of similar
import, unless the context otherwise requires, shall be deemed to refer to
August 26, 2002.
8.5 Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
8.6 Entire Agreement; No Third Party Beneficiaries; Rights of Ownership.
This Agreement (including the documents and the instruments referred to herein)
(a) constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof; and (b) except as provided in Sections 2.2, 2.3 and 5.5,
is not intended to confer upon any person other than the parties hereto any
rights or remedies hereunder. The parties hereby acknowledge that, except as
hereinafter agreed to in writing, no party shall have the right to acquire or
shall be deemed to have acquired shares of common stock of the other party
pursuant to the Merger until consummation thereof.
8.7 Governing Law; Consent to Jurisdiction.
(a) This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware without regard to the principles of
conflicts of laws thereof.
(b) Each of the parties hereto (i) consents to submit itself to the
exclusive personal jurisdiction of any Delaware state court or any federal court
located in the State of Florida in the event any dispute arises out of this
Agreement or any of the transactions contemplated by this Agreement and (ii)
agrees that it shall not attempt to deny or defeat such personal jurisdiction by
motion or other request for leave from any such court.
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8.8 Severability; No Remedy in Certain Circumstances. Any term or provision
of this Agreement that is invalid or unenforceable in any situation in any
jurisdiction shall not affect the validity or enforceability of the remaining
terms and provisions hereof or the validity or enforceability of the offending
term or provision in any other situation or in any other jurisdiction. If the
final judgment of a court of competent jurisdiction declares that any term or
provision hereof is invalid or unenforceable, the parties agree that the court
making the determination of invalidity or unenforceability shall have the power
to reduce the scope, duration, or area of the term or provision, to delete
specific words or phrases, or to replace any invalid or unenforceable term or
provision with a term or provision that is valid and enforceable and that comes
closest to expressing the intention of the invalid or unenforceable term or
provision, and this Agreement shall be enforceable as so modified after the
expiration of the time within which the judgment may be appealed. Except as
otherwise contemplated by this Agreement, to the extent that a party hereto took
an action inconsistent herewith or failed to take action consistent herewith or
required hereby pursuant to an order or judgment of a court or other competent
authority, such party shall incur no liability or obligation unless such party
did not in good faith seek to resist or object to the imposition or entering of
such order or judgment.
8.9 Publicity. Except as otherwise required by any applicable law or rules
or regulations promulgated thereunder, or by the rules of the NASDAQ Stock
Market, so long as this Agreement is in effect, neither the Company, Hammond nor
Hammond I, Inc. shall, or shall permit any of its Subsidiaries to, issue or
cause the publication of any press release or other public announcement with
respect to the transactions contemplated by this Agreement without the consent
of the other party, which consent shall not be unreasonably withheld or delayed.
8.10 Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties hereto (whether by
operation of law or otherwise) without the prior written consent of the other
parties. Subject to the preceding sentence, this Agreement will be binding upon,
inure to the benefit of and be enforceable by the parties and their respective
successors and assigns.
8.11 Adjustment. All dollar amounts and share numbers set forth herein,
including without limitation the Merger Consideration, shall be subject to
equitable adjustment in the event of any stock split, stock dividend, reverse
stock split or similar event affecting the Company Common Stock, between the
date of this Agreement and the Effective Time, to the extent appropriate.
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IN WITNESS WHEREOF, Hammond I, Inc., Merger Sub, Hammond and the Company
have caused this Agreement, to be signed by their respective officers thereunto
duly authorized, all as of August 26, 2002.
HAMMOND I, INC.
By:/s/ Robert A. Hammond, Jr.
--------------------------
Name: Robert A. Hammond, Jr.
Title:President
HAMMOND ACQUISITION CORP.
By:/s/Robert. A. Hammond, Jr.
--------------------------
Name: Robert A. Hammond, Jr.
Title: President
PARTSBASE, INC.
By:/s/ Mark Weicher
----------------
Name: Mark Weicher
Title: Chief Financial Officer
/s/ Robert A. Hammond, Jr.
--------------------------
Robert A. Hammond, Jr.
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APPENDIX B
Opinion and Consent of vFinance Investments, Inc.
August 26, 2002
Board of Directors
PartsBase, Inc.
905 Clint Moore Road
Boca Raton, Florida 33431
Gentlemen:
You have requested that we render our opinion as to the fairness, from a
financial point of view, to the holders (other than Robert Hammond) of the
common stock of PartsBase, Inc., a Delaware corporation ( "PartsBase"), of the
consideration set forth in the proposed Agreement and Plan of Merger, dated as
of August 26, 2002 (the "Merger Agreement"), by and among Hammond I, Inc., a
Florida corporation (the "Acquiror"), Hammond Acquisition Corp., a Delaware
corporation and wholly owned subsidiary of the Acquiror ("Merger Sub"), and
PartsBase. Pursuant to the Agreement, Merger Sub will merge (the "Merger") into
PartsBase.
vFinance Investments, Inc. (the "Firm"), as part of its investment banking
business, is engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. We are familiar with
PartsBase, having conducted a due diligence review of PartsBase in connection
with the rendering of this opinion.
In connection with the review and analysis performed to render our opinion,
among other things, we have:
i. Reviewed the periodic reports under Sections 13, 14, and 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
certain interim reports of PartsBase, as well as the financial
statements prepared by the management of PartsBase;
ii. Reviewed certain internal financial analyses for PartsBase prepared by
its management;
iii. Held discussions with representatives of PartsBase, the Acquiror and
their financial and legal advisors, regarding the strategic rationale
for, and potential benefits of, the transaction and the past and
current business operations, financial condition and future prospects
of the company;
iv. Reviewed certain publicly available documents relating to PartsBase;
v. Reviewed internal detailed financial statements provided to us by
PartsBase;
vi. Reviewed publicly available data and information for companies which we
have determined to be comparable to PartsBase;
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vii. Reviewed available data for companies which we have determined to be
comparable to PartsBase;
viii. Reviewed the financial terms of other recent similar transactions;
ix. Conducted such other financial analyses and examinations and considered
such other financial, economic and market criteria as we have
determined to be appropriate for purposes of this opinion; and
x. Reviewed the draft Merger Agreement and certain related documents.
We have relied upon the accuracy and completeness of all of the financial
and other information reviewed by us and have assumed such accuracy and
completeness for purposes of rendering this opinion. In that regard, we have
assumed with PartsBase's consent that the financial forecasts provided by the
managements of PartsBase has been reasonably prepared on a basis reflecting the
best currently available judgments and estimates of the management of PartsBase.
Our advisory services and the opinion expressed herein are provided for the
information and assistance of the Board of Directors of PartsBase in connection
with its consideration of the transaction. This Opinion is not intended to be
and does not constitute a recommendation to any stockholder as to how such
stockholder should vote in connection with the proposed Transaction.
Based upon and subject to the consideration of the privatization
transaction offer of $1.41 per share to be received by the holders of shares of
PartsBase common stock (other than Robert Hammond) pursuant to the Merger
Agreement is fair, from a financial point of view, to holders of the PartsBase
common stock other than Robert Hammond.
This Opinion is delivered to the Board of Directors of PartsBase subject to
the conditions, scope of engagement, limitations and understandings set forth in
this Opinion and our engagement letter, and subject to the understanding that
the obligations of the Firm hereunder are solely corporate obligations, and no
officer, director, employee, agent, shareholder or controlling person of the
Firm shall be subjected to any personal liability whatsoever to any person, nor
will any such claim be asserted by or on behalf of you or your affiliates.
We have tried to apply objective measures of value in rendering our
Opinion. You understand, however, that such a valuation necessarily is based on
some subjective interpretations of value. We understand that we are not
obligated to revise our opinion due to events and fluctuating economic
conditions occurring subsequent to the date of this Opinion.
We have been engaged to render an opinion as to whether the consideration
in the proposed transaction is fair, from a financial point of view, to the
shareholders of the Company, and will receive a fee in connection with the
delivery of this opinion, which is not contingent upon the consummation of the
Transaction.
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In the ordinary course of business, we may hold or actively trade the
equity securities of PartsBase for our own account or for the account of
customers and, accordingly may at any time hold a long or short position in such
securities.
We hereby consent to the use of this opinion in any public disclosure of
PartsBase in which it is required by law, rule, or regulation to be disclosed.
Very Truly Yours,
VFINANCE INVESTMENTS, INC.
By: /s/ VFINANCE INVESTMENTS, INC.
--------------------------------
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APPENDIX C
Section 262 of the Delaware General Corporation Law
DELAWARE CODE
TITLE 8. CORPORATIONS
CHAPTER 1. GENERAL CORPORATION LAW
SUBCHAPTER IX. MERGER, CONSOLIDATION OR CONVERSION
SECTION 262 APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to sub-Section (d) of this
Section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with sub-Section (d) of this Section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to Section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Sec. 251 (other than a merger effected pursuant to Section
251(g) of this title), Section 252, Section 254, Section 257, Section 258,
Section 263 or Section 264 of this title:
1. Provided, however, that no appraisal rights under this Section
shall be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at: the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of Section 251 of this title.
2. Notwithstanding paragraph (1) of this sub-Section, appraisal rights
under this Section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement of merger or consolidation pursuant to Sections 251, 252,
254, 257, 258, 263 and 264 of this title to accept for such stock anything
except:
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a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the merger
or consolidation will be either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of
record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
3. In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this Section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this Section, including those set forth in sub-Sections (d)
and (e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
1. If a proposed merger or consolidation for which appraisal rights
are provided under this Section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsection (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of
such stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of such
stockholder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such stockholder's shares. A proxy or
vote against the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written demand
as herein provided. Within 10 days after the effective date of such merger or
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consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
2. If the merger or consolidation was approved pursuant to Section 228
or Section 253 of this title, then either a constituent corporation, before the
effective date of the merger or consolidation or the surviving or resulting
corporation within 10 days thereafter, shall notify each of the holders of any
class or series of stock of such constituent corporation who are entitled to
appraisal rights of the approval of the merger or consolidation and that
appraisal rights are available for any or all shares of such class or series of
stock of such constituent corporation, and shall include in such notice a copy
of this section. Such notice may, and, if given on or after the effective date
of the merger or consolidation, shall, also notify such stockholders of the
effective date of the merger or consolidation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of such notice,
demand in writing from the surviving or resulting corporation the appraisal of
such holder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such holder's shares. If such notice
did not notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent corporation shall send a second
notice before the effective date of the merger or consolidation notifying each
of the holders of any class or series of stock of such constituent corporation
that are entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send such a
second notice to all such holders on or within 10 days after such effective
date; provided, however, that if such second notice is sent more than 20 days
following the sending of the first notice, such second notice need only be sent
to each stockholder who is entitled to appraisal rights and who has demanded
appraisal of such holder's shares in accordance with this sub-Section. An
affidavit of the secretary or assistant secretary or of the transfer agent of
the corporation that is required to give either notice that such notice has been
given shall, in the absence of fraud, be prima facie evidence of the facts
stated therein. For purposes of determining the stockholders entitled to receive
either notice, each constituent corporation may fix, in advance, a record date
that shall be not more than 10 days prior to the date the notice is given,
provided, that if the notice is given on or after the effective date of the
merger or consolidation, the record date shall be such effective date. If no
record date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the day on
which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with sub-Sections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
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the merger or consolidation, any stockholder who has complied with the
requirements of sub-Sections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under sub-Section (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this Section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to sub-Section (f) of this Section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
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required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in sub-Section (d) of
this Section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that:
if no petition for an appraisal shall be filed within the time provided in
sub-Section (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in sub-Section (e) of this Section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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APPENDIX D
Annual Report on Form 10-K for the Year Ended December 31, 2001
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2001
Commission File Number: 000-29727
______________________________________________
PARTSBASE, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0604158
State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
905 Clint Moore Road
Boca Raton, Florida 33487-8233
(Address of principal executive offices)
Registrant's telephone number, including area code: (561) 953-0700
_________________________________________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
The aggregate market value of the Common Stock held by non-affiliates of the
registrant as of March 26, 2002 was approximately $3,330,165 based on the $0.68
closing sales price for the Common Stock quoted on NASDAQ on such date. For
purposes of this computation, all executive officers and directors of the
registrant have been deemed to be affiliates. Such determination should not be
deemed to be an admission that such directors and officers are, in fact,
affiliates of the registrant.
The number of shares of Common Stock of the registrant outstanding as of
March 26, 2002 was 13,977,920.
__________________________________________________
PARTSBASE, INC.
TABLE OF CONTENTS
Page
PART I
ITEM 1. Business...................................................... 1
ITEM 2. Properties.....................................................13
ITEM 3. Legal Proceedings. ............................................14
ITEM 4. Submission of Matters to a Vote of Security Holders ...........14
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters...........................................15
ITEM 6. Selected Financial Data........................................16
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................17
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.....21
ITEM 8. Financial Statements and Supplementary Data ...................21
ITEM 9. Change in and Disagreements with Accountants on Accounting
and Financial Disclosures.....................................22
PART III
ITEM 10. Directors and Executive Officers of the Registrant............23
ITEM 11. Executive Compensation........................................26
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management...............................................29
ITEM 13. Certain Relationships and Related Transactions................30
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K..................................................31
SIGNATURES ..............................................................32
ANNEX I .............................................................F-1
PART I
Item 1. Business
THE FOLLOWING DESCRIPTION OF OUR BUSINESS CONTAINS FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995, AS DO THE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS SECTIONS OF THIS FORM 10-K, ALL OF WHICH RELATE TO SUCH
MATTERS AS ANTICIPATED FINANCIAL PERFORMANCE, BUSINESS PROSPECTS, TECHNOLOGICAL
DEVELOPMENTS, AND SIMILAR MATTERS. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN
AND UNKNOWN RISKS, UNCERTAINTIES, AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL
RESULTS, PERFORMANCE, OR ACHIEVEMENTS OF THE COMPANY TO BE MATERIALLY DIFFERENT
FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED ELSEWHERE IN THIS REPORT IN THE
SECTION ENTITLED "RISK FACTORS" AND THE RISKS DISCUSSED IN OUR OTHER SECURITIES
AND EXCHANGE COMMISSION FILINGS.
Company
All references to "we", "us", "our", "our company", the "Company" or
"PartsBase" in this report refer to PartsBase, Inc., a Delaware corporation and
its wholly owned subsidiary, Florida corporation, RNpartners, Inc.
("RNpartners"). We currently operate two businesses: (i) we provide Internet
business-to-business e-commerce services for the aviation industry (the
"Aviation e-commerce Business"); and (ii) since October 2001, we have provided,
for a fee, critical care registered nurses for temporary assignment to hospitals
located in Palm Beach County and Broward County, Florida (the "Nurse Staffing
Business") Our Web site addresses are WWW.PARTSBASE.COM. and WWW.RNpartners.COM.
The information contained on these Web sites is not a part of this Annual Report
on Form 10-K.
Industry Overview
The Aviation E-commerce Business
We are an online provider of Internet business-to-business e-commerce
services for the aviation industry. Our global e-commerce marketplace, sometimes
referred to as our "e-marketplace" or our "solution," provides our subscribers
in more than 115 countries with the ability to buy and sell new, used and
overhauled aviation parts and products in an efficient, competitive and
cost-effective manner. We estimate that our e-marketplace utilizes a database of
approximately 2,500 suppliers, containing over 23.5 million line items of
inventory. We believe our e-marketplace constitutes one of the largest
independent databases of inventory and information in the aviation industry.
Current members of our e-commerce marketplace include Boeing, Honeywell, Federal
Express, BE Aerospace, Fokker, Raytheon, Rolls Royce, United Airlines, Frontier
Airlines, BF Goodrich Aerospace, Saab, Lufthansa and Northrup Grumman.
The worldwide market for aviation parts and products is highly fragmented
and includes many types of suppliers, such as airlines, original equipment
1
manufacturers ("OEMs"), numerous independent distributors, on-site airport
maintenance providers, also known as fixed base operators, Federal Aviation
Administration certified repair and overhaul facilities, traders and brokers.
There are four types of parts, components, or supplies purchased by aviation
companies: rotables (i.e. pumps, landing gear), repairables (i.e. valves,
pistons), expendables (i.e. fasteners, bearings), and consumables (i.e. grease,
oil). Rotables constitute 80% of the value of all parts purchased, but only 20%
of the number of transactions. A typical air carrier can process 3,000 purchase
orders per day, while a typical major OEM can process 20,000 purchase orders per
day. A large commercial aircraft, such as a 747, can contain over 3 million
parts.
According to Boeing's 20-year current market outlook, the world fleet of
aircraft is projected to increase from 4,548 aircraft in 2000 to 32,955 aircraft
in 2020. Boeing estimates the total market potential during this period for
commercial aviation support services, in 2000 dollars, is $3.1 trillion, of
which $1.5 trillion will be spent on airframe and engine repair parts. The
airframe and engine repair parts market constitutes the primary focus of our
database and service offerings. In addition, management believes that as the age
of the world fleet of aircraft increases the demand for new, used and overhauled
parts and products may increase.
We provide the aerospace industry with an Internet based e-marketplace in
which this fragmented market can easily locate and procure parts from a variety
of sellers, in a cost effective manner. The advent of the Internet has created
new opportunities for conducting business-to-business commerce, offering the
potential for organizations to streamline complex processes, lower costs and
improve productivity. Even if a company is currently using other electronic data
interchange (EDI) networks, the Internet and e-marketplace exchanges can provide
significant opportunities to save companies on transaction costs, in addition to
providing better pricing opportunities.
In February 2001, we introduced "PartsDirect", which allows aviation buyers
to solicit quotes online to purchase aircraft parts. As sellers reply to these
quotations, buyers are given an easy-to-read display of all prices offered by
potential sellers. Seller quotations are updated on a real-time basis as bids
are posted. The buyer can then generate a purchase order electronically to the
seller of his or her choice. Through PartsDirect, we seek to provide a worldwide
search capability to buyers that creates a forum in which buyers can save money
by enabling them to more quickly and efficiently locate surplus new, repaired,
or overhauled inventory. Sellers utilizing the e-marketplace will gain access to
an expanded customer base and have a greater opportunity to sell their
inventory. If our new technology gains acceptance in the marketplace, we intend
to begin the integration of our sites offerings, utilizing standard XML
protocols, into customer's Enterprise Resource Planning (ERP) systems. Because
of the aerospace industry's enormous size and global nature, the integration
challenge of tying together these companies is one of great magnitude. Many
industry experts estimate that this is a process that will take at least two or
three years to gain traction.
In October 2001, we introduced our premium parts search functionality which
allows our subscribers to search for a part by a National Stock Number, a number
used by governmental agencies to classify aviation and aerospace parts, and
return a list of all the companies that carry the standard manufacturers' part
number. We seek to facilitate the process for buyers of aviation and aerospace
parts to locate these parts and provide them with the applicable OEM's of such
parts so as to decrease lead times for procurement and maintain optimum
inventory levels of such parts.
2
In January 2002, we launched "Parts2Find" which enables subscriber sellers
who specialize in hard to find aviation and aerospace parts to retrieve all
requests for parts (numbers) for a given day that were not found in our database
by member "would-be" buyers and contact them, should they have access to such
parts. We believe this functionality enhances the value of our website by
simultaneously facilitating the procurement process for both subscriber buyers
and sellers by providing an additional resource for parts and incremental
revenue opportunities.
The Nurse Staffing Business
Services Provided
Since October 2001, we have provided, for a fee, registered nurses to our
hospital clients to supplement their staff. Hospitals generally obtain
supplemental staffing from local temporary (per diem) agencies. Per diem
staffing, which has historically comprised the majority of the temporary
healthcare staffing industry, involves the placement of locally-based healthcare
professionals on short-term assignments, such as daily shift work, on an as
needed (per diem) basis. Hospitals often give minimal advance notice of their
per diem assignments, and require a quick turnaround from their staffing
agencies, generally less than 24 hours. Per diem agencies select from a local
highly skilled labor pool and provide pre-screened candidates to their hospital
clients.
Nurses / Hospital Client Base / Industry
We provide medical nurses, surgical nurses and specialty nurses, all of
whom are registered nurses, in a wide range of specialties for assignments in
Broward County and Palm Beach County, Florida. We place our qualified nurse
professionals with hospitals and hospital networks. The majority of our
assignments are in acute-care hospitals, including teaching institutions, trauma
centers and community hospitals.
We offer our registered nurse professionals local placement opportunities
and provide supplemental staffing solutions to our hospital clients all of whom
are currently located in South Florida. In January 2002, we had approximately
800 open orders with our hospital clients in our service area. Our number of
hospital clients has grown from approximately 5 in November 2001 to 22 active
hospital clients as of March 2002. As of December 2001, two clients comprised
approximately 41% of our revenues; no other single client, including affiliated
groups, comprised more than 10% of our registered nurse employees on assignment
or 10% of our revenues.
In 2000, total healthcare expenditures in the United States were estimated
at $1.3 trillion, representing approximately 13% of the U.S. gross domestic
product, and had grown approximately 8% over 1999 according to the Centers for
Medicare & Medicaid Services. Over the next decade, an aging U.S. population and
advances in medical technology are expected to drive increases in hospital
patient populations and the consumption of healthcare services. As a result,
total healthcare expenditures are projected to increase by approximately $1.3
trillion during the next decade.
Within the healthcare staffing sector, temporary staffing has emerged as an
increasingly utilized method to efficiently deliver healthcare services. In the
3
mid-1990s, several factors prompted the increased usage of temporary staffing at
hospitals. A principal factor was cost containment. Managed care, Medicare,
Medicaid and competitive pressures created renewed emphasis on cost containment.
Among other responses, this led acute-care hospitals to redesign their staffing
models to reduce their levels of fixed staffing and to include a variable
staffing component.
The temporary healthcare staffing industry accounted for $7.2 billion in
revenues in 2000 and this amount is projected to increase by 21%, to $8.7
billion, in 2001 according to estimates by The Staffing Industry Report, an
independent staffing industry publication. Approximately 70% of the temporary
healthcare staffing industry is comprised of nurse staffing and approximately
30% is comprised of allied health, physicians and other healthcare
professionals. Temporary healthcare staffing has experienced strong historical
growth since 1996, growing at a compound annual growth rate of 13%, but this
growth has accelerated to approximately 15% over the past two years. Within the
temporary healthcare staffing industry, we believe that critical care nurse
staffing is one of the fastest growing segments.
Demand and Supply Drivers
Since the mid-1990s, changes in the healthcare industry prompted a
permanent shift in staffing models that led to an increased usage of
supplemental staffing at hospitals. The supply of professionals choosing
supplemental healthcare as a short-term or long-term career option has also
grown alongside increased demand for supplemental healthcare professionals. We
believe that this expanded demand and supply pattern will continue, particularly
in the critical care temporary nurse staffing sector, because of the following
drivers:
Demand Drivers
DEMOGRAPHICS AND ADVANCES IN MEDICINE AND TECHNOLOGY. As the U.S.
population ages and as advances in medicine result in longer life
expectancy, it is likely that chronic illnesses and hospital populations
will continue to increase. We believe that these factors will increase the
demand for both temporary and permanent nurses. In addition, advances in
healthcare technology have increased the demand for specialty nurses who
are qualified to operate advanced medical equipment or perform complex
medical procedures associated with critical care.
SHIFT TO FLEXIBLE STAFFING MODELS. Nurse wages comprise the largest
percentage of hospitals' labor expenses. Cost containment initiatives and a
renewed focus on cost-effective healthcare service delivery continue to
lead many hospitals and other healthcare facilities to adopt flexible
staffing models that include reduced permanent staffing levels and
increased utilization of flexible staffing sources, such as temporary staff
nurses.
NURSING SHORTAGE. Most regions of the United States are experiencing a
shortage of nurses. The American Hospital Association estimates that up to
126,000 position vacancies currently exist for registered nurses. This
represents approximately 10% of the hospital-based nursing workforce. The
Journal of the American Medical Association has reported that the
registered nurse workforce is expected to be 20% below projected
requirements by 2020. Faced with increasing demand for and a shrinking
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supply of nurses, hospitals are utilizing more temporary nurses to meet
staffing requirements. Factors contributing to the current and projected
declining supply of nurses include:
DECREASING NUMBER OF ENTRANTS TO NURSING SCHOOL AND NEW NURSING
GRADUATES. According to the American Association of Colleges of Nursing,
enrollment in all basic nursing education programs (baccalaureate,
associate or diploma) has fallen each year since 1995 by approximately
5%.
NURSES LEAVING PATIENT CARE ENVIRONMENTS FOR LESS STRESSFUL AND DEMANDING
CAREERS. Career opportunities for nurses have expanded beyond the
traditional bedside role. Pharmaceutical companies, insurance companies,
HMOs and hospital service and supply companies increasingly offer nurses
attractive positions which involve less demanding work schedules and
physical requirements.
AGING NURSE POPULATION. The average age of a registered nurse is
estimated to be 45.2 years old, an increase of 8.4% since 1988. By 2010,
40% of the nurse population is expected to be older than 50, as compared
to 29% of nurses that were older than 50 as of March 2000. As a growing
number of nurses retire, the nursing shortage is likely to worsen.
SEASONALITY. Hospitals in areas that experience significant seasonal
fluctuations in population, such as Florida during the winter months, must
be able to efficiently adjust their staffing levels to accommodate the
change in demand. Many of these hospitals utilize temporary healthcare
professionals to satisfy these seasonal staffing needs.
FAMILY AND MEDICAL LEAVE ACT. The adoption of the Family and Medical Leave
Act in 1993, which mandates 12-week job-protected maternity and dependent
care leave, continues to create temporary nursing vacancies at healthcare
facilities. Approximately 94% of the registered nurses working at
healthcare facilities in the United States are women.
STATE LEGISLATION REQUIRING HEALTHCARE FACILITIES TO UTILIZE MORE NURSES.
In response to concerns by consumer groups over the quality of care
provided in healthcare facilities and concerns by nursing organizations
about the increased workloads and pressures placed upon nurses, several
states have passed or introduced legislation that is expected to increase
the demand for nurses.
MINIMUM NURSE-TO-PATIENT RATIOS. California passed legislation in 1999
(effective January 2002) that requires the establishment of minimum
nurse-to-patient ratios throughout all hospitals. Other states have already
adopted, and several are now considering, similar legislation.
ELIMINATION OF MANDATORY OVERTIME. Many healthcare facilities require their
permanent staff to work overtime to cover staffing shortages. Maine and
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Oregon recently passed legislation that limits mandatory overtime for
nurses, and similar legislation has already been introduced in several
other states.
Supply Drivers
TRADITIONAL REASONS FOR A HEALTHCARE PROFESSIONAL TO WORK ON A SUPPLEMENTAL
ASSIGNMENT. Supplemental assignments allow healthcare professionals to
explore new areas of the United States, work at prestigious hospitals,
learn new skills, build their resumes and avoid unwanted workplace politics
that may accompany a permanent position. Other benefits to supplemental
healthcare professionals include professional development opportunities,
competitive wages and flexible work schedules. All of these opportunities
have been constant supply drivers, bringing a growing number of new
healthcare professionals into accepting temporary assignments.
WORD-OF-MOUTH REFERRALS. New applicants are most often referred to
supplemental nurse staffing companies by current or former employees.
Growth in the number of healthcare professionals that have accepted
temporary assignments, as well as the increased number of hospitals that
utilize temporary healthcare professionals, creates more opportunities for
referrals.
MORE NURSES CHOOSING SUPPLEMENTAL ASSIGNMENTS DUE TO THE NURSING SHORTAGE.
In times of nursing shortages, nurses with permanent jobs feel more secure
about their employment prospects. They have a higher degree of confidence
that they can leave their permanent position to join the supplemental
healthcare professional workforce and have the ability to return to a
permanent position in the future. Additionally, during a nursing shortage,
permanent staff nurses are often required to assume greater responsibility
and patient loads, work mandatory overtime and deal with increased
pressures within the hospital. Many experienced and critical care nurses
consequently choose to leave their permanent employer, and look for a more
flexible and rewarding position as a supplemental healthcare professional.
Business Strategy
The Aviation E-commerce Business
Our goal is to become one of the leading aviation industry e-commerce
marketplaces. In order to capitalize on the continued expansion of the market
for aviation parts and products, our technology takes advantage of the growth,
pervasiveness, low costs and community building nature of the Internet as a
basis for e-commerce for the broad, highly fragmented aviation industry. It is
our belief that the value of an e-marketplace grows substantially as each new
member brings additional parts, products, information and buying power to the
community.
Our technology has been designed to streamline the procurement cycle for
our subscribers. We enable subscribers to source, bid parts and products, and
eventually manage their order payment online. Our target members are primarily
businesses that buy and sell aviation parts, supplies and components in a global
marketplace. Our current members vary from small businesses to Fortune 500
companies such as Boeing, BF Goodrich Aerospace, Honeywell, and Federal Express.
We have designed our e-marketplace to meet the needs of these customers and
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their industry. With a standard Internet connection, a Web browser and a
PartsBase subscription, each of our e-marketplace subscribers can immediately
participate as both a buyer and a seller.
Our e-marketplace is designed to provide advantages over traditional
procurement processes, including:
o Reduced procurement costs;
o More efficient pricing and improved access to sellers for buyers;
o Ability to locate the most geographically desirable parts;
o Expanded distribution opportunities for sellers; and
o Ease of use and better access to information.
Our current Web site features include:
o Online buying and selling options utilizing advanced parts search
features, inventory listings, requests for quotations ("RFQs"), and
Purchase Order generation;
o Member access to detailed information regarding current transactions;
o Online auctions for aviation parts and products;
o Procurement controls providing members with the ability to monitor
corporate purchasing; and
o Community-building information such as industry job and aircraft sales
listings, as well as links to members and other industry Web sites.
Our objective is to establish our e-marketplace as the preferred aviation
industry business-to-business e-commerce solution. The key elements of our
strategy include:
o Achieving growth through adding additional functionalities so as to
generate additional sources of revenues;
o Strengthening the PartsBase brand;
o Increasing the number of subscribers and market penetration;
o Establishing and expanding strategic sales and marketing relationships;
o Expanding international presence; and
o Attracting and retaining members with new content, features and services.
The successful implementation of our strategy will be subject to many risks
and will depend on many factors, including but not limited to the continued
growth and acceptance of e-commerce in the aviation industry as a whole, and the
acceptance of our business model in particular. We may be adversely affected by
a variety of risks and difficulties. For a detailed description of certain of
these risks, please refer to the "Risk Factors" section.
The Nurse Staffing Business
Our goal is to expand our temporary nurse staffing operations first
throughout Florida and ultimately throughout the United States. The key
components of our business strategy include:
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EXPANDING OUR NETWORK OF REGISTERED NURSE PROFESSIONALS. Through our
recruiting efforts in South Florida we continue to expand our network of
registered nurse professionals. As of March 2002, we currently have a
network of approximately 300 registered nurses, approximately 75 of whom
are placed by us with our hospital clients continuously. We have exhibited
growth in our registered nurse employee base over the past three months
primarily through referrals from our current and former employees, as well
as through advertising and direct mailings. While we expect these methods
to continue to gain momentum, we are implementing creative ways to attract
additional registered nurse professionals. An example of this strategy
would be our internet recruitment tools such as the RNpartners.com website,
which is a known nurse community site on the Internet.
STRENGTHENING AND EXPANDING OUR RELATIONSHIPS WITH HOSPITALS AND HEALTHCARE
FACILITIES. We seek to continue to strengthen and expand our relationships
with our hospital clients, and to develop new relationships. Because we
possess a network of registered nurses, we are well positioned to offer our
hospital clients effective solutions to meet their supplemental staffing
needs particularly in the critical care area.
LEVERAGING OUR BUSINESS MODEL AND LARGE HOSPITAL AND HEALTHCARE FACILITY
CLIENT BASE TO INCREASE PRODUCTIVITY. We seek to increase our productivity
through our recruiting strategy, network of registered nurses, established
hospital clients relationships, proprietary information systems, innovative
marketing and recruitment programs, training programs and centralized
administrative support systems. Our recruiting strategy allows a recruiter
in any of our offices to take advantage of all of our placement
opportunities. In addition, our information systems and support personnel
permit our recruiters to spend more time focused on our supplemental
healthcare professionals' needs and placing them on appropriate assignments
in hospitals in their specialized disciplines.
Sales and Marketing
The Aviation E-commerce Business
We market through a direct inside and outside sales force. Since our
potential members fall within a defined market segment, we are able to identify
and target the purchasing decision-makers and potential users who will influence
the decision to adopt our e-commerce solution.
Our sales and marketing approach is designed to help buyers and sellers
understand both the business and technical benefits of our e-marketplace, and to
promote adoption through one-on-one education and training.
Our sales and marketing programs are designed to educate our target market,
create awareness and attract members to our e-marketplace. To achieve these
goals, we intend to take advantage of the community offered by our existing
membership base and engage in marketing activities such as trade shows, speaking
engagements and Web site marketing.
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We provide member service support from 6:00 a.m. to 8:00 p.m., Eastern
Standard Time, Monday through Friday. Our customer support department is
responsible for day-to-day contact with members and responds to questions from
members through e-mail and a toll-free number. This department is responsible
for retaining and increasing use by existing members and is an important aspect
of member satisfaction. Our customer support and service personnel handle
general member inquiries and technical questions. We have automated some of the
tools used by our customer support and service staff, such as tracking screens
that let our support staff track a transaction through a variety of information
sources.
Our sales and marketing group consisted of approximately 72 individuals as
of December 31, 2001, all of whom are located at our Boca Raton, Florida
headquarters.
The Nurse Staffing Business
We believe that nursing professionals are attracted to us because of our
sizeable and diverse offering of work assignments and our service and
relationship-oriented approach. We also market ourselves through a combination
of a web site, print advertising, direct mail, printed marketing material and,
most importantly, through personal word-of-mouth referrals from current and
former employees. We also operate RNpartners.com, a nurse community website that
caters to the professional and personal lives of nurses and offers nursing news
and updates, links to other Internet sites, discounted products and services,
and career opportunities including an online application process. Currently, our
four recruiters are actively working with a pre-screened pool of approximately
300 registered nurses in an effort to place them with one of our hospital
clients.
Screening/Quality Management
Through our quality management department, we screen each candidate prior
to their employment and we continue to evaluate each registered nurse after they
are placed to ensure adequate performance as well as to determine feasibility
for future placements. Our internal processes are designed to ensure that each
registered nurse has the appropriate experience, credentials and skills for the
assignments that they accept. Our screening and quality management process
includes three principal stages:
INITIAL SCREENING. Each new registered nurse candidate who submits an
application with us must meet certain criteria, including appropriate
prior work experience and proper educational and licensing credentials.
We independently verify each applicant's work history and references. Our
clinical skills checklists, developed for each specialty area, are used
by our hospital clients' hiring managers as a basis for evaluating
candidates and conducting interviews, and for facilitating the selection
of a registered nurse who can meet the hospital client's specific needs.
ASSIGNMENT SPECIFIC SCREENING. Once an assignment is accepted by a
supplemental healthcare professional, our quality management department
tracks the necessary documentation and license verification required for
the registered nurse to meet the requirements set forth by us, the
hospital and, when required, the applicable state board of health or
nursing. These requirements may include obtaining copies of specific
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health records, drug screening, criminal background checks and certain
certifications or continuing education courses.
ONGOING EVALUATION. We continually evaluate our registered nurse
professionals' performance through a verbal and written evaluation
process. We receive these evaluations directly from our hospital clients,
and use the feedback to determine appropriate future assignments for each
registered nurse.
Sales and Marketing to Hospitals and Healthcare Facilities
Our client service directors market our services to prospective hospital
clients, and supervise ongoing contract management of existing clients in their
territory. The number of our hospital and healthcare facility clients that we
serve has grown from approximately 5 in November 2001 to 22 active clients in
March 2002. All of our registered nurse assignments are at acute-care hospitals
located in Broward County and Palm Beach County, Florida.
Account Management
Once hospital contracts are obtained by our registered nurse area sales
managers, our four hospital account coordinators are responsible for soliciting
and receiving orders from these clients and working with our recruiters to fill
those orders with qualified registered nurse professionals. An "order" is a
request from a client hospital for a registered nurse to fill an assignment.
Hospital account coordinators regularly call and solicit orders from our
clients, who also submit orders via the Internet and by fax. Our average number
of orders for upcoming assignments has increased significantly during the past
three months. The combination of an increasing number of open orders and a
greater number of nurses choosing supplemental staffing assignments benefits us
by providing us with numerous assignments to offer and an increasing supply of
new registered nurse professionals to hire. In March 2002, we have over 1,885
open customer orders in South Florida (the area encompassing Broward and Palm
Beach counties). Our growth in open orders can be attributed to factors
including:
o Continuing increased demand for registered nurses;
o Our extensive network of registered nurse employees; and
o Our increased number of hospital client relationships.
Because hospitals often list their orders with multiple service
providers, open orders may also be listed with our competitors. An order will
generally be filled by the company that provides a suitable candidate first,
highlighting the need for a network of registered nurses and integrated
operating and information systems to quickly and effectively match hospital
client needs with appropriate registered nurses.
Placement
Orders are entered into our information network and are made available to
the recruiters at all of our offices. Our recruiters provide our hospital
coordinators with the personnel profiles of the registered nurse who have
expressed an interest in a particular assignment. The hospital coordinator
approves the profiles to be sent to the hospital client and confirms the
assignments with the hospital. Our recruiters seek to develop and maintain
strong and long-lasting relationships with our registered nurses. Each recruiter
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manages a group of approved registered nurse employees and works to understand
the unique needs and desires of each individual registered nurse. The recruiter
will present open order assignments to a registered nurse, request that the
personnel profile be submitted for assignment, arrange a telephone interview
with assistance from the coordinators and generally facilitate each assignment.
We share orders among our various offices to increase placement opportunities
for our registered nurse employees.
Registered Nurse Payroll
We pay our registered nurse employees only to the extent they accept
placement and actually work at one of our hospital clients. We perform all
payroll services for our registered nurse employees. Providing payroll services
is a value-added and convenient service that hospitals increasingly expect from
their supplemental staffing sources. To provide convenience and flexibility to
our hospital clients, we accommodate several different payroll frequencies. This
enables our hospital clients to integrate management of supplemental registered
nurse staff scheduling and overtime with their permanent staff. Consistent
accuracy and timeliness of making payroll payments is essential to the retention
of our registered nurses. Our internal payroll service group currently receives
and processes timesheets for approximately 75 registered nurse employees,
weekly. Payroll is typically processed daily after the completion of each pay
period, heightening the importance of having adequately trained and skilled
payroll personnel and appropriate operating and information systems. We process
our payroll internally so as to minimize costs and provide a higher degree of
flexibility in accommodating our registered nurse professional workforce as
opposed to processing externally through a payroll processing service. Our
payroll service group offers our registered nurse professionals the ability to
be paid daily upon receipt of an approved time sheet from our hospital clients.
Registered Nurse Benefits
In our effort to attract and retain highly qualified professionals, we
offer a variety of benefits to our registered nurse employees. These benefits
include:
o 24-HOUR MANAGEMENT AND CLINICAL SUPPORT. It is our goal to always be
available to our registered nurses. Registered nurse employees with
emergencies can be connected 24 hours per day with a clinical liaison or
recruitment manager to help resolve their problem.
o HOSPITAL BILLING. To accommodate the needs of our hospital clients, we
bill all of our registered nurse professionals on a payroll contract
basis. Under a payroll contract, the registered nurse is our employee for
payroll and benefits purposes. Under this arrangement, we bill our
hospital clients at an hourly rate that effectively includes
reimbursement for recruitment fees, wages and benefits for the registered
nurse professional, and employer taxes. Overtime and holiday hours worked
are typically billed at a premium rate. We in turn pay the registered
nurse's wages and benefits which are calculated on an hourly basis.
Providing payroll services is a value-added and convenient service that
hospitals increasingly expect from their supplemental nurse staffing
sources.
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o DAILY PAY. Our local branch offices have the capability to produce
payroll checks for our registered nurse employees the very same day their
time sheets are verified and approved. This is an attractive benefit to
registered nurses who, if working for another staffing firm, may be
forced to wait for the payroll cycle to be completed before they can
receive their paychecks.
o INFORMATION SYSTEMS Our primary management information and
communications systems are centralized and controlled in our corporate
headquarters and are utilized in each of our staffing offices. Our
financial systems are primarily centralized at our corporate headquarters
and our operational reporting is standardized at all of our offices. We
use an internal system to facilitate payroll for our corporate employees
and our temporary healthcare professionals. We are in the process of
developing a proprietary Windows-based, interactive information system
that will be an important tool in maximizing our productivity and
accommodating our recruiting strategy. The system will be custom-designed
for our business model, including integrated processes for registered
nurse professional and hospital contract management, matching of
supplemental healthcare professionals to available assignments,
registered nurse professional file submissions for placements, quality
management tracking, controlling compensation packages and managing
hospital contract and billing terms. Our system will provide our staff
with fast, detailed information regarding individual registered nurses
and hospital clients. The system will also provide a platform for
interacting and transacting with registered nurse employees and hospital
facility clients via the Internet. We anticipate that the initial
features of this system will be functional during the latter part of the
second quarter of 2002.
Competition
The Aviation E-commerce Business
The market for business-to-business e-commerce and Internet ordering and
purchasing is new and rapidly evolving, and competition is intense and expected
to increase significantly in the future. We believe that companies in our
Internet business-to-business e-marketplace compete on the basis of:
o Ease of use of technology;
o Breadth and depth of product and service offerings;
o Pricing of products and services;
o Quality and reliability of the Internet purchasing solution; and
o Quality and scope of customer service and support.
We currently compete almost solely in the market for aviation parts and
products and face competition from three main areas within this market: other
start-up businesses that have formed exchanges with e-commerce offerings,
existing aerospace companies, or groups of companies that have formed exchanges,
and traditional manufacturers, suppliers and distributors of aviation parts that
have developed e-commerce initiatives that are designed to facilitate commerce
between one buyer and multiple sellers.
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Because of the rapidly evolving nature of e-commerce, it is difficult to
objectively estimate the number of companies that compete directly against us.
We believe that currently, our primary competitor is the Inventory Locator
Service Inc., a subsidiary of Aviall, Inc. Additional competition is expected
during 2002 from buy side exchanges formed by major domestic and foreign
carriers, and sell side exchanges formed by large aerospace OEM's.
Current and potential competitors may be able to devote significantly
greater resources to marketing and promotional campaigns, and may adopt more
aggressive pricing policies or may try to attract users by offering services for
free and devote substantially more resources to product development than us.
Increased competition may result in reduced operating margins, loss of market
share and diminished value in our brand, any of which could materially and
adversely affect our business, financial condition and results of operations.
New technologies and the expansion of existing technologies may increase the
competitive pressures on us by enabling competitors to offer a similar but
lower-cost service. We cannot assure you that we will be able to compete
successfully against current and potential competitors. Further, as a strategic
response to changes in the competitive environment or otherwise, we may, from
time to time, make pricing, service or marketing decisions or acquisitions that
could materially and adversely affect our business, financial condition and
results of operations.
The Nurse Staffing Business
The nurse staffing industry is highly competitive. We compete with
national firms and local and regional firms. We compete with these firms to
attract registered nurses with critical care skills as temporary healthcare
professionals and to attract hospital clients. We compete for temporary
healthcare professionals on the basis of the quantity, diversity and quality of
assignments available, compensation packages, and the benefits that we provide
to a temporary healthcare professional while they are on an assignment. We
compete for hospital clients on the basis of the quality of our temporary
healthcare professionals, the timely availability of our professionals with
requisite skills, the quality, scope and price of our services, and the
geographic reach of our services. Continuing nursing shortages and factors
driving the demand for nurses over the past several years have made it
increasingly difficult for hospitals to meet their critical care staffing needs.
We are focused on attaining a critical mass of available nursing candidates via
substantial word-of-mouth referral networks and seek to establish RNpartners as
a recognizable brand name, thereby enabling us to attract a consistent flow of
new applicants. We believe we can also more easily provide payroll services
billing, which is cash flow intensive, to healthcare providers. Some of our
competitors in the temporary healthcare staffing sector include American Mobile
Nurse, Interim Healthcare Services, Nursefinders and Starmed.
Intellectual Property
The Aviation E-commerce Business
We rely on a combination of trademark and copyright law, trade secret
protection and confidentiality and/or license agreements with our employees,
customers and business partners to protect our proprietary rights in products,
services, know-how and information. We have a federal trademark registration for
"PartsBase" and "PartsBase.com." We may seek additional trademarks, copyrights
and patents in the future. Our means of protecting our proprietary rights in the
13
United States or abroad may not be adequate and competitors may independently
develop similar technology. We cannot be certain that our services do not
infringe patents or other intellectual property rights that may relate to our
services. Like other technology and Internet-based businesses, we face the risk
that we will be unable to protect our intellectual property and other
proprietary rights, and the risk that we will be found to have infringed the
proprietary rights of others.
The Nurse Staffing Business
We rely on confidentiality agreements with our employees and customers to
protect our proprietary rights in products, services, know-how and information.
We have no current federal trademark registrations, however, at sometime in the
future, we may seek trademarks, copyrights and patents.
Government Regulation
The Aviation E-commerce Business
Both domestic and foreign entities regulate the parts and products sold
on our Web site. The Federal Aviation Administration (the "FAA") is charged with
regulating the manufacture, repair and operation of all aircraft and aircraft
equipment operated in the United States. The FAA monitors safety by promulgating
regulations regarding proper maintenance of aircraft and aircraft equipment.
Similar regulations exist in foreign countries. Regulatory agencies specify
maintenance, repair and inspection procedures for aircraft and aircraft
equipment. Certified technicians in approved repair facilities on set schedules
must perform these procedures. All parts must conform to prescribed regulations
and be certified prior to installation on any aircraft. Although we are not
currently subject to any governmental regulation regarding the parts and
products sold on our Web site, we may in the future become subject to FAA or
other regulatory requirements.
The Nurse Staffing Business
The healthcare industry is subject to extensive and complex federal and
state laws and regulations related to professional licensure, conduct of
operations, payment for services and payment for referrals. Our business,
however, is not directly impacted by or subject to the extensive and complex
laws and regulations that generally govern the healthcare industry. The laws and
regulations which are applicable to our hospital and healthcare facility clients
could indirectly impact our business to a certain extent, but because we provide
services on a contract basis and are paid directly by our hospital and
healthcare facility clients, we do not have any direct Medicare or managed care
reimbursement risk. Florida requires state registration for businesses that
employ and/or assign healthcare personnel to provide healthcare services on-site
at hospitals and other healthcare facilities. We are currently registered in
Florida. All of the supplemental registered nurses that we employ are required
to be individually licensed under state law. We take reasonable steps to ensure
that our employees possess all necessary licenses in all material respects.
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Employees
The following table details our employee compliment for our two businesses
as of December 31, 2001 and 2000 respectively:
2001 2000 2001
Aviation E-commerce Business: Nurse Staffing Business:
Sales and marketing 72 127 Registered Nurses 36
Programming, technical and customer support 11 33 Sales and Marketing 8
--- --- Administration 7
Total 83 160 --
Supplemental Nurse Staffing 51 -- Total 51
Corporate finance and administration 14 29
--- ---
Grand Total 148 189
Registered nurses are considered our employees upon completing one
twelve-hour shift at one of our hospital clients. None of our employees are
represented by a labor union. We have not experienced any work stoppages, and we
consider our relationship with our employees to be good.
Risk Factors
The Aviation E-commerce Business
We have never been profitable, anticipate continued losses and cannot
guarantee profitability in the future. We have never been profitable and expect
to continue to incur operating losses until at least the end of fiscal 2002. We
may be unable to ever achieve profitability in the future. We have incurred net
consolidated losses in each accounting period since we began operations in April
1996, including net losses attributable to common shareholders of $5,612,233,
$13,453,981, $7,815,409 ($5,913,034 before consideration of the value of a
preferred stock beneficial conversion feature) during 2001, 2000 and 1999,
respectively. Although revenues have grown in recent periods, we cannot assure
you that we will achieve sufficient revenues for profitability. Even if we do
achieve profitability, we cannot assure you that we can sustain or increase
profitability on a quarterly or annual basis in the future. If revenues grow
slower than we anticipate, or if operating expenses exceed expectations or
cannot be adjusted accordingly, our business, results of operations and
financial condition will be materially and adversely affected.
We cannot predict our success because our business model is unproven and
we have operated our business for only a short period of time. Our business
model is new to the aviation industry and our ability to generate revenues or
profits is unproven. We have a limited operating history, which will make it
difficult to evaluate our performance. Our prospects will be dependent upon our
ability to effectively implement our business model and adapt to changes in the
business-to-business e-commerce market. If our business model is not viable or
if we are unable to identify and address changes in our markets, we will not be
able to grow our business, compete effectively or achieve profitability. These
factors could cause our stock price to fall significantly.
15
We primarily rely on revenue from subscriptions and we may not be able to
successfully expand our membership base or establish additional revenue sources.
We currently generate revenues from e-commerce customers in the aviation
industry who subscribe to our service. Our success will be dependent on our
ability to expand our membership base within the aviation industry. We have
experienced decreases in our subscriber base. In addition, our success will
depend on our ability to generate additional revenues through the introduction
of a new functionality and/or the expansion into new markets and industries. We
cannot assure you that we will be successful in any efforts to generate
additional revenues.
We receive substantially all of our revenue from participants in the
aviation industry, so a downturn in the aviation industry could damage our
business. We receive substantially all of our revenue from members associated
with the aviation industry, and we expect these revenues will account for
substantially all of our revenues for the foreseeable future. Our dependence on
members associated with the aviation industry makes us vulnerable to downturns
in that industry. A downturn could lead our members to reduce their level of
activity on our e-marketplace and cause some to cancel their subscription.
Intense competitive pressures in the business-to-business e-commerce
market may impede our ability to establish a substantial market share that would
allow us to be profitable. The business-to-business e-commerce market is new,
rapidly evolving, and intensely competitive, and we expect competition to
further intensify in the future. Barriers to entry are minimal, and competitors
may develop and offer services similar to ours in the future. Recent entrants
into the business-to-business aviation parts market include an alliance of
prominent aircraft parts manufacturers and aviation industry participants that
have superior capital resources and established reputations in the industry. In
addition, we expect that additional companies will offer competing e-commerce
solutions in the future, and our business could be severely harmed if we are not
able to compete successfully against current or future competitors. In addition,
our members and partners may become competitors in the future. Increased
competition is likely to result in price reductions, reduced gross margins
and/or loss of market share, any of which could harm our business. Our actual
and potential competitors vary in size and in the scope and breadth of the
services they offer.
Quarterly Operating Results are Subject to Significant Fluctuations. Our
revenues and operating results may vary significantly from quarter to quarter
due to a number of factors, not all of which are in our control. These factors
include:
o Subscriber and advertiser demand for our solutions;
o User traffic levels and activity on our e-marketplace;
o Seasonal fluctuations in Internet usage;
o Changes in the growth rate of Internet usage;
o The commitment of e-commerce customers in the aviation industry who
subscribe to our service;
o The timing and amount of costs relating to the expansion of our
operations;
o Changes in our pricing policies or those of our competitors;
o The introduction of new solutions by us or our competitors;
o Costs related to acquisitions of technology or businesses;
o General economic and market conditions; and
o Effects of terrorist activities upon the aviation industry.
16
Our revenues for the foreseeable future will remain dependent on user
traffic levels and the commitment of e-commerce customers in the aviation
industry who subscribe to our service. Such future revenues are difficult to
forecast. In addition, we may significantly increase our operating expenses to
increase our sales and marketing operations, to continue our expansion, to
upgrade and enhance our technology, and to market and support our solutions. We
may be unable to adjust spending quickly enough to offset any unexpected revenue
shortfall. If we have a shortfall in revenues in relation to our expenses, then
our business, results of operations and financial condition would be materially
and adversely affected. Such a result would likely affect the market price of
our common stock in a manner that may be unrelated to our long-term operating
performance.
Due to all of the foregoing factors and the other risks discussed in this
section, you should not rely on quarter-to-quarter comparisons of our results of
operations as an indication of future performance. It is possible that, in some
future periods, our results of operations may be below the expectations of
public market analysts and investors. In this event, the price of our common
stock may fall.
If we fail to effectively manage our operations and the use of our
services, we may lose members or incur significant expenses. Our success depends
on effective planning and growth management. We will need to continue to improve
our financial and managerial controls, reporting systems, and procedures, and we
will need to continue to expand, train and manage our workforce. We continue to
increase the scope of our operations and our growth has placed, and will
continue to place, a significant strain on our management and operational
systems and resources. If we do not successfully implement and integrate these
new systems or if we fail to scale these systems to our growth, the performance
of our Web site may suffer which would cause us to lose members. In addition,
any failure could make us unable to operate with adequate, accurate and timely
financial and operational information, which could result in us incurring
unnecessary and possibly damaging expenses.
Because our revenue is derived from providing e-marketplace access to
subscribers for an annual subscription fee, the cancellation or non-renewal of
these subscriptions would hurt our business. We have generated substantially all
of our revenues to date through member subscription fees for access to our
e-marketplace. Generally, our subscription fees are paid on an annual basis, and
these subscriptions may be terminated on short-term notice. We have expended
significant financial and personnel resources and have expanded our operations
on the assumption that our subscribers will renew these annual subscriptions. We
do not have a sufficiently long history of operations to be able to predict
renewal rates of our members. If our members fail to continuously renew, or if
they terminate their subscriptions, our revenues would be significantly reduced
and our business could suffer dramatically.
There are a finite number of potential subscribers and we may be unable
to develop other means of generating revenue, so our growth may be limited. A
major element of our growth strategy is the expansion of our subscriber base.
The number of participants in the aviation market limits our potential
subscriber base. Additionally, the barriers to entry, which exist in the
aviation market, may limit the entry of additional subscribers into our
e-marketplace. Accordingly, the number of potential subscribers to our
e-marketplace is likely finite, in which case our revenues may be similarly
limited if we cannot generate revenue through other means.
17
If our sellers do not provide timely, professional and lawful delivery of
products to our buyers, our membership may decrease and we may have liability.
We rely on our sellers to deliver purchased parts and products to our buyers in
a professional, safe and timely manner. If our sellers do not deliver the parts
and products to our buyers in a professional, safe and timely manner, then our
service will not meet customer expectations and our reputation and brand will be
damaged. In addition, deliveries that are nonconforming, late or are not
accompanied by information required by applicable laws or regulations, could
expose us to liability or result in decreased adoption and use of our solution,
which could have a negative effect on our business, results of operations and
financial condition.
We cannot guard against harm to our business from the activities of third
parties on our web site. Our future success will depend largely upon the
reliably of our sellers in delivering and accurately representing their listed
products and buyers paying the agreed purchase price. We do not take
responsibility for the delivery of payment or goods to any member. We have
received in the past, and anticipate that we will receive in the future,
communications from members who did not receive the purchase price or the
products that were to be exchanged. While we can suspend the privileges of
members who fail to fulfill their delivery or payment obligations, we do not
currently have the ability to require sellers to deliver products or buyers to
make payments. We do not compensate members who believe they have been defrauded
by other members. Any negative publicity generated as a result of fraudulent or
deceptive conduct by members of our e-marketplace could damage our reputation
and diminish the value of our brand name. We may in the future receive requests
from members for reimbursement or threats of legal action against us if no
reimbursement is made. Any resulting litigation could be costly for us, divert
management attention, result in increased costs of doing business, lead to
adverse judgments, or otherwise harm our business.
If we are unable to implement adequate measures to maintain the value of
our intellectual property and internet domain name, our ability to compete may
be severely harmed. As an Internet company, our current and future copyrights,
service marks, trademarks, patents, trade secrets, domain name and similar
intellectual property, if any, are especially vital to our success. Despite our
precautions, unauthorized third parties may infringe or misappropriate our
intellectual property; copy portions of our services or reverse engineer or
obtain and use information that we regard as proprietary. Any infringement or
misappropriation of our intellectual property or proprietary information could
make it difficult for us to compete. In addition, we currently hold various
Internet Web addresses relating to our network, including the domain name
"PARTSBASE.COM." If we are not able to prevent third parties from acquiring Web
addresses that are similar to our addresses, third parties could acquire similar
domain names that could create confusion that diverts traffic away from our
e-marketplace to other competing Web sites.
Other parties may assert claims against us that we are infringing upon
their intellectual property rights, which could harm our financial condition and
ability to compete. We cannot be certain that our services do not infringe upon
the intellectual property rights of others. Because patent applications in the
United States are not publicly disclosed until the patent is issued,
applications may have been filed which relate to services similar to those
offered by us. We may be subject to legal proceedings and claims from time to
time in the ordinary course of our business, including claims of alleged
infringement of the trademarks and other intellectual property rights of third
parties. If our services violate third-party proprietary rights, we cannot
assure you that we would be able to obtain licenses to continue offering such
18
services on commercially reasonable terms, or at all. Any claims against us
relating to the infringement of third-party proprietary rights, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources and for injunctions preventing us from distributing these
services. Such claims could severely harm our financial condition and ability to
compete.
If we are unable to license third-party technologies or effectively
integrate them, we may experience delays in development or expansion of our
business. The e-commerce market is rapidly evolving and we have and will depend
on third-party software and other technology for the effective operation of our
Web site and business. We may not be able to license or renew the license for
these technologies on terms favorable to us or at all. Our inability to obtain
necessary third-party licenses could delay the continued development of our
business and services, which could result in a loss of members, slow our growth
and severely harm our business. In addition, even if we are able to license
needed technology, we may not be able to successfully integrate such technology
into our operations, which could also result in a loss of members, slow our
growth and severely harm our business.
Risks Related to the Internet and e-Commerce Industries
Our growth may be impaired if the Internet is unable to accommodate
growth in e-commerce. Our success depends on the widespread use of and growth in
the use of the Internet for retrieving, sharing and transferring information
among buyers and sellers in the aviation parts market. If the Internet cannot
accommodate growth in e-commerce or experiences periods of poor performance, the
growth of our business may suffer. Our ability to sustain and improve our
services is limited, in part, by the speed and reliability of the networks
operated by third parties. Consequently, the emergence and growth of the market
for our services is dependent on improvements being made to the Internet
infrastructure to alleviate overloading and congestion. Additionally, the
possible slow adoption of the Internet as a means of commerce by businesses may
harm our prospects. Even if the Internet is widely adopted as a means of
commerce, the adoption of our network for procurement, particularly by companies
that have relied on traditional means of procurement, will require broad
acceptance of e-commerce and online purchasing. In addition, companies that have
already invested substantial resources in traditional methods of procurement, or
in-house e-commerce solutions, may be reluctant to adopt our e-commerce
solution, thus impairing the growth of our member base and revenue potential.
The security risks related to e-commerce may cause members to reduce the
use of our service, and attempting to guard against these risks may cause us to
incur significant costs and expenses. A fundamental requirement to conduct
business-to-business e-commerce is the secure transmission of information over
public networks. If our members are not confident in the security of e-commerce,
they may not effect transactions on our e-marketplace or renew their
subscriptions, which would severely harm our business. There can be no guarantee
that advances in computer capabilities, new discoveries in the field of
cryptography, or other developments will not result in the compromise or breach
of the algorithms that we use to protect content and transactions on our
e-marketplace or proprietary information in our databases. We may be required to
incur significant costs to protect against security breaches or to alleviate
problems caused by breaches. Further, a well-publicized compromise of security
could deter people from using the Internet to conduct transactions that involve
19
transmitting confidential information. Our failure to prevent security breaches,
or well-publicized security breaches affecting the Internet in general, could
adversely affect the willingness of our members to use our services.
If our sellers fail to provide timely and accurate information, our
membership base and potential revenue may decline. Our members use our service
in large part because of the comprehensive breadth and accuracy of our
databases. It is our responsibility to load seller product information into our
database and categorize the information for search purposes. However, we are
dependent on our sellers to provide us in a timely manner with accurate,
complete, and current information regarding their product inventory. If our
timely loading of this information is impaired, this could result in member
dissatisfaction and a loss of members.
We may not be able to keep up with technological advancements, which
could result in a loss of members and harm our ability to compete. The market
for Internet commerce is characterized by rapid change, evolving industry
standards and the frequent introduction of new technological products and
services. The introduction of new technology, products, services or standards
may prove to be too difficult, costly or simply impossible to integrate into our
existing systems. Moreover, innovations could render obsolete our existing or
any future products and services. Our ability to remain competitive will also
depend heavily upon our ability to maintain and upgrade our technology products
and services. We must continue to add hardware and enhance software to
accommodate any increased content and use of our Web site. If we are unable to
increase the data storage and processing capacity of our systems at least in
pace with the growth in demand, our Web site may fail to operate at an optimal
level for unknown periods of time. As a relatively small company in the market
for Internet commerce, we will be in a position of responding to technological
changes rather than establishing them. Any difficulty keeping pace with
technological advancements could hurt our ability to retain members and
effectively compete.
Because we do not maintain a redundant system, any system failure could
delay or interrupt our service, which could severely harm our business and
result in a loss of members. Our ability to successfully maintain an e-commerce
marketplace and provide acceptable levels of customer service depends largely on
the efficient and uninterrupted operation of our computer and communications
hardware and network systems. Any interruptions could severely harm our business
and result in a loss of members. Our computer and communications systems are
located in Boca Raton, Florida. Although we periodically back up our databases
to tapes and store the backup tapes offsite, we have not maintained a redundant
site. As a result, our systems and operations are particularly vulnerable to
damage or interruption from human error, sabotage, fire, flood, hurricane, power
loss, telecommunications or equipment failure, and similar events. We cannot
assure you that we will not experience system failures in the future. Moreover,
we have experienced delays and interruptions in our telephone and Internet
access that have prevented members from accessing our e-marketplace and customer
service department. Furthermore, we do not have a formal disaster recovery plan
and do not carry sufficient business interruption insurance to compensate us for
losses that may occur as a result of any system failure, and therefore the
occurrence of any system failure or similar event could harm our business
dramatically.
Defects in the complex software on which our services depend could cause
service interruptions that could damage our reputation and harm our business.
Unlike many traditional suppliers and distributors of aviation parts, we are
wholly dependent on the error-free functioning of our Web site and its
20
associated software. Our e-marketplace depends on complex software developed
internally and by third parties. Moreover, we are relying on third-party
software to implement our transaction-based model, which software has not yet
been integrated into our system. Software often contains defects, particularly
when first introduced or when new versions are released. Our testing procedures
may not discover software defects that affect our new or current services or
enhancements until after they are deployed. These defects could cause service
interruptions, which could damage our reputation or increase our service costs,
cause us to lose revenue, delay market acceptance, or divert our development
resources, any of which could severely harm our business, financial condition,
and results of operations.
We could face liability for information retrieved from or transmitted
over the internet and liability for aircraft products sold over the Internet. We
could be exposed to liability with respect to third-party information that may
be accessible through our Web site. If any third-party content information
provided on our Web site contains errors, consumers potentially could make
claims against us for losses incurred in reliance on that information. In
addition, because defective aviation products can result in substantial losses
of property or life, we have a relatively greater risk of being exposed to
product liability claims arising out of or relating to aviation parts and
products sold through our Web site, which could result in us incurring
substantial defense costs and, if successful, liability, either of which could
severely harm our business. We currently carry no policies, which would insure
us against product liability claims.
Risks Related to the Nurse Staffing Business
We can not predict our success as we have operated our business for a
short period of time. We have a limited operating history, which will make it
difficult for you to evaluate our performance. Our prospects will be dependent
upon our ability to effectively implement our business model and adapt to
changes in the nurse staffing business. If our business model is not viable or
if we are unable to identify and address changes in our markets, we will not be
able to grow our business, compete effectively or achieve profitability. These
factors could cause our stock price to fall significantly.
If we are unable to attract qualified registered nurses for our
supplemental nurse staffing business at reasonable costs, it could increase our
operating costs and negatively impact our business. We rely significantly on our
ability to attract and retain registered nurses who possess the skills,
experience and licenses necessary to meet the requirements of our hospital and
healthcare facility clients. We compete for registered nurses with other
temporary healthcare staffing companies and with hospitals and healthcare
facilities. We must continually evaluate and expand our registered nurse network
to keep pace with our hospital and healthcare facility clients' needs.
Currently, there is a shortage of qualified nurses in most areas of the United
States, competition for nursing personnel is increasing, and salaries and
benefits have risen. We may be unable to continue to increase the number of
registered nurses that we recruit, decreasing the potential for growth of our
business. Our ability to attract and retain registered nurses depends on several
factors, including our ability to provide registered nurses with assignments
that they view as attractive and to provide them with competitive benefits and
wages. We cannot assure you that we will be successful in any of these areas.
The cost of attracting registered nurses and providing them with attractive
benefit packages may be higher than we anticipate and, as a result, if we are
unable to pass these costs on to our hospital clients, our profitability could
21
decline. Moreover, if we are unable to attract and retain registered nurses the
quality of our services to our hospital clients may decline and, as a result, we
could lose clients.
We operate in a highly competitive market and our success depends on our
ability to remain competitive in obtaining and retaining hospital clients and
registered nurses. The supplemental nurse staffing business is highly
competitive. We compete in regional and local markets with full-service staffing
companies and with specialized temporary staffing agencies. Some of our
competitors in the supplemental nurse staffing sector include American Mobile
Nurse, Interim Healthcare Services and Nursefinders. Some of these companies may
have greater marketing and financial resources than we do. We believe that the
primary competitive factors in obtaining and retaining hospital clients are
identifying qualified healthcare professionals for specific job requirements,
providing qualified employees in a timely manner, pricing services competitively
and effectively monitoring employees' job performance. We compete for registered
nurses based on the quantity, diversity and quality of assignments offered,
compensation packages and the benefits that we provide. Competition for hospital
clients and registered nurses may increase in the future and, as a result, we
may not be able to remain competitive. To the extent competitors seek to gain or
retain market share by reducing prices or increasing marketing expenditures, we
could lose revenues or hospital clients and our margins could decline, which
could seriously harm our operating results and cause the price of our stock to
decline. In addition, the development of alternative recruitment channels could
lead our hospital clients to bypass our services, which would also cause our
revenues and margins to decline.
Our business depends upon our ability to secure and fill new orders from
our hospital clients because we do not have long-term agreements or exclusive
contracts with them. We do not have long-term agreements or exclusive guaranteed
order contracts with our hospital clients. The success of our business is
dependent upon our ability to continually secure new orders from hospitals and
to fill those orders with our registered nurse employees. Our hospital clients
are free to place orders with our competitors and choose to use temporary
healthcare professionals that our competitors offer them. Therefore, we must
maintain positive relationships with our hospital clients. If we fail to
maintain positive relationships with our hospital clients, we may be unable to
generate new supplemental healthcare professional orders and our business may be
adversely affected.
Fluctuations in patient occupancy at the hospital of our clients may
adversely affect the demand for our services and therefore the profitability of
our business. Demand for our supplemental healthcare staffing services is
significantly affected by the general level of patient occupancy at our hospital
clients' facilities. When occupancy increases, supplemental employees are often
added before full-time employees are hired. As occupancy decreases, hospital
clients typically will reduce their use of temporary employees before
undertaking layoffs of their regular employees. In addition, we may experience
more competitive pricing pressure during periods of occupancy downturn.
Occupancy at our hospital clients' facilities also fluctuates due to the
seasonality of some elective procedures. We are unable to predict the level of
patient occupancy at any particular time and its effect on our revenues and
earnings.
Healthcare reform could negatively impact our business opportunities,
revenues and margins. The U.S. government has undertaken efforts to control
growing healthcare costs through legislation, regulation and voluntary
agreements with medical care providers and drug companies. In the recent past,
22
the U.S. Congress has considered several comprehensive healthcare reform
proposals. The proposals were generally intended to expand healthcare coverage
for the uninsured and reduce the growth of total healthcare expenditures. While
the U.S. Congress did not adopt any comprehensive reform proposals, members of
Congress may raise similar proposals in the future. If any of these proposals
are approved, hospitals and other healthcare facilities may react by spending
less on healthcare staffing, including nurses. If this were to occur, we would
have fewer business opportunities, which could have a material adverse effect on
our business. State governments have also attempted to control the growth of
healthcare costs. For example, the state of Massachusetts has recently
implemented a regulation that limits the hourly rate paid to temporary nursing
agencies for registered nurses, licensed practical nurses and certified nurses
aides. While the current regulation does not apply to us, if similar regulations
were to be applied in Florida, our revenues and margins could decrease.
Furthermore, third party payors, such as health maintenance organizations,
increasingly challenge the prices charged for medical care. Failure by hospitals
to obtain full reimbursement from those third party payors could reduce the
demand or the price paid for our services.
We operate in a regulated industry and changes in regulations or
violations of regulations may result in increased costs or sanctions that could
reduce our revenues and profitability. The healthcare industry is subject to
extensive and complex federal and state laws and regulations related to
professional licensure, conduct of operations, payment for services and payment
for referrals. If we fail to comply with the laws and regulations that are
directly applicable to our business, we could suffer civil and/or criminal
penalties or be subject to injunctions or cease and desist orders. Our business
is generally not subject to the extensive and complex laws that apply to our
hospital clients, including laws related to Medicare, Medicaid and other federal
and state healthcare programs. However, these laws and regulations could
indirectly affect the demand or the prices paid for our services. For example,
our hospital clients could suffer civil and/or criminal penalties and/or be
excluded from participating in Medicare, Medicaid and other healthcare programs
if they fail to comply with the laws and regulations applicable to their
businesses. In addition, our hospital clients could receive reduced
reimbursements or be excluded from coverage, because of a change in the rates or
conditions set by federal or state governments. In turn, violations of or
changes to these laws and regulations that adversely affect our hospital clients
could also adversely affect the prices that these clients are willing or able to
pay for our services.
Significant legal actions could subject us to substantial liabilities. In
recent years, our hospital clients have become subject to an increasing number
of legal actions alleging malpractice or related legal theories. Because our
registered nurses provide medical care, claims may be brought against our
registered nurses and us relating to the quality of medical care provided by our
registered nurse employees while on assignment at our hospital clients. We and
our registered nurse employees may at times be named in these lawsuits
regardless of our contractual obligations or the standard of care provided by
our registered nurses. In some instances, we may be required to indemnify
hospital clients contractually against some or all of these potential legal
actions. Also, because our registered nurses are our employees, we may be
subject to various employment claims and contractual disputes regarding the
terms of a registered nurse's employment. We have two layers of professional and
general liability coverage. The professional and general liability coverage
consists of primary coverage with limits of $1 million per occurrence and $3
million in the aggregate and an umbrella policy with limits of $5 million.
However, our insurance coverage may not cover all claims against us or continue
to be available to us at a reasonable cost. Also, we may not be able to pass on
23
all or any portion of increased insurance costs to our hospital clients. If we
are unable to maintain adequate insurance coverage or if any claims are not
covered by insurance, we may be exposed to substantial liabilities.
We may be legally liable for damages resulting from our hospital clients'
mistreatment of our healthcare personnel. Because we are in the business of
placing our registered nurses in the workplaces of other companies, we are
subject to possible claims by our registered nurses alleging discrimination,
sexual harassment, negligence and other similar activities by our hospital
clients. The cost of defending such claims, even if groundless, could be
substantial and the associated negative publicity could adversely affect our
ability to attract and retain qualified individuals in the future.
Difficulties in developing and maintaining our management information and
communications systems may result in increased costs that reduce our
profitability. Our ability to deliver our staffing services to our hospital
clients and manage our internal systems depends to a large extent upon the
performance of our management information and communications systems, currently
under development. If these systems do not adequately support our operations, or
if we are required to incur significant additional costs to maintain or expand
these systems, our business and financial results could be materially adversely
affected.
Our operations may deteriorate if we are unable to continue to attract,
develop and retain our sales personnel. Our success is dependent upon the
performance of our sales personnel, especially client registered nurse sales
managers, hospital account coordinators and recruiters. The number of
individuals who meet our qualifications for these positions is limited and we
may experience difficulty in attracting qualified candidates. In addition, we
commit substantial resources to the training, development and support of these
individuals. Competition for qualified sales personnel in the line of business
in which we operate is strong and there is a risk that we may not be able to
retain our sales personnel after we have expended the time and expense to
recruit and train them.
Risks Associated with Potential Acquisitions or Investments
We may acquire or make investments in businesses, products, services or
technologies some of which may not be complementary or related to our current
businesses. From time to time we may have discussions with companies regarding
our acquiring, or investing in, their businesses, products, services or
technologies. We cannot assure you that we will be able to identify suitable
acquisition or investment candidates. Even if we do identify suitable
candidates, we cannot assure you that we will be able to consummate such
acquisitions or investments on commercially acceptable terms. If we buy a
company, we could have difficulty in assimilating that company's personnel and
operations. In addition, the key personnel of the acquired company may decide
not to work for us. If we make other types of acquisitions, we could have
difficulty in assimilating the acquired products, services or technologies into
our operations. These difficulties could disrupt our ongoing business, distract
our management and employees, increase our expenses and adversely affect our
results of operations due to accounting requirements such as goodwill.
Furthermore, we may incur debt or issue equity securities to pay for any future
acquisitions. The issuance of equity securities could be dilutive to our
existing stockholders. We do not have established criteria for evaluating
acquisition or investment opportunities.
24
Future growth of our operations may make additional capital or financing
necessary. We anticipate that we have sufficient working capital to meet our
working capital needs for at least the next 12 months. However, we may need to
raise additional funds in the future in order to:
o Finance unanticipated working capital requirements;
o Develop or enhance existing services or products;
o Respond to competitive pressures; and
o Acquire complementary businesses, technologies, content or products.
We cannot be certain that we will be able to obtain needed funds on
favorable terms, if at all. If we decide to raise funds by issuing additional
equity securities, investors in our common stock may experience additional
dilution.
We may be unable to obtain sufficient funds to effectively operate our
business, which could damage our competitive position. In the rapidly evolving
and highly competitive e-commerce industry, our future prospects will depend
heavily on our ability to take advantage of new business opportunities and
respond to technological developments. There can be no assurances that we will
have sufficient capital resources to respond to business opportunities,
technological advancements and competitive pressures. A lack of capital
resources could seriously damage our competitive position and prospects.
You may experience significant volatility in the market value of our
shares and may be unable to sell our stock on terms favorable to you. Because we
have no history of profitability, it will be difficult for investors in the
public market to determine the intrinsic value of our shares. In addition, our
market capitalization and public float is small relative to other public
companies in the business-to-business e-commerce or other sectors. As a result,
the price at which our common stock trades may be more volatile than those of
other public companies and, as a result, it may be more difficult for you to
sell our stock on terms favorable to you. In addition, any significant
volatility in the market price of our common stock could result in the
initiation of securities class action litigation, which could divert our
management and financial resources from more productive uses.
ITEM 2. PROPERTIES
We are currently obligated under three separate lease agreements with
separate unaffiliated third parties for approximately 6,600 square feet of
office space in Boca Raton, Florida (the "Boca Raton Lease"), approximately
1,000 square feet of office space in Fort Lauderdale, Florida (the "Fort
Lauderdale Lease") and approximately 1,260 square feet of office space in West
Palm Beach, Florida (the "West Palm Beach Lease"). We are obligated to pay
approximately (i) $8,700 monthly through February 2003 under the Boca Raton
Lease; (ii) $900 monthly through November 2004 under the Fort Lauderdale Lease;
and (iii) $1,700 monthly under the West Palm Beach Lease. We may terminate the
West Palm Beach Lease prior to November 2004 in either December 2002 or December
2003 upon payment of 50% of the remaining rent due through November 2004. Our
25
corporate headquarters are located in our Boca Raton, Florida office. We use our
Fort Lauderdale and West Palm Beach offices as satellite service offices for our
Nurse Staffing Business.
ITEM 3. LEGAL PROCEEDINGS
In September 2000 the Company sued a third party financial institution
because such financial institution paid a check in the amount of $161,000
despite a stop payment order duly issued by the Company. The payee cashed the
check, along with a replacement check. Before the Company learned that the payee
had cashed both checks, the Company entered into a binding settlement with the
payee ending the Company's business relationship with the payee. The payee
refused to return the amounts and the financial institution failed to credit the
Company's account. The Company filed suit, and discovery has commenced. The
financial institution recently sued the payee, who then sued the Company for
indemnification, claiming the settlement agreement creates this claim. The
Company disputes this contention. This matter is scheduled for mediation in
April 2002.
In December 2000, a third party (the "Third Party"), unaffiliated with
the Company, instituted arbitration against the Company in Dallas, Texas based
upon allegations that the Company breached a February 18, 2000 professional
services agreement. The Third Party claimed damages of $308,083 plus
un-liquidated damage amounts for copyright infringement, interest, attorneys'
fees and costs. The Company filed a counterclaim denying the breach and claiming
entitlement to a refund of $73,496 previously paid to the Third Party plus
damages of $250,000 because of the Third Party's breach of its obligations to
the Company. This matter was settled on June 30, 2001, resulting with the
Company making a $175,000 payment to the Third Party. This settlement is
classified as a litigation expense in the statement of operations for the year
ended December 31, 2001.
In April and May 2001, the Company received notice of, or had been served
with, four purported class action lawsuits (Foderaro vs. PartsBase.com, Inc. et
al, Case No.: 01-8319 CIV- FERGUSON; IKCYBERINVESTMENTS vs. PartsBase.com, Inc.
et al, Case No.: 01-8368 CIV-SEITZ; and Webb vs. PartsBase, et.al. Case No.
01-8376 CIV- GRAHAM and Jesus Martin vs. PartsBase.com, Inc. et al, Case No.
01-8526-CIV-UNGARO-BENAGES). These cases were consolidated into one action
entitled, In re: PartsBase.com, Inc. Securities Litigation, Case No.
01-8319-CIV-UNGARO-BENAGES/BROWN currently before the Honorable Ursula
Ungaro-Benages. The consolidated lawsuit names as defendants the Company,
certain of its current and former officers and directors, and the underwriters
of its initial public offering of securities. The consolidated lawsuit alleges
violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and
alleges the Company's March 2000 registration statement misrepresented and
failed to disclose matters related to the Company's business operations and
membership sales. The complaint alleges damages of nearly $42 million. The Court
has recently certified a class consisting of purchasers of the Company's common
stock in the offering during the period from March 22, 2000 through April 25,
2000. The Company continues to believe that the allegations contained in the
consolidated lawsuit are without merit and intends to vigorously defend this
action. Nevertheless, an unfavorable resolution of these lawsuits could have a
material adverse effect on the Company in one or more future periods. The
Company maintains a director and officer's liability insurance policy that
provides $3 million of coverage, with retention of $200,000. The Company's legal
expenses currently exceed the retention amount. At June 30, 2001, the Company
recorded a litigation reserve for $200,000 to cover the expected retention. This
reserve has been included in litigation and other related costs in the statement
26
of operations for the year ended December 31, 2001. The parties are currently
engaged in settlement discussions. The results of the settlement discussions
th ultimate resolution of this matter are uncertain.
The Company does not intend to file further Current Reports on Form 8-K
or other disclosures describing additional lawsuits, if any, purporting class
action status, in either federal or state court, which are based on allegations
substantially similar to those contained in the consolidated lawsuit described
above.
In July 2001, the Company was served with a lawsuit filed by an
information technology vendor claiming damages resulting from the Company's
alleged breach of a software sales and service contract in the amount of
$126,631 plus interest, costs and fees. This amount is included in litigation
and other related costs in the statement of operations for the year ended
December 31, 2001. The Company intends to vigorously defend the allegations
contained in this lawsuit. In July 2001, the Company sued the manufacturer of
such software for damages totaling $220,000 as a result of software malfunction.
The Company believes the resolution of this matter will not have a material
impact upon the Company's consolidated financial statements, results of
operations or cash flows
In March 2001 we received notice from counsel to the Business Software
Alliance (the "BSA"), an industry watchdog group representing software
manufacturers, in connection with the BSA's investigation of our possible
illegal duplication of certain software companies' proprietary software
products. Through subsequent correspondence from the BSA, the BSA has alleged
that we have installed unauthorized copies of BSA member software products on
our computers. The correspondence from the BSA provides that our potential
exposure in this matter could be over $1,950,000 if willful copyright
infringement is shown. We are currently in negotiations with the BSA in an
attempt to resolve the matter. To date, we are not aware of any legal
proceedings initiated by BSA in this matter.
From time to time, we could be subject to legal proceedings and claims in
the ordinary course of business, including claims of alleged infringement of
trademarks, copyrights and other intellectual property rights.
We are not currently aware of any other legal proceedings or claims that
we believe are likely to have a material adverse effect on our financial
position, results of operations, or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth
quarter of the fiscal year covered
by this report.
27
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since March 22, 2000, our Common Stock has been traded on the NASDAQ
National Market System under the symbol "PRTS". The following table sets forth
the high and low closing sales prices for our Common Stock for the periods
indicated.
2001 High Low
First Quarter $2.56 $1.00
Second Quarter $1.77 $0.79
Third Quarter $1.00 $0.40
Fourth Quarter $0.95 $0.41
2000 High Low
First Quarter (Commencing March 22) $14.88 $9.00
Second Quarter $10.88 $4.25
Third Quarter $ 8.75 $2.75
Fourth Quarter $ 3.88 $1.69
On February 15, 2002, the Company received notice from the NASDAQ
National Market warning that the Company's stock may be delisted because its
common stock has failed to maintain a minimum bid price of $1 over the last 30
consecutive trading days and failed to maintain a minimum market value of public
float of $5,000,000. In accordance with MarketPlace Rules, the Company is
provided 90 calendar days, or until May 15, 2002 to regain compliance. If the
Company is unable to demonstrate compliance on or before May 15, 2002, NASDAQ
staff will provide the Company with written notification that its securities
will be delisted. At any time, the Company may appeal NASDAQ Staff's decision to
a NASDAQ Listing Qualifications Panel.
As of March 26, 2002, there were approximately 1,490 holders of record of
our Common Stock.
We have never paid cash dividends on our common stock. We intend to
retain future earnings, if any, to finance the expansion of our business and do
not anticipate that any cash dividends will be paid in the foreseeable future.
The future dividend policy will depend on our earnings, capital requirements,
expansion plans, financial condition and other relevant factors.
28
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the notes to the
consolidated financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations", which are included elsewhere in
this Form 10-K. In September 2001, we incorporated RNpartners, a wholly owned
subsidiary, Florida corporation, to launch our nurse staffing business.
RNpartners commenced operations on October 1, 2001. The Consolidated Statements
of Operations Data for 2001 contain the operations of RNpartners for the period
of October 1, 2001 through December 31, 2001. The Consolidated Balance Sheet
Data includes the balances of RNpartners as of December 31, 2001. The selected
consolidated financial data of PartsBase.Inc. as of and for each of the five
years in the period ended December 31, 2001 have been derived from PartsBase's
audited consolidated financial statements.
Consolidated Statements of
Operations Data: For the Years Ended December 31,
----------------------------------------------------------------------------
1997 1998 1999 2000 2001
--------------- -------------- -------------- --------------- --------------
Net revenues $ 2,861 $ 3,504 $ 362,224 $ 4,097,585 $ 5,619,121
--------- --------- ----------- ------------ -----------
Cost of revenues 104,041 43,452 1,412,532 6,140,741 4,451,631
Stock-based compensation expense -- -- 1,799,139 2,308,440 247,506
--------- --------- ----------- ------------ -----------
Total cost of revenues 104,041 43,452 3,211,671 8,449,181 4,699,137
--------- --------- ----------- ------------ -----------
Gross profit (loss) (101,180) (39,958 (2,849,447) (4,351,596) 919,984
--------- --------- ----------- ------------ -----------
Operating expenses:
General and administrative expenses 90,452 108,163 1,293,091 8,920,354 7,224,266
Stock-based compensation expense -- -- 899,821 1,944,398 72,931
Litigation and other related costs -- -- -- -- 457,500
--------- --------- ----------- ------------ -----------
Total operating expenses 90,452 108,163 2,192,912 10,864,752 7,754,697
--------- --------- ----------- ------------ -----------
Operating loss (191,632) (148,121) (5,042,359) (15,216,348) (6,834,713)
Other income (expense), net -- -- (870,675) 1,762,367 1,222,480
--------- --------- ----------- ------------ -----------
Net loss before value of preferred
stock beneficial conversion feature (191,632) (148,121) (5,913,034) (13,453,981) (5,612,233)
Value of preferred stock beneficial
conversion feature -- -- (1,902,375) -- --
--------- --------- ----------- ------------ -----------
Net loss attributable to common stockholders $(191,632) $(148,121) $(7,815,409) $(13,453,981) $(5,612,233)
========= ========= =========== ============ ===========
Basic and diluted net loss per share $ -- $ -- $ (.84) $ (1.03) $ (.40)
========= ========= =========== ============ ===========
Weighted average of common shares
outstanding -- -- 9,251,250 13,053,755 14,108,895
========= ========= =========== ============ ===========
Consolidated Balance Sheet Data:
As of December 31,
-------------------------------------------------------------------------
1997 1998 1999 2000 2001
--------------- -------------- -------------- --------------- --------------
Cash and cash equivalents $ -- $ -- $ 735,276 $ 23,045,491 $23,851,593
Investments, at amortized cost current portion) -- -- -- 7,139,052 900,073
Working capital (deficiency) (1,709) (19,044) (687,172) 27,652,259 22,762,318
Total assets 7,848 6,084 4,729,295 37,281,553 29,163,770
Accumulated deficit (263,538) (411,659) (7,762,678) (21,216,659) (26,828,892)
Total stockholders' equity (deficiency) 6,139 (19,044) 1,541,916 32,347,901 26,439,487
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
We currently operate in two business segments: (i) we provide
business-to-business e-commerce services for the aviation industry and (ii)
since October 2001 we have provided, for a fee, registered nurses for temporary
assignment to hospitals located in Broward County and Palm Beach County,
Florida.
We were incorporated in Texas on April 27, 1999 and prior to such date
operated as a division of Aviation Laboratories, Inc. At the Company's Annual
Meeting of Stockholders held on June 20, 2001, the stockholders approved an
amendment to affect a change in the state of incorporation of the Company from
Texas to Delaware and changed the name of the Company from PartsBase.com, Inc.
to PartsBase, Inc. As a Texas corporation, the Company's shares of common stock
had no par value. As a result of the reincorporation in Delaware, the Company's
shares of preferred and common stock, each have a $0.001 par value and $14,004
was reclassified from Additional Paid-In Capital to Common Stock to reflect the
par value of the shares of common stock outstanding. No shares of preferred
stock were issued or outstanding at December 31, 2001 and 2000, respectively.
The following discussion of our consolidated financial condition and
results of operations should be read together with the consolidated financial
statements and the related notes included elsewhere in this report which are
deemed to be incorporated into this section. The following discussion contains
forward-looking statements that reflect our plans, estimates and beliefs. Our
actual results may differ materially from those anticipated in these
forward-looking statements as a result of a number of factors, including but not
limited to those set forth under "Risk Factors" and included elsewhere in this
report.
Since we began operations in April 1996, we have incurred significant net
losses. For the years ended December 31, 1997, 1998, 1999, 2000 and 2001, our
consolidated net losses attributable to holders of common stock were $191,632,
$148,121, $7,815,409, $13,453,981 and $5,612,233, respectively.
The Aviation E-commerce Business and Corporate
Results of Operations
Comparison of Years Ended December 31, 2001 and 2000
Net Revenues
Net revenues consist of subscription fees charged to subscribers and, to
a lesser extent, banner advertising and other revenues. For fiscal years 2001
and 2000, our net revenues were $5,520,825 and $4,097,585, respectively, an
increase of $1,423,240 or 35%. During fiscal year 2001 we signed up 1,423 new
subscribers and renewed 1,603 subscriptions from existing customers. Of the 2001
renewed subscriptions, 501 subscribers renewed their subscriptions for a third
year. This compares to 3,175 new subscribers and 1,285 renewals sold in fiscal
30
year 2000. Given the finite size of the aerospace community the number of new
subscribers signed up in 2001 decreased compared to 2000. The average new
subscription fee in fiscal year 2001 was $1,863 compared to $1,411 in fiscal
year 2000. The average new subscriber fee increased in fiscal year 2001 due to
higher prices due to additional value added services being provided to our
subscribers such as government procurement data, the new "PartsDirect" feature,
premium parts search functionality improvements and other enhancements to our
service offerings. At December 31, 2001, we had 2,926 paying subscribers
compared to 4,756 paying subscribers at December 31, 2000. A paid subscriber is
defined as a customer whose subscription is currently active, and therefore,
does not include subscribers whose subscriptions have expired. The subscriber
count decreased during 2001 compared to 2000, as PartsBase was unable to acquire
new subscribers at a sufficient rate to replace current customers whose
subscriptions expired or were deactivated during their subscription period for
non payment of their invoice.
For the fiscal years 2001 and 2000, gross revenues were $5,234,073 and
$6,293,834, respectively, a decrease of $1,059,761, or 17%. The decrease in
gross revenue in fiscal year 2001 is attributable to a smaller sales force, a
deeper penetration of the finite number of members in the aerospace community,
fewer renewals of initial subscribers in 2000 and a general downturn in the
overall aviation industry as a result of the events of September 11, 2001. Our
subscription activity has since rebounded to pre September 11, 2001 levels.
PartsBase records subscription, banner advertising and other revenues
over the life of the respective subscription, which is typically 12 months.
Gross revenue represents total subscription and advertising sales made during
the period, of which a portion is deferred and recognized as earned. Net
revenues represent that portion of current and prior year's gross revenues that
was earned during the period. Sales costs, including commissions, are expensed
as incurred, and are included in the cost of revenue. Deferred revenue decreased
to $2,231,076 at December 31, 2001, compared to $3,349,869 as of December 31,
2000.
The following table sets forth gross revenue by product line for each of
the four quarters in fiscal year 2001, as well as sequential quarter-to-quarter
revenue growth percentage for the second, third, and fourth quarters of fiscal
year 2001.
Revenue Detail by Quarter (000's)
Year Ended December 31, 2001
---------------------------------------------------------------------------------------------------------------
Three Months Ended Sequential Growth
------------------------------------------ -------------------------------
03/31 06/30 09/30 12/31 2nd Qtr 3rd Qtr 4th Qtr
----- ----- ----- ----- ------- ------- -------
New Subscriptions $1,048 $ 729 $ 492 $ 381 (30%) (33%) (23%)
Renewal Subscriptions 509 387 591 833 (24%) 53% 41%
Advertising 60 89 27 26 48% (70%) (0%)
Other 43 2 15 2 (95%) 650% (87%)
----- ----- ----- ----- ----- ----- ----
Total Gross Revenue $1,660 $1,207 $1,125 $1,242 (25%) (82%) 10%
===== ===== ===== ===== ===== ===== =====
Total Net Revenue $1,599 $1,354 $1,344 $1,224 (15%) (1%) (9%)
===== ===== ===== ===== ===== ===== =====
Salesperson Compenssation $ 730 $ 484 $ 398 $ 422 (34%) (18%) 6%
===== ===== ===== ===== ===== ===== =====
Sales Comp/Gross Rev. 44% 40% 35% 34%
===== ===== ===== =====
Deferred Revenue Bal. $3,175 $2,731 $2,413 $2,231
===== ===== ===== =====
31
Cost of Revenues
Cost of revenues consists of compensation for our sales and marketing
personnel, telephone expenses, amortization and maintenance of web site
development costs, contract payments to a third party for procurement data
functionality and a proportion of rent and office expenses. Compensation costs
for sales and marketing personnel are incurred in the month paid while the
revenue is pro-rated over the related subscription period, generally a 12-month
period. Therefore, during quarters with negative gross revenue growth, gross
margins will be positively impacted due to the effect of a smaller pool of sales
commissions being expensed in their entirety during the quarter, whereas sales
from prior quarters with larger gross revenues are being amortized over the
subscription term. For fiscal year 2001, our total cost of revenues, including
stock based compensation of $247,506 was $4,587,664 compared to $8,449,181,
including stock-based compensation of $2,308,440, for fiscal year 2000, a
decrease of $3,861,517, or 46%. As a percent of net revenues, costs of revenues
excluding stock-based compensation, were 79% and 150% for fiscal years 2001 and
2000, respectively. Salesperson compensation as a percentage of gross revenues
was 39% and 45% for fiscal years 2001 and 2000, respectively. Salesperson
compensation as a percentage of gross revenues is starting to trend back
downwards, as renewals, for which the commission rate is substantially lower
than new subscriptions, comprise a greater portion of gross revenues.
The primary reason for the decrease of $1,800,583 in cost of revenues,
excluding stock-based compensation for fiscal year 2001 is a decrease of
$822,297 in commissions to our salespeople. At December 31, 2001 PartsBase
employed 72 persons in sales and customer service as compared to 127 persons at
December 31, 2000. Additionally included in cost of revenues are information
technology costs related to our website which had decreased in 2001 by 308,117
primarily as a result of a decrease in the level of website development
activities.
General and Administrative Expenses
For fiscal years 2001 and 2000, aviation e-commerce general and
administrative expenses, excluding stock-based compensation expense of $72,931
and $1,944,398 respectively, and unallocated corporate general and
administrative expenses of $1,048,075 and $0 respectively, were $5,916,591 and
$8,920,354, respectively; a decrease of 34% and $3,003,763 from the prior year.
General and administrative expenses consisted primarily of personnel costs of
$3,342,017 and $5,577,268, rent expense of $685,664 and $536,769, advertising
costs of $100,364 and $745,685, bad debt expense of $705,413 and $142,254, and
other costs totaling $1,083,133 and $1,918,378 respectively, consisting of rent,
utilities, supplies and other related administrative costs, for the fiscal years
ended 2001 and 2000, respectively.
The decrease in other costs for the fiscal year 2001, compared to the
prior year is primarily attributable to a decrease of $248,073 in amortization
of deferred financing costs. The Company made significant personnel reductions
during 2001. In addition, depending on salary level, all remaining salaried
personnel took a pay reduction, ranging from 5%-30%. The Company expects that
its personnel costs will continue to decrease into 2002. The increase in bad
debt expense compared to the same periods of the prior year relates to the
Company's policy of paying sales commissions upon signing a Company sales order,
rather than upon cash receipt, thereby increasing the probability that sales
orders of lesser quality could be submitted. Although the Company can recover
commissions paid to sales representatives if the customer does not pay, the
32
Company's high turnover has made it difficult to collect on a portion of
subscriptions sold. During the third quarter, the Company significantly
tightened its deal verification processes, and expects that its bad debt expense
will decrease in 2002.
For the fiscal years 2001 and 2000, unallocated corporate general and
administrative expenses, excluding stock-based compensation of $72,931 and
$1,944,398, respectively, were $1,048,075 and $0. Corporate general and
administrative expenses consisted primarily of executive compensation of
$663,599, professional and directors' fees of $ 279,219 and directors' and
officers' liability insurance premiums of $105,257.
At December 31, 2001, we employed 25 persons in administrative,
information technology and executive management positions (inclusive of
corporate positions), compared with 62 persons in such positions at December 31,
2000.
Corporate Litigation and Other Related Costs
Corporate litigation and other related costs of $457,500 and $0 for 2001
and 2000, respectively, consist of a provision for $200,000 to cover incurred
retention costs associated with a class action lawsuit the Company is party to
as well as $257,500, during 2001, to settle or accrue for litigation and other
related costs. As of December 31, 2001, $427,500 had been paid of which $227,500
represented settlement payments and related costs and the remaining $200,000 had
been paid to cover incurred retention costs associated with a class action
lawsuit to which the Company is a defendant.
Stock-Based Compensation
In connection with the issuance of employee stock options issued prior to
our IPO, stock-based compensation expense of $320,437 and $4,252,838 was
recognized in fiscal years 2001 and 2000, respectively, and is classified as a
component of cost of revenue and operating expense (See Note 7 to the
consolidated financial statements). These remaining charges of $1,090 will be
fully recognized by January 2002.
Corporate Other Income, Net
Corporate other income, net consisting primarily of interest and dividend
income was $1,222,480 and $1,762,367 for fiscal years 2001 and 2000,
respectively, a decrease of $539,887 in 2001. The decrease in other income, net
in fiscal year 2001 is attributable to lower cash, cash equivalents and
investments balances and an overall market decline in interest rates on the
Company's investments and cash equivalents.
Net Loss
As a result of the foregoing, the net loss attributable to common
stockholders, inclusive of corporate expenses, decreased to $5,339,456 for
fiscal year 2001 from $13,453,981 for fiscal year 2000. Excluding stock-based
compensation expense in 2001 and 2000 (See Note 7 to the consolidated financial
statements), the net loss attributable to common stockholders for fiscal year
2001 decreased to $5,019,019, compared to $9,201,143 for fiscal year 2000.
33
Comparison of Years Ended December 31, 2000 and 1999
Net Revenues
For fiscal years 2000 and 1999, our net revenues were $4,097,585 and
$362,224, respectively, an increase of $3,735,361 or 1,031%. During fiscal year
2000, we signed up 3,175 new subscribers and renewed 1,285 subscriptions from
existing customers. This compares to 1,952 new subscribers and 26 renewals sold
in fiscal year 1999. The average subscription fee in fiscal year 2000 was $1,411
compared to $899 in fiscal year 1999. The average new subscriber fee increased
in fiscal year 2000 due to additional value added services being provided to our
subscribers, such as government procurement data. At December 31, 2000, we had
4,756 paying subscribers, compared to 1,952 paying subscribers at December 31,
1999. A paid subscriber is defined as a customer whose subscription is currently
active, and therefore, does not include subscribers whose subscriptions have
expired.
For the fiscal years 2000 and 1999, gross revenues were $6,293,834 and
$1,631,855, respectively, an increase of $4,661,979, or 286%. The increase in
gross revenue in fiscal year 2000 is attributable to a larger sales force,
subscription price increases, additional value-added services, and the impact of
renewals on subscriptions sold in 1999.
We recognize subscription, banner advertising and other revenues over the
life of the respective subscription, which is typically 12 months. Gross revenue
represents total subscription and advertising sales made during the period, of
which a portion is deferred and recognized as earned. Net revenues represent
that portion of current and prior year's gross revenues that was earned during
the period. Sales costs, including commissions, are expensed as incurred, and
are included in the cost of revenue. Deferred revenue, net increased to
$3,349,869 at December 31, 2000, compared to $1,263,978 as of December 31, 1999.
The following table sets forth gross revenue by product line for each of
the four quarters in fiscal year 2000, as well as sequential quarter-to-quarter
revenue growth percentage for the second, third, and fourth quarters of fiscal
year 2000.
Gross Revenue by Product Line (000's)
Year Ended December 31, 2000
------------------------------------------------------------------------------------------------------
Three Months Ended Sequential Growth
------------------------------------------- --------------------------------
03/31 06/30 09/30 12/31 2nd Qtr 3rd Qtr 4th Qtr
------ ------ ----- ----- ------- ------- -------
Subscription $1,182 $1,191 $1,607 $2,000 0.1% 34.9% 24.5%
Advertising 128 95 48 20 25.8%) (49.5%) (58.3%)
Other 1 17 5 - 1,600.0% (70.6%) -
----- ----- ----- ----- --------- ------- -------
Total $1,311 $1,303 $1,660 $2,020 0.0% 27.4% 21.7%
===== ===== ===== ===== ========= ======= =======
Cost of Revenues
For fiscal year 2000, our total cost of revenues, including stock-based
compensation of $2,308,440, were $8,449,181 compared to $3,211,671, including
stock-based compensation of $1,799,139, for fiscal year 1999, an increase of
$5,237,510, or 163%. As a percent of sales, costs of revenues, excluding
34
stock-based compensation, were 150% and 390% for fiscal years 2000 and 1999,
respectively. The primary reason for the increase of $4,728,209 in cost of
revenues, excluding stock-based compensation for fiscal year 2000, is an
increase of $2,651,974 in commissions to our salespeople, and information
technology costs totaling $1,023,669 incurred in 2000, which include contract
payments totaling $700,000 to a third party for government procurement data
functionality, that were not incurred in 1999. At December 31, 2000, we employed
127 persons in sales and marketing, compared with 51 in total at December 31,
1999.
General and Administrative Expenses
For fiscal years 2000 and 1999, our operating expenses, including
stock-based compensation expense, were $10,864,752 and $2,192,912, respectively,
an increase of $8,671,840, or 395% from the prior year. General and
administrative expenses consisted primarily of personnel costs of $5,577,268 and
$478,361, advertising costs of $745,685 and $151,195, and other costs totaling
$2,597,401 and $663,535, consisting of professional fees, rent, utilities,
supplies and other related administrative costs, for the fiscal years ended 2000
and 1999, respectively. At December 31, 2000, we employed 62 persons in
administrative, information technology and executive management positions,
compared with 16 persons in such positions at December 31, 1999.
Stock-Based Compensation
In connection with the issuance of employee stock options issued prior to
our IPO, stock-based compensation expense of $4,252,838 and $2,698,960 was
recognized in fiscal years 2000 and 1999, respectively, and is classified as a
component of cost of revenue and operating expense (See Note 7 to the financial
statements).
Other Income (Expense), Net
For fiscal years 2000 and 1999, other income (expense), net was
$1,762,367 and ($870,675), respectively, an increase of $2,633,042 in other
income, net in 2000. The significant increase in other income net, in fiscal
year 2000 is attributable to interest income earned primarily on the proceeds
from our IPO compared to non-cash interest expense related to the issuance of
convertible notes as part of our private placement during the prior year.
Net Loss
As a result of the foregoing, the net loss attributable to common
stockholders increased to $13,453,981 for fiscal year 2000 from $7,815,409 for
fiscal year 1999. Excluding stock-based compensation expense in 2000 and 1999
and the value of the preferred stock beneficial conversion feature in 1999 (See
Note 7 to the consolidated financial statements), the net loss attributable to
common stockholders for fiscal year 2000 decreased to $9,201,143, compared to
$3,214,074 for fiscal year 1999.
35
The Nurse Staffing Business
Results of Operations
Comparison of Years Ended December 31, 2001 and 2000
Net Revenues
We commenced our nurse staffing operations on October 1, 2001 and through
December 31, 2001 earned $98,296 in net revenues from the placement of our
registered nurse employees working as supplemental nursing staff in hospitals in
Palm Beach County and Broward County, Florida. Approximately 40% of these
revenues were derived from two hospitals.
Cost of Revenues
Cost of revenues consists of compensation for our registered nurse
employees, uniforms and costs incurred in the recruitment of qualified
professional healthcare professionals. For the three months ended December 31,
2001 our total cost of revenues totaled $111,473 or 113% of net revenues.
Registered nurse compensation as a percentage of cost of revenues totaled 86%
for the three months ended December 31, 2001.
General and Administrative Expenses
For the three months ended December 31, 2001, general and administrative
expenses totaled $259,600. General and administrative expenses consisted
primarily of personnel costs of $176,180, advertising costs for the recruitment
of qualified registered nurses of $27,639 and other costs totaling $55,781,
consisting of rent, marketing expenses, phone and utilities, supplies and other
related administrative costs. At December 31, 2001, we employed seven persons in
administrative, and executive management positions in our nurse staffing
operations.
Net Loss
As a result of the foregoing, the net loss incurred during the three
months ended December 31, 2001 totaled $272,777.
Financial Condition
For fiscal years 2001 and 2000, the Company had $23,851,593 and
$23,045,491 of cash and cash equivalents, $900,073 and $7,139,052 of current
investments at amortized cost, and $1,070,000 and $500,000 of restricted cash
invested in certificates of deposit respectively. At December 31, 2001, we had
working capital of $22,762,318. The decrease in current investments at amortized
costs is attributable to our use of cash to fund operations of both of our
business segments and the repurchase of our common stock. During the fiscal year
ended December 31, 2001, we repurchased 538,120 shares of our common stock on
the open market at an aggregate purchase price of $795,544, inclusive of
brokerage fees. All of these shares were retired as of December 31, 2001.
We believe that our existing cash and cash equivalents and marketable
securities will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next twelve months. Our future
36
long-term capital needs will depend significantly on the rate of growth of our
businesses, the timing of extended service offerings, the success of these
services once they are launched as well as the extent to which we engage in
acquisitions or investments. Any projections of future long-term cash needs and
cash flows are subject to substantial uncertainty. We may need to raise
additional funds in future periods through public or private financings, or
other arrangements. Any additional financings, if needed, might not be available
on reasonable terms or at all. Failure to raise capital when needed could harm
our business, financial condition and results of operations. In addition, such a
failure to raise needed capital could impair our future plans to expand our
e-marketplace, attract new members, provide new and upgrade current services to
our members and expand the operations of our supplemental nurse staffing agency
either through internal growth or acquisition. If additional funds are raised
through the issuance of equity securities, additional dilution to existing
shareholders could result. In addition, any equity securities issued might have
rights, preferences or privileges senior to our common stock.
Cash Flows
Net cash flows used in operating activities were $4,616,561, $7,844,219,
and $596,498 for fiscal years 2001, 2000, and 1999, respectively. The decrease
in net cash used in operating activities for fiscal year 2001 was primarily the
result of decreased expenditures for sales and marketing, information
technology, and general and administrative expenses to coincide with the
Company's streamlining of operations. The increase in net cash used in operating
activities for fiscal year 2000 was primarily the result of increased
expenditures for sales, marketing, information technology and general and
administrative expenses to coincide with the Company's building critical mass of
its operations.
Net cash flows provided by (used in) investing activities were
$6,039,281, ($10,592,615), and ($1,238,124) for fiscal years 2001, 2000, and
1999, respectively. The decrease in net cash used in investing activities for
fiscal year 2001 includes the maturity of investment securities totaling
$6,918,743, as compared to the purchase of $7,643,140 of investment securities
in 2000 and a decrease in expenditures resulting from purchases of personal
property and equipment for the new facility, including computer hardware and
software commensurate with the streamlining of operations in 2001 as compared to
an increase in expenditures for personal property and equipment for the former
corporate headquarters, including computer hardware and software.
Net cash flows (used in) provided by financing activities were
($616,618), $40,747,049, and $2,569,898 for fiscal years 2001, 2000, and 1999,
respectively. The increase in net cash used in financing activities for fiscal
year 2001 is primarily the result of the repurchase of 538,120 shares of the
Company's common stock for $795,544 as opposed to net proceeds of $40,881,000
received by PartsBase in connection with the issuance of common stock related to
the Company's IPO, offset by the purchase for treasury of 136,685 shares of our
common stock, totaling $330,202.
New Accounting Guidance
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
37
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows for a derivative's gains and losses to
offset related results on the hedged item in the statement of operations and
requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting treatment. The
Company adopted the provisions of SFAS No. 133, as amended by SFAS No. 138, in
the first quarter of 2001 and its adoption had no impact to its consolidated
financial statements.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
completed after June 30, 2001. SFAS No. 141 also specifies criteria that
intangible assets acquired in a purchase method business combination must meet
to be recognized and reported apart from goodwill. SFAS No. 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least annually on a basis set
forth in SFAS No. 142, and that intangible assets with estimatable useful lives
be amortized over their respective useful lives to their estimated residual
values, and reviewed for impairment. The Company adopted the provisions of SFAS
No. 141 and SFAS No. 142 on January 1, 2002. Adoption of these two standards is
not expected to have a material effect on the Company's results of operations or
financial position.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations", which addresses financial accounting and reporting for
legal obligations associated with the retirement of tangible long-lived assets
that result from acquisition, construction, development, and/or normal use of
the asset, and the associated asset retirement cost. SFAS No. 143 requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of fair value can
be made. The fair value of the liability is added to the carrying amount of the
related asset and depreciated over the life of the asset. The liability is
accreted each period through charges to operating expense. If the obligation is
settled for other than the carrying amount of the liability, the Company will
recognize a gain or loss on settlement. The Company is required and plans to
adopt the provisions of SFAS No. 143 for the quarter ending March 31, 2002. The
adoption of SFAS No. 143 is not expected to have a material effect on the
Company's financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of a Disposal of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
the disposal of a segment of a business. This statement also amends ARB No. 51,
"Consolidated Financial Statements," to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. SFAS No. 144 is
effective for the fiscal year ending December 31, 2002, and the interim periods
within fiscal 2002, with early application encouraged. The provisions of this
statement generally are to be applied prospectively. The Company is currently
evaluating whether adoption of SFAS No. 144 will have a material effect on its
financial position or results of operations.
Critical Accounting Policies
The Company's critical accounting policies, including the assumptions and
judgements underlying them, are disclosed in the Notes to the Consolidated
Financial Statements. These policies have been consistently applied in all
material respects and addresses such matters as principles of consolidation,
revenue recognition, concentration of credit risk, accounting for stock based
compensation and investments. While the estimates and judgements associated with
the application of these policies may be affected by different assumptions and
conditions, the Company believes the judgements associated with the reported
amounts are appropriate under the circumstances.
38
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to the impact of interest rate changes.
Interest Rate Risk
The primary objective of our investment activities is to preserve
principal while at the same time maximizing yields without significantly
increasing risk. At December 31, 2001, our portfolio consisted of investments in
institutional money market funds and "A" rated or higher corporate bonds (See
Note 3 to the consolidated financial statements). Our investment policy is
focused on ensuring that we have liquid cash balances available to meet our
day-to-day operating cash needs. The policy establishes guidelines for the
investment of surplus cash balances that will maximize return with minimum
credit and liquidity risk. All investments are held in U.S. dollars. Specific
instruments approved for inclusion in the portfolio are limited to: obligations
issued by the U.S. Treasury and U.S. Federal Agencies, obligations of U.S.
commercial banks such as bankers' acceptances and certificates of deposits and
obligations of major corporations and bank holding companies such as direct
issue commercial paper, investment grade bond funds and medium term notes.
We intend to hold our investments until maturity; however, we are exposed
to the impact of interest rate changes and change in the market values of our
investments. Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may have
their fair market value adversely impacted due to a rise in interest rates,
while floating rate securities may produce less income than expected if interest
rates fall. Due in part to these factors, our future investment income may fall
short of expectations due to changes in interest rates or we may suffer losses
in principal if forced to sell securities that have an other than temporary
decline in market value due to changes in interest rates or other factors.
Foreign Exchange Risk
We have minimal exposure to foreign exchange risk as all of our sales to
customers outside of the United States are collected in U.S. dollars.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For information required by Item 8, refer to "PartsBase, Inc.
Consolidated Financial Information" filed as part of this Report in Annex I.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
None.
39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
At December 31, 2001 our executive officers were as follows:
NAME AGE POSITION
--------------------- --- -----------------------------------
Robert A. Hammond, Jr. 47 Chairman of the Board of Directors,
President, Chief Executive Officer,
Secretary and Treasurer
Mark J. Weicher 50 Chief Financial Officer
Brian Tolley 26 Chief Information Officer
Robert A. Hammond, Jr. Mr. Hammond has served as our President, Chief
Executive Officer, Chairman, Secretary and Treasurer since our incorporation in
April 1999. In April 1996, Mr. Hammond founded our predecessor as a division of
Aviation Laboratories, Inc., a company for which he also served as Chief
Executive Officer from its inception in August 1985. From August 1985 until June
1999, Mr. Hammond was the Chief Executive Officer and Chairman of Great Pines
Water Company, a publicly traded bottled water company that was sold to Suntory
Bottled Water Group in June 1999.
Mark J. Weicher. Mr. Weicher has served as our Chief Financial Officer
since August 2001 and joined us in March 2001. From September 2000 through
February 2001, Mr. Weicher served as an independent business consultant. From
February 1999 through August 2000, Mr. Weicher served as Chief Financial Officer
of Site2shop.com, Inc. a multi media company engaged in marketing various
consumer products through its self produced television programs print media and
internet and television programs designed to educate the general public
regarding various trends and general information. Mr. Weicher served as Chief
Financial Officer of Computer Access International, Inc., a refurbisher of
trailing technology and peripherals from January 1997 through January 1999. Mr.
Weicher is a Certified Public Accountant and received his Bachelor of Science in
accounting from Brooklyn College.
Brian Tolley. Mr. Tolley joined us as Chief Information Officer in
September 2000. Prior to joining us, Mr. Tolley served as the Vice President of
Advanced Technology for Precision Response Corporation, Prcnet.com, a company
engaged in providing telephone and internet based customer service and marketing
services on an outsourced basis to large corporations. Prior to his tenure with
Prcnet.com, Mr. Tolley served as the Director of Software Development for
Mortgage Banking System, Inc.
Board Committees
We have established an audit committee and a compensation committee. The
audit committee, the current members of which are Pierre Narath, Thomas Van Hare
and Charles Menefee, recommends to the board of directors the independent
certified public accountants to be selected to audit our annual financial
statements and approves any special assignments given to those accountants. The
audit committee also reviews the planned scope of the annual audit, the
independent accountants' letter of comments and management's response thereto
regarding any major accounting changes made or contemplated and the
40
effectiveness and efficiency of our internal accounting staff. The compensation
committee, the current members of which are Robert A. Hammond, Jr., Pierre
Narath, Thomas Van Hare and Edward McCartin makes recommendations to the board
of directors regarding the compensation payable to our executive officers,
reviews general policies relating to the compensation and benefits of our
employees and administers the PartsBase, Inc. 1999 stock option plan and 2001
stock plan.
Compensation Committee Interlocks and Insider Participation
The compensation committee is responsible for determining salaries,
incentives and other forms of compensation for our directors and other employees
and administering other various compensation and benefit plans. The compensation
committee met once in 2001 but did not meet in 2000. Our board of directors was
responsible for these matters in 2000. As of March 21, 2002, our board of
directors consists of Messrs. Robert A. Hammond, Jr., Thomas Van Hare, Pierre
Narath, Charles Menefee, Edward McCartin and Kenneth Corriea. Mr. Hammond
participates in all discussions and decisions regarding salaries and incentive
compensation for all employees and consultants of PartsBase, Inc., except that
he is excluded from discussions regarding his own salary and incentive
compensation. Other than Mr. Hammond, no current board member has at any time
been an officer or employee of PartsBase, Inc. No interlocking relationships
exist between any member of our board of directors and any other company's board
of directors or compensation committee. No interlocking relationship existed
between any member of our board of directors and any member of any other
company's board of directors or compensation committee in 2000.
Director Compensation
Since inception until June 19, 2001, no board member had received any
cash compensation for his services as a director. At the March 16, 2001 board of
directors meeting, we granted to Mr. Narath the option to acquire 20,000 shares
of our common stock at an exercise price of $3.00 per share at any time through
March 2011. At the June 20, 2001 board of directors meeting, we granted each non
employee director an annual stipend of $10,000 payable quarterly; in the event
the board of directors shall meet in excess of four times annually, each non
employee director shall be paid $2,500 for each meeting attended in person and
$1,250 for each meeting attended by phone for each incremental meeting. The
board of directors subsequently amended the stipend policy retroactive to June
20, 2001 so that each non employee director shall be paid $2,500 per quarter if
at least one meeting per quarter is attended in person and $1,250 per quarter if
at least one meeting is attended by phone provided that at least one meeting is
held per quarter.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, requires the
Company's directors, certain officers and beneficial owners of more than 10% of
our common stock (collectively, "Reporting Persons") to file reports of
securities ownership and changes in such ownership with the SEC. Reporting
Persons are required by the SEC to furnish the Company with copies of all
Section 16(a) forms they file.
Based solely on its review of the copies of such forms received or
written representations from the Reporting Persons, the Company believes that
with respect to the year ended December 31, 2001, all Reporting Persons complied
with all applicable reporting requirements under Section 16(a) of the Securities
Exchange Act of 1934.
41
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
from PartsBase which was paid to PartsBase's Chief Executive Officer and the
four other most highly compensated executive officers during the years ended
December 31, 2001, 2000, and 1999.
Summary Compensation Table
---------------------------------------------------------------------------------------------------
Long Term Compensation Awards
----------------------------------
Annual Compensation Payouts
------------------------------- --------
Securities
Other Under
Annual Restricted lying All Other
Name and Compen- Stock Options/ LTIP Compen-
Principal Position Year Salary Bonus sation (1) Awards SARS Payouts sation
--------------------------- ---- --------- -------- ---------- ---------- ---------- ------- ---------
Robert Hammond, President, 2001 $ 226,126 $ -- $ 42,187 $ -- 150,000 $ -- $ --
Chief Executive Officer and 2000 $ 227,778 $ -- $ 18,829 $ -- -- $ -- $ --
Chairman of the Board (2) 1999 $ 81,250 $ -- $ 52 $ -- -- $ -- $ --
Brian Tolley, Chief 2001 $ 135,341 $ -- $ 6,160 $ -- 45,000 $ -- $ --
Information Officer (3) 2000 $ 53,750 $ -- $ 26 $ - 35,000 $ -- $ --
1999 $ -- $ -- $ -- $ -- -- $ -- $ --
Mark Weicher, Chief 2001 $ 41,250 $ -- $ -- $ -- 18,000 $ -- $ --
Financial Officer (4) 2000 $ -- $ -- $ -- $ -- -- $ -- $ --
1999 $ -- $ -- $ -- $ -- -- $ -- $ --
Michael Siegel, Chief 2001 $ 127,210 $ -- $ 5,841 $ -- 76,000 $ -- $ --
Financial Officer (5) 2000 $ 160,189 $ 30,000 $ 8,666 $ -- 75,000 $ -- $ --
1999 $ -- $ -- $ -- $ -- -- $ -- $ --
_______________________________________
(1) Unless otherwise noted, other annual compensation represents the annual premium for term life insurance
for the above executives with coverage ranging from $25,000 to $100,000.
(2) Other annual compensation in 2001 includes lease and insurance payments of $26,908 on two vehicles paid
by the Company; one of which was sold in October 2001 to an unaffiliated third party net of aggregate
unpaid lease payments due of $9,631. Additionally, Mr. Hammond has the use of two automobiles
purchased by the Company in 2001 at an aggregate cost of $131,583 Also included in 2001 other annual
compensation is an unaccountable expense allowance of $13,047. The Company was the owner and
beneficiary of a $2,000,000 key man life insurance policy on Mr. Hammond. The premium for fiscal year
2000 was $3,935; the policy was cancelled in 2001.
(3) Other annual compensation in 2001 includes a car allowance of $6,000 in 2001. Mr. Tolley joined the
Company on August 16, 2000.
(4) Mr. Weicher joined the Company in March 2001 and was named Chief Financial Officer in August 2001.
(5) Mr. Siegel joined the Company on January 20, 2000 and received a $30,000 signing bonus paid upon
acceptance of employment. Other annual compensation includes a car allowance of $5,625 in 2001 and
$8,523 in 2000. Mr. Siegel resigned from the Company on August 16, 2001.
42
Stock Options
The following table sets forth information concerning the grant of stock
options to each of the named officers in fiscal year 2001.
Option /SAR Grants in Last Fiscal Year
-------------------------------------------------------------------------------------------------------
Individual Grants
---------------------------------------------------------------
Potential Realizable
Number of Percentage of Total Value at Assumed Annual
Securities Options/SARs Rates of Stock Price
Underlying Granted to Exercise or Appreciation for
Options/SARs Employees in Base Price Expiration Optional Term (3)
Name Granted (1) Fiscal Year 2001 ($/Sh) Date 5% ($) 10% ($)
---------------- ----------- ------------------- ----------- ---------- ---------- ----------
Robert Hammond 150,000 19.67 $ 2.00 06/20/11 -- --
Brian Tolley 45,000 5.90 $ 2.00 06/20/11 -- --
Mark Weicher 18,000 2.36 $ 2.00 06/20/11 -- --
Michael Siegel (2) 76,000 7.83 $ 2.00 06/20/11 -- --
-------------------------------------
(1) All options granted under our 1999 Stock Option Plan were in consideration of salary reductions by the
respective officers, with the exception of Mr. Hammond. The shares underlying the options become
exercisable ratably over 12 months from June 20, 2001, the date of grant.
(2) Mr. Siegel resigned from the Company on August 16, 2001, however his options continue to vest in
consideration for him waiving any entitlements he may have had to severance payments and as compensation
for consulting services rendered since his departure from the Company regarding financial matters
pertaining to the Company and services to be rendered relative to the Company's outstanding litigation
which commenced during his tenure.
(3) On June 20, 2001, the date of grant, the closing market price of the Company's shares of common stock
was $1.05.
The following table sets forth certain summary information concerning
exercised and unexercised options to purchase shares of our common stock as of
December 31, 2001 held by the named executive officers.
Aggregated Option Exercises in Last Fiscal Year And Year-endn Option Values
---------------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options at
Acquired on Value Options at Fiscal Year End Fiscal Year-End
Name Exercise (#) Realized Exercisable/Unexercisable Excersiable/Unexercisable (1)
------------------ ------------ -------- --------------------------- -----------------------------
Robert Hammond 0 N/A 87,497/62,503 $ 0 / $ 0
Brian Tolley 0 N/A 38,643/41,357 $ 0 / $ 0
Mark Weicher 0 N/A 10,500/7,500 $ 0 / $ 0
Michael Siegel 40,618 $45,492 75,628/34,804 $ 3,125 / $ 314
-----------------------------------
(1) The difference between the average of the high and low bid prices per share of the common stock as
reported by the NASDAQ National Market on December 31, 2001, and the exercise or base price.
N/A Not applicable.
Employment Agreements and Arrangements
In November 1999 and September 2000, we entered into employment
agreements with Messrs. Hammond, Jr., and Tolley, respectively. The employment
contracts have initial terms of two years but shall be renewed for successive
two-year periods unless earlier terminated. The agreements may be terminated by
us or the employee, with or without cause, upon 30 days prior written notice.
The base salaries of each executive officer may be increased at the discretion
of the board of directors or the compensation committee of the board of
43
directors. In addition to base salaries, each of the executives is entitled to
three weeks vacation, reimbursement of business expenses and may, at our
expense, participate along with his spouse and dependents in any medical or
other insurance plan maintained by us for salaried employees. The Company leases
one automobile for Mr. Hammond, Jr. and he has the use of two Company owned
automobiles. Mr. Tolley receives monthly car allowances of $500: Mr. Siegel
formerly received a monthly car allowance of $750. Each of the employment
agreements contain non-compete covenants that prohibit the employee from
directly or indirectly participating in business in competition with us
following termination of his employment for a period of two years. Pursuant to
the terms of his employment agreement, Mr. Siegel was entitled to receive a
severance payment equal to six month's salary in the event of a termination of
his employment for any reason other than cause, as defined in his employment
agreement. At the time of his resignation, Mr. Siegel waived his severance
payment entitlement in consideration of continued vesting rights in all option
grants received as of the date of his resignation and the Company waiving the
forfeiture provisions of such grants. Additionally, Mr. Siegel agreed to make
himself available as needed in conjunction with any financial matters or
outstanding litigation matters which may have arisen during his tenure as Chief
Financial Officer.
Employee Benefit Plans
In November 1999, we adopted the PartsBase.com, Inc. 1999 Stock Option
Plan for the purpose of promoting our long-term growth and profitability by
providing key people with incentives to improve stockholder value and contribute
to our growth and financial success.
The Stock Option Plan provides for the award to eligible participants,
including employees, officers, directors and consultants, of stock options
including non-qualified options and incentive stock options under Section 422 of
the Internal Revenue Service Code. Under the stock option plan, 2,000,000 shares
of common stock are reserved for issuance. The 1999 Stock Option Plan will
terminate on September 30, 2008 unless extended by our board of directors and,
to the extent required under applicable law, our stockholders. The 1999 Stock
Option Plan may be amended or terminated by our board of directors at any time
provided that our shareholders must approve any significant amendments.
As of the date of this annual report, non-qualified options to purchase a
total of 682,292 shares of common stock were outstanding under our 1999 Stock
Option Plan at exercise prices ranging from $0.63 to $6.38.
At the Company's Annual Meeting of Stockholders held on June 20, 2001,
the stockholders adopted the PartsBase, Inc. 2001 Stock Plan for the purpose of
promoting our long-term growth and profitability by providing key people with
incentives to improve stockholder value and contribute to our growth and
financial success.
The 2001 Stock Plan provides for the award to eligible participants,
including employees, officers, directors and consultants, of stock options
including non-qualified options and incentive stock options under Section 422 of
the Internal Revenue Service Code as well as stock grants. Under the Stock Plan,
1,000,000 shares of common stock are reserved for issuance. The 2001 Stock Plan
may be amended or terminated by our board of directors at any time provided that
our shareholders must approve any significant amendments.
44
As of the date of this annual report, no options to purchase shares of
common stock and no shares of common stock have been granted or shares issued
under the 2001 Stock Plan.
Both the 1999 Stock Option Plan and the 2001 Stock Plan are administered
by our by the compensation committee of our board of directors (the
"Committee"). The Committee selects participants and establishes the terms and
conditions of each option, stock or other rights granted under the plans,
including the exercise price, the number of shares subject to options, or other
equity rights and the time at which the options become exercisable and the
number of shares. The exercise price of all "incentive stock options" within the
meaning of Section 422 of the Internal Revenue Service Code, granted under the
stock option plan must be equal to 100% to the fair market value of the option
shares on the date of the grant. The term of any incentive stock option granted
under the stock option plan may not exceed ten years; however, where the
eligible stock option plan participant owns over 10% of the total combined
voting power of all classes of our stock, the exercise price must be at least
equal to 110% of the fair market value of the option shares on the date of the
grant and the term can not exceed five years.
To the extent required to comply with Rule 16b-3 under the Exchange Act,
if applicable, and in any event in the case of an incentive stock option, no
award granted under the stock option plan is transferable by a grantee otherwise
than by will or by laws of descent and distribution. Other terms and conditions
of each award are set forth in the grant agreement governing the award and
determined by the Committee as administrators of the stock option plan.
Limitations on Liability of Directors and Indemnification of Directors and
Officers
As permitted by the Delaware General Corporation Law, we have included in
our articles of incorporation, a provision to eliminate the personal liability
of our directors for monetary damages for breach or alleged breach of their
fiduciary duties as directors, subject to exceptions. In addition, both of our
articles of incorporation and our bylaws provide that we are required to
indemnify our officers and directors, and we are required to pay for, and may
advance, expenses for our officers and directors as incurred in connection with
proceedings against them for which they may be indemnified. We have entered into
indemnification agreements with our officers and directors containing provisions
that are in some respects broader than specific indemnification provisions
contained in the Delaware General Corporation Law. The indemnification
agreements require us, among other things, to indemnify our officers and
directors against liabilities that may arise by reason of their status or
service as officers and directors, other than liabilities arising from willful
misconduct of a culpable nature, to pay for their expenses incurred as a result
of any proceeding against them as to which they could be indemnified, and to
obtain directors' and officers' insurance if available on reasonable terms. We
have also obtained directors' and officers' liability insurance.
Except as noted in Item 3- Legal Proceedings of this annual report, we
are not aware of any other pending or threatened litigation or proceeding
involving a director, officer, employee or agent of ours in which
indemnification would be required or permitted. We are not aware of any other
threatened litigation or proceedings that might result in a claim for
indemnification. We believe that our charter provisions and indemnification
agreements are necessary to attract and retain qualified persons as directors
and officers.
45
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding shares of our common
stock beneficially owned as of March 26, 2002:
o Each person or group known to us that beneficially owns more than five
percent of our outstanding common stock;
o Our directors and the named executive officers listed in the Summary
Compensation Table; and - all of our executive officers and directors as
a group.
Beneficial ownership is calculated in accordance with Rule 13d-3(d) under
the Securities Exchange Act of 1934. Shares of common stock subject to options
and warrants that are currently exercisable or are exercisable within 60 days of
March 26, 2002 are deemed outstanding with respect to the person holding those
options but are not deemed outstanding for purposes of computing the percentage
ownership of any other person. We believe each person named in the table has
sole voting and investment power with respect to the shares identified as
beneficially owned by them.
Name and Address (1) Number Percent
--------------------- ----------- -------
Robert A. Hammond, Jr. 9,150,000 (2) 64.77
Thomas Van Hare 10,000 (3) *
Pierre A. Narath (4) 60,000 (5) *
Michael W. Siegel 151,000 (6) 1.07
Brian Tolley 61,039 (3) *
Mark Weicher 18,000 (3) *
Charles Menefee 0 0.00
Edward McCartin 0 0.00
Kenneth Corriea 0 0.00
All directors and executive
officers as group (9 persons) 9,450,039 65.87
------------------------------
* Represents less than 1% of the outstanding common stock.
(1) Except as otherwise indicated, the business address of each person listed is
c/o PartsBase.com, Inc., 905 Clint Moore Road, Boca Raton, Florida 33487.
(2) Includes 4,500,000 shares owned by Mr. Hammond individually and 4,500,000
shares owned by R. Hammond, L.P., a limited partnership of which Mr. Hammond
is the sole general partner and of which a trust established for the benefit
of Mr. Hammond's children is a 99% limited partner.
(3) Consists of shares underlying stock options that are currently exercisable
or will become exercisable within 60 days following March 22, 2002.
(4) Mr. Narath's address is 1538 Turnpike Street, North Andover, Massachusetts
01845.
(5) Consists of 40,000 shares of our common stock owned by Metro Investments, a
company controlled by Mr.Narath, and 20,000 shares underlying stock options
that are currently exercisable or will become exercisable within 60 days
following March 22, 2002. Excludes 260,000 shares of common stock owned by
Touchstone Software Corp., a company of which Mr. Narath is an officer,
director and significant stockholder. Mr. Narath has no voting or
dispositive powers regarding these shares.
(6) Consists of 40,618 shares of common stock owned and 110,382 shares
underlying stock options that are currently exercisable or will become
exercisable within 60 days following March 22, 2002. Mr. Siegel resigned
from the Company on August 16, 2001.
46
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
47
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this Report:
1. Financial Statements
Index to Financial Statements in Annex I
2. Financial Statement Schedules:
All schedules have been omitted because they are inapplicable,
not required, or the information is included elsewhere in the
Financial Statements or Notes thereto.
Exhibits:
See Exhibit Index. The Exhibits listed in the accompanying
Exhibit Index are filed or incorporated by reference as part of
this report.
(b) Reports on Form 8-K:
None.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
By: /S/ Robert A. Hammond, Jr.
---------------------------
Robert A. Hammond, Jr.
President, Chief Executive Officer,
and Chairman
Date: March 27, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 27, 2002 /S/ Robert A. Hammond, Jr.
---------------------------
Robert A. Hammond, Jr.
President, Chief Executive Officer,
Secretary, Treasurer and Chairman
(Principal Executive Officer)
Date: March 27, 2002 /S/ Mark J. Weicher
--------------------
Mark J. Weicher
Chief Financial Officer
(Principal Financial Accounting Officer)
Date: March 27, 2002 /S/ Pierre Narath
-------------------
Pierre Narath
Director
Date: March 27, 2002 /S/ Thomas Van Hare
---------------------
Thomas Van Hare
Director
Date: March 27, 2002 /S/ Charles Menefee
---------------------
Charles Menefee
Director
Date: March 27, 2002 /S/ Edward McCartin
---------------------
Edward McCartin
Director
Date: March 27, 2002 /S/ Kenneth Corriea
---------------------
Kenneth Corriea
Director
49
ANNEX I
PARTSBASE, INC. (formerly PARTSBASE.COM, INC.) AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report ..............................................F-2
Consolidated Balance Sheets as of December 31, 2001 and 2000...............F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2001, 2000 and 1999..........................................F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2001, 2000 and 1999......................................F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999 .........................................F-6
Notes to Consolidated Financial Statements.................................F-7
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
PartsBase, Inc.
Boca Raton, Florida
We have audited the accompanying consolidated balance sheets of PartsBase, Inc.
(formerly PartsBase.com, Inc.) and subsidiary (the "Company") as of December 31,
2001 and 2000, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2001
and 2000, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte and Touche LLP
Certified Public Accountants
Fort Lauderdale, Florida
March 15, 2002
F-2
PARTSBASE, INC. (formerly PARTSBASE.COM, INC.) AND SUBSIDIARY
Consolidated Balance Sheets
December 31,
-----------------------------------------
ASSETS 2001 2000
-------------------- --------------------
Current assets:
Cash and cash equivalents $ 23,851,593 $ 23,045,491
Accounts receivable, net 403,969 1,641,092
Investments, at amortized cost 900,073 7,139,052
Prepaid expenses and other current assets 330,966 671,221
------------- -------------
Total current assets 25,486,601 32,496,856
Property and equipment, net 2,570,330 3,655,310
Certificates of deposit - restricted cash 1,070,000 500,000
Other assets 36,839 629,387
------------- -------------
Total assets $ 29,163,770 $ 37,281,553
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 87,060 $ 1,075,032
Accrued expenses and other current liabilities 406,147 419,696
Deferred revenue, net 2,231,076 3,349,869
------------- -------------
Total current liabilities 2,724,283 4,844,597
Other liabilities -- 89,055
------------- -------------
Total liabilities 2,724,283 4,933,652
Commitments and contingencies (Note 6) -- --
Stockholders' equity:
Preferred stock, $0.001 par value in 2001 and no par value in
2000; 2,000,000 shares authorized, 0 shares issued and outstanding
in 2001 and 2000 -- --
Common stock, $0.001 par value in 2001 and no par value in 2000
(Note 7); 30,000,000 shares authorized, issued and outstanding
14,003,620 in 2001 and 14,255,480 in 2000 14,004 --
Additional paid-in capital 53,255,465 55,478,819
Treasury stock, 0 shares in 2001 and 136,685 shares in 2000
at cost -- (330,202)
Accumulated deficit (26,828,892) (21,216,659)
Unearned compensation (1,090) (1,584,057)
------------- -------------
Total stockholders' equity 26,439,487 32,347,901
------------- -------------
Total liabilities and stockholders' equity $ 29,163,770 $ 37,281,553
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
F-3
PARTSBASE, INC. (formerly PARTSBASE.COM, INC.) AND SUBSIDIARY
Consolidated Statements of Operations
Year Ended December 31,
-----------------------------------------------------
2001 2000 1999
---------------- ------------------- ----------------
Net revenues $ 5,619,121 $ 4,097,585 $ 362,224
Cost of revenues 4,451,631 6,140,741 1,412,532
Stock-based compensation expense 247,506 2,308,440 1,799,139
------------ ------------ -----------
Total cost of revenues 4,699,137 8,449,181 3,211,671
------------ ------------ -----------
Gross profit (loss) 919,984 (4,351,596) (2,849,447)
Operating expenses:
General and administrative expenses 7,224,266 8,920,354 1,293,091
Stock-based compensation expense 72,931 1,944,398 899,821
Litigation and other related costs 457,500 -- --
------------ ------------ -----------
Total operating expenses 7,754,697 10,864,752 2,192,912
------------ ------------ -----------
Operating loss (6,834,713) (15,216,348) (5,042,359)
Other income (expense), net 1,222,480 1,762,367 (870,675)
------------ ------------ -----------
Net loss before value of preferred stock beneficial
conversion feature (5,612,233) (13,453,981) (5,913,034)
Value of preferred stock beneficial conversion feature -- -- (1,902,375)
------------ ------------ -----------
Net loss attributable to common shareholders $ (5,612,233) $ (13,453,981) $ (7,815,409)
============ ============= ============
Basic and diluted net loss per common share $ (0.40) $ (1.03) $ (0.84)
============ ============= ============
Weighted average common shares outstanding 14,108,895 13,053,755 9,251,250
============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
F-4
PARTSBASE, INC. (formerly PARTSBASE.COM, INC.) AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 2001, 2000, and 1999
PREFERRED STOCK COMMON STOCK TREASURY STOCK ADDITIONAL
------------------------- -------------------- --------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ------------- ----------- -------- --------- ------------ ---------------
Balance, December 31, 1998 $ 392,615
Net loss (January 1-April 26,
1999)
Contribution from parent 22,659
Reorganization (464,390)
Common stock issued 9,000,000
Restricted stock issued 1,075,250 5,859,383
Preferred stock issued 855,000 $ 1,902,375 1,902,375
Exchange of restricted stock
for stock options (824,000) 3,531,441
Unearned compensation related
to stock options 1,084,414
Recognition of unearned
compensation
Beneficial conversion feature
of convertible notes 850,000
Warrants issued 2,000,000
Net loss (April 27-
December 31, 1999)
--------- ------------ ----------- -------- --------- ------------ -------------
Balance, December 31, 1999. 855,000 1,902,375 9,251,250 -- -- -- 15,178,497
Common stock issued 3,500,000 40,710,595
Conversion of convertible
preferred stock (855,000) (1,902,375) 855,000 1,902,375
Conversion of convertible
notes 481,250 (569,516)
Unearned compensation related
to stock options 1,206,153
Recognition of unearned
compensation
Reverse unearned compensation
due to forfeited non-vested
options (3,145,536)
Employee non-qualified stock
options exercised 304,665 196,251
Purchases of treasury stock (136,685) (136,685) $ (330,202)
Net loss
--------- ------------ ----------- -------- --------- ------------ -------------
Balance, December 31, 2000 -- -- 14,255,480 -- (136,685) (330,202) 55,478,819
Recognition of unearned
compensation
Reverse unearned compensation
due to forfeited non-vested
options (1,124,795)
Employee non-qualified stock
options exercised 286,260 178,926
Purchases of treasury stock (538,120) (538,120) (795,544)
Retirement of treasury stock 674,805 1,125,746 (1,125,746)
Reincorporation at $0.001
par value $ 14,004 (14,004)
Revaluation of non-vested
options (137,735)
Net loss
--------- ------------ ----------- -------- --------- ------------ -------------
Balance, December 31, 2001 -- $ -- 14,003,620 $ 14,004 -- $ -- $ 53,255,465
========= =========== =========== ======= ========= =========== ============
The accompanying notes are an integral part of these consolidated financial statements.
F-5
PARTSBASE, INC. (formerly PARTSBASE.COM, INC.) AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity- Continued
For the Years Ended December 31, 2001, 2000, and 1999
TOTAL
DIVISIONAL STOCKHOLDERS'
UNEARNED ACCUMULATED EQUITY EQUITY
COMPENSATION DEFICIT (DEFICIENCY) (DEFICIENCY)
------------- -------------- ------------ ---------------
Balance, December 31, 1998 $ (411,659) $ (19,044)
Net loss (January 1-April 26,
1999) (52,731) (52,731)
Contribution from parent 22,659
Reorganization 464,390 --
Common stock issued --
Restricted stock issued $ (5,859,383) --
Preferred stock issued $ (1,902,375) 1,902,375
Exchange of restricted stock
for stock options (3,531,441) --
Unearned compensation related
to stock options (1,084,414) --
Recognition of unearned
compensation 2,698,960 2,698,960
Beneficial conversion feature
of convertible notes 850,000
Warrants issued 2,000,000
Net loss (April 27-
December 31, 1999) (5,860,303) (5,860,303)
------------- -------------- ---------- --------------
Balance, December 31, 1999. (7,776,278) (7,762,678) -- 1,541,916
Common stock issued 40,710,595
Conversion of convertible
preferred stock --
Conversion of convertible
notes (569,516)
Unearned compensation related
to stock options (1,206,153) --
Recognition of unearned
compensation 4,252,838 4,252,838
Reverse unearned compensation
due to forfeited non-vested
options 3,145,536 --
Employee non-qualified stock
options exercised 196,251
Purchases of treasury stock (330,202)
Net loss (13,453,981) (13,453,981)
------------- -------------- ---------- --------------
Balance, December 31, 2000 (1,584,057) (21,216,659) -- 32,347,901
Recognition of unearned
compensation 320,437 320,437
Reverse unearned compensation
due to forfeited non-vested
options 1,124,795 --
Employee non-qualified stock
options exercised 178,926
Purchases of treasury stock (795,544)
Retirement of treasury stock --
Reincorporation at $0.001
par value --
Revaluation of non-vested
options --
Net loss (5,612,233) (5,612,233)
------------- -------------- ---------- --------------
Balance, December 31, 2001 $ (1,090) $ (26,828,892) $ -- $ 26,439,487
============== ============== ========== ==============
The accompanying notes are an integral part of these consolidated financial statements.
F-5a
PARTSBASE, INC. (formerly PARTSBASE.COM, INC.) AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------------------------------
2001 2000 1999
------------- -------------- -------------
Cash flows from operating activities:
Net loss $ (5,612,233) $ (13,453,981) $ (5,913,034)
Adjustments to reconcile net loss to cash used in
operating activities
Depreciation and amortization 868,807 752,314 410,918
Loss on property disposals -- -- 583
Provision for doubtful accounts 705,904 142,254 --
Provision for litigation and other related costs 457,500 -- --
Recognition of stock based compensation 320,437 4,252,838 2,698,960
Noncash interest on convertible notes -- -- 850,000
Noncash costs allocated from former parent -- -- 15,037
Changes in assets and liabilities
Accounts receivable, net (195,531) (1,355,015) (297,884)
Prepaid and other current assets 373,035 (666,674) (504,547)
Deferred financing costs and other assets -- (5,226) (56,282)
Accounts payable (704,888) 347,401 716,054
Other accrued liabilities (437,549) 186,426 233,270
Deferred revenue, net (392,043) 1,955,444 1,241,319
Accounts payable-related party -- -- 9,108
------------- ------------- -----------
Net cash used in operating activities (4,616,561) (7,844,219) (596,498)
------------- ------------- -----------
Cash flows from investing activities:
Capital expenditures (155,576) (2,925,475) (1,022,049)
Purchase of investment securities (19,689,018) (7,643,140) --
Website development costs -- (24,000) (216,075)
Maturities of marketable debt securities 6,918,743 -- --
Proceeds from sale of investment securities 19,355,348 -- --
Loss on sale of marketable securities 155,776 -- --
Redemption of certificate of deposit-restricted cash 1,119,008 -- --
Purchase of certificate of deposit-restricted cash (1,665,000) -- --
------------- ------------- -----------
Net cash provided by (used in) investing activities 6,039,281 (10,592,615) (1,238,124)
------------- ------------- -----------
Cash flows from financing activities:
Issuance of convertible notes -- -- 962,500
Issuance of common stock -- 40,881,000 --
Debt issue costs -- -- (138,700)
Issuance of preferred stock -- -- 1,902,375
Deferred offering costs -- -- (163,899)
Exercise of employee non-qualified stock options 178,926 196,251 --
Purchase of treasury stock (795,544) (330,202) --
Paid-in capital -- -- 7,622
------------- ------------- -----------
Net cash provided by (used in) financing activities (616,618) 40,747,049 2,569,898
------------- ------------- -----------
Net increase in cash and cash equivalents 806,102 22,310,215 735,276
Cash and cash equivalents at the beginning of the period 23,045,491 735,276 --
------------- ------------- -----------
Cash and cash equivalents at the end of the period $ 23,851,593 $ 23,045,491 $ 735,276
============= ============= ===========
Noncash financing activities:
Warrants issued in connection with the issuance of the
convertible notes $ -- $ -- $ 2,000,000
============= ============= ===========
Retirement of treasury stock $ 1,125,746 $ -- $ --
============= ============= ===========
Stock option forfeitures $ 1,124,795 $ 3,145,536 $ --
============= ============= ===========
Revaluation of non vested stock options $ 137,735 $ -- $ --
============= ============= ===========
Reincorporation affecting par value of stock $ 14,004 $ -- $ --
============= ============= ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-6
PARTSBASE, INC. (formerly PARTSBASE.COM, INC.) AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 1 - BACKGROUND AND ORGANIZATION
PartsBase, Inc. ("PartsBase" or the "Company") operates in two business
segments; an online provider of aviation e-commerce business and a supplemental
nurse staffing agency.
Prior to April 1999, the Company operated as a division (the "Division") of
Aviation Laboratories, Inc. ("Aviation Labs"). In April 1999, the assets of the
Division were conveyed to Mr. Robert A. Hammond, Jr. in consideration for, among
other things, Mr. Hammond's equity interest in Aviation Labs. On April 27, 1999,
Mr. Hammond transferred the assets of the Division into and incorporated
PartsBase as a Texas corporation. The accounting for the contribution of the
Division into PartsBase has been reported in the accompanying financial
statements as a reorganization of entities under common control in a manner
similar to a pooling of interests. At the Company's Annual Meeting of
Stockholders held on June 20, 2001, the stockholders approved an amendment to
affect a change in the state of incorporation of the Company from Texas to
Delaware and changed the name of the Company from PartsBase.com, Inc. to
PartsBase, Inc.
Partsbase's global e-marketplace provides a means for aviation parts buyers
and sellers to buy and sell new, repaired or overhauled aviation parts and list
products and services.
In September 2001, the Company formed RNpartners, Inc., a Florida
corporation, as a wholly owned subsidiary of PartsBase, which operates as a
supplemental nurse staffing agency. RNpartners commenced operations on October
1, 2001 as a provider of critical care registered nurses for temporary
assignment to hospitals in Palm Beach and Broward counties of the State of
Florida.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
PartsBase, Inc. and its wholly owned subsidiary, RNpartners, Inc. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Revenue Recognition
PartsBase recognizes subscription, banner advertising, and other revenues
over the life of the respective subscription, which is typically 12 months.
Sales costs, including commissions, are expensed as incurred, and are included
in the cost of revenues. Gross revenue represents total subscription,
advertising and other sales made during the period presented, of which a portion
is deferred. Deferred revenue as of December 31, 2001 and 2000 was $2,231,076
and $3,349,869, respectively. Net revenue represents that portion of gross
revenue that was earned during the period presented. Nurse staffing revenues and
the related labor costs and payroll taxes are recorded in the period in which
staffing services are performed.
F-7
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments purchased
with an original maturity of three months or less.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk
consist primarily of uninsured cash and cash equivalents. Cash and cash
equivalents are deposited with federally insured commercial banks in the United
States and in institutional money market funds. At December 31, 2001 the Company
had all of its cash and cash equivalents in three financial institutions of
which the excess over $100,000 is not covered by FDIC insurance and which,
therefore, did not limit the Company's amount of credit exposure. The Company
believes it is not exposed to any significant credit risk on cash and cash
equivalents.
The Company's global e-marketplace segment sells primarily to aviation
related companies and does not require collateral. The Company's supplemental
nurse staffing agency sells the services of its registered nurse employees to
hospitals in South Florida. The Company analyzes the need for reserves for
potential credit losses and records a provision for bad debts when necessary. As
of December 31, 2001 and 2000, the Company maintained an allowance for doubtful
accounts related to its receivables of $149,922 and, $221,559, respectively.
The Company e-marketplace segment has subscribers in more than 115
countries. The e-marketplace segment did not derive more than 10% of its revenue
from any single foreign country during 2001, 2000 or 1999. Prior to 1999, all of
the Company's revenue was derived from domestic customers. The Company's
supplemental nurse staffing agency has 15 hospital clients. Two hospitals
comprised approximately 41% of the segment's revenues for the three months ended
December 31, 2001, its initial period of operation.
Fair Value Of Financial Instruments
The Company's financial instruments, including cash and cash equivalents,
investments, accounts receivable and accounts payable are carried at cost, which
approximates their fair value because of the short-term maturity of these
instruments.
Property and Equipment
Property and equipment is stated at cost. Costs incurred for additions,
improvements and betterments are capitalized as incurred. Costs for maintenance
and repairs are charged to expense as incurred. Gains or losses on dispositions
of property and equipment are included in the statements of operations.
Leasehold improvements are amortized over the shorter of their estimated useful
life or the lease term using the straight-line method. Depreciation and
amortization are computed using the straight-line method over the following
estimated service lives of the related assets:
Computer software...................................... 3 years
Automobiles............................................ 5 years
Computer equipment..................................... 5 years
Communication equipment................................ 7 years
Furniture and fixtures................................. 7 years
F-8
Impairment of Long-Lived Assets
The Company evaluates the recoverability of long-lived assets, as well as
depreciation and amortization periods, to determine whether an adjustment to
carrying values or a revision to estimated useful lives is appropriate.
Recoverability is determined through evaluation of anticipated cash flows on an
undiscounted basis. If the estimated future cash flows are projected to be less
than the carrying value, an impairment write-down would be recorded, measured by
the amount of the asset's carrying value in excess of fair value.
Web Site Development Costs
The Company follows the provisions of Statements of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"). SOP 98-1 requires that entities capitalize certain
costs related to internal use software once certain criteria have been met.
Web site development costs, which are enhancements intended to extend
and/or improve significantly the marketability of the original product, are
capitalized; all other costs are expensed as incurred and classified as cost of
revenues. Web site development costs of $0 and $24,000 were capitalized during
the years ended December 31, 2001 and 2000, respectively. As of December 31,
2001 and 2000 capitalized web site development costs, net of amortization, were
$0 and $90,020, respectively, and are included in other assets in the
accompanying consolidated balance sheets. For the years ended December 31, 2001,
2000 and 1999, amortization of web site development costs totaled $90,020,
$122,132 and $27,923, respectively.
Amortization is computed on an enhancement-by-enhancement basis utilizing
the straight-line method over the estimated economic life of the enhancement,
which at December 31, 2001 and 2000, is estimated to be 24 months.
Accounting for Stock-based Compensation
The Company accounts for stock-based compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation." Under APB No. 25,
compensation expense for employees, is based on the difference, if any, on the
date of the grant, between the fair value of the Company's stock and the
exercise price. For non-employees, compensation expense is based on the fair
value of the option granted as defined in SFAS No. 123.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
F-9
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and net operating loss and tax credit carry-forwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the tax provision in the period that
includes the enactment date. Valuation allowances are established when necessary
to reduce deferred tax assets to the amount to be recovered.
Net Loss Per Share
Basic net income/(loss) per share is calculated on the basis of the
weighted average number of shares outstanding during the period, excluding
dilution. Diluted net income/(loss) per share is computed on the basis of the
weighted average number of shares outstanding during the period plus potential
common shares arising from the assumed exercise of stock options and warrants,
if dilutive. The dilutive impact of potential common shares is determined by
applying the treasury stock method.
Reclassifications
Certain amounts in the prior years' financial statements have been
reclassified to conform to the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
New Accounting Guidance
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows for a derivative's gains and losses to
offset related results on the hedged item in the statement of operations and
requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting treatment. The
Company adopted the provisions of SFAS No. 133, as amended by SFAS No. 138, in
the first quarter of 2001 and its adoption had no impact to its consolidated
financial statements.
In June 2001, the FASB issued SFAS No. 141," Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that
F-10
the purchase method of accounting be used for all business combinations
completed after June 30, 2001. SFAS No. 141 also specifies criteria that
intangible assets acquired in a purchase method business combination must meet
to be recognized and reported apart from goodwill. SFAS No. 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least annually on a basis set
forth in SFAS No. 142, and that intangible assets with estimatable useful lives
be amortized over their respective useful lives to their estimated residual
values, and reviewed for impairment. The Company adopted the provisions of SFAS
No. 141 and SFAS No. 142 on January 1, 2002. Adoption of these two standards is
not expected to have a material effect on the Company's results of operations or
financial position.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations", which addresses financial accounting and reporting for
legal obligations associated with the retirement of tangible long-lived assets
that result from acquisition, construction, development, and/or normal use of
the asset, and the associated asset retirement cost. SFAS No. 143 requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of fair value can
be made. The fair value of the liability is added to the carrying amount of the
related asset and depreciated over the life of the asset. The liability is
accreted each period through charges to operating expense. If the obligation is
settled for other than the carrying amount of the liability, the Company will
recognize a gain or loss on settlement. The Company is required and plans to
adopt the provisions of SFAS No. 143 for the quarter ending March 31, 2002. The
adoption of SFAS No. 143 is not expected to have a material effect on the
Company's financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of a Disposal of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
the disposal of a segment of a business. This statement also amends ARB No. 51,
"Consolidated Financial Statements," to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. SFAS No. 144 is
effective for the fiscal year ending December 31, 2002, and the interim periods
within fiscal 2002, with early application encouraged. The provisions of this
statement generally are to be applied prospectively. The Company is currently
evaluating whether adoption of SFAS No. 144 will have a material effect on its
financial position or results of operations.
Note 3 - INVESTMENTS
The Company's investments in U.S. government and corporate debt securities,
whose maturities are typically one year or less, are classified as
held-to-maturity and valued at amortized cost, which approximates fair value.
Investments in securities are summarized as follows at December 31, 2001 and
2000:
F-11
Market Gross Unrealized Gross Unrealized Amortized
Value Holding Gain Holding Loss Cost
--------- ---------------- ---------------- --------------
December 31, 2001:
Current:
Corporate debt securities $ 896,735 $ -- $ 3,338 $ 900,073
========== ============ ============= ==========
December 31, 2000:
Current:
U.S. government agencies $ 774,162 $ 939 $ -- $ 773,223
Corporate debt securities 6,440,416 74,587 -- 6,365,829
---------- ----------- ------------- ----------
Totals $ 7,214,578 $ 75,526 $ -- $ 7,139,052
========== =========== ============= ==========
Non-Current:
Corporate debt securities $ 500,110 $ -- $ (1,741) $ 501,851
========== =========== ============= ==========
The non-current portion of investments is included in other assets in the
accompanying consolidated balance sheet at December 31, 2000. The Company did
not own any investments whose maturity exceeded one year as of December 31,
2001. Investments totaling $12,488 and $2,237, represented the balance in a
brokerage cash account at December 31, 2001 and 2000, respectively, are not
included in the summary above.
On January 15, 2001, corporate debt securities owned by the Company, issued
by a State of California electrical utility (the "Utility"), with a face value
of $400,000 and maturing on January 15, 2001, were defaulted on. In February
2002, the Company has collected all accrued interest due, according to the
contractual terms of the debt security and the bond was redeemed by the Utility
on March 1, 2002.
During 2001, the Company realized a net capital loss of $155,776 as a
result of the sale of investment grade bond funds in conjunction with a strategy
to minimize state taxes. No such losses were realized during fiscal 2000 and
1999.
Note 4 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
2001 2000
---------------- -----------------
Computer Equipment $ 1,844,150 $ 1,829,161
Computer Software 991,962 1,493,035
Telephone Equipment 289,230 289,230
Furniture and Fixtures 343,688 336,363
L/H Improvements 14,606 11,808
Automobiles 131,583 --
----------- -----------
3,615,219 3,959,597
Accumulated Depreciation (1,044,889) (304,287)
----------- -----------
$ 2,570,330 $ 3,655,310
=========== ===========
F-12
Depreciation and amortization expense for the years ended December 31,
2001, 2000, and 1999 was $794,950, $279,641, and $22,193, respectively.
As a result of the Company's sublease being vacated by a bankruptcy court,
as more fully described in Note 6, the Company provided for the loss of the net
book value of its leasehold improvements associated with the sublease as of
December 31, 2001 totaling $11,357.
Note 5 - SEGMENT INFORMATION
Based on the criteria established by SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," management assesses Company
performance and allocates resources principally on the basis of two segments:
(i) aviation e-commerce segment which develops and markets an online marketplace
for the purchasing and distribution of aviation products, globally and (ii) the
supplemental nurse staffing agency currently in South Florida. This segment was
formed in September 2001 as a wholly-owned subsidiary of the Company and
commenced operations in October 2001. Accordingly, the Company operated in one
business line in the years ended December 31, 2000 and 1999, respectively.
The online marketplace for the purchasing and distribution of aviation
products provides a means for aviation parts buyers and sellers to buy and sell
new, repaired or overhauled aviation parts, list products, services and
catalogs. The primary source of revenues is from the sales of subscriptions,
generally one year in term and recognized over the life of the subscription.
Additionally, the Company recognizes revenue from advertising sales, principally
banner ads which run from three months to one year in duration of which revenue
is recognized ratably over the run period. Cost of revenues include the
commissions paid to salespersons who sell subscriptions and banner advertising
and direct costs of operating the web site, the related depreciation and the
overhead associated with managing the website.
The supplemental nurse staffing agency provides registered nurses to
hospitals in Broward and Palm Beach counties of Florida to supplement their
existing nursing staffs based on need. The sole source of revenue is derived
from the hourly fees charged to the hospitals for the services rendered by the
Company's registered nurse employees. Cost of revenues include the wages paid
to these nurses as well as the cost of recruitment, the related depreciation and
the overhead of managing the segment.
Revenues, expenses and assets are accounted for in accordance with the
accounting policies set forth in Note 1. Revenues and non-overhead expenses for
each business line are those that directly relate to those operations. Overhead
expenses, such as administrative expenses are allocated to each business line
based on management's best estimate of the resources utilized in the management
and operations of each business line. Total assets are those assets directly
used in the Company's operations in each line of business. Other than the online
marketplace funding the operations of the supplemental nurse staffing agency,
there are no significant transfers between segments.
F-13
For the year ended December 31, 2001
------------------------------------------------------------------
Aviation
e-commerce Supplemental Corporate and
(In thousands) business Nurse Staffing Other Total
------------- -------------- -------------- ----------
Subscription revenues $ 5,151 $ 5,151
Advertising 344 344
Nurse staffing services -- $ 98 98
Other 26 -- 26
-------- ----- ---------
Total revenues 5,521 98 5,619
-------- ----- ---------
Cost of revenues 4,397 111 4,509
General and
administrative 5,313 260 $ 1,048 6,621
Depreciation and amortization 795 -- -- 795
Stock based
compensation 72 -- -- 72
Litigation and other
related costs -- -- 458 458
-------- ----- -------- ---------
Total costs and
operating expenses 10,577 371 1,506 12,454
-------- ----- -------- ---------
Operating loss $ (5,056) $(273) $ (1,506) $ (6,835)
========= ===== ======== =========
Interest income $ -- $ -- $ 995 $ 995
========= ===== ======== =========
Other income, net $ -- $ -- $ 228 $ 228
========= ===== ======== =========
Capital expenditures $ 151 $ 5 $ -- $ 156
========= ===== ======== =========
Total assets $ 29,018 $ 146 $ -- $ 29,164
========= ===== ======== =========
All of the Company's long-lived assets are geographically located in the
United States. Management does not review revenues by geographical locations.
Note 6 - COMMITMENTS AND CONTIGENCIES
In September 2000 the Company sued a third party financial institution
because such financial institution paid a check in the amount of $161,000
despite a stop payment order duly issued by the Company. The payee cashed the
check, along with a replacement check. Before the Company learned that the payee
had cashed both checks, the Company entered into a binding settlement with the
payee ending the Company's business relationship with the payee. The payee
refused to return the amounts and the financial institution failed to credit the
Company's account. The Company filed suit, and discovery has commenced. The only
claim against the Company in this matter is the financial institution's demand
for legal fees if the financial institution prevails. In a separately filed
lawsuit, the payee of the checks has filed an action for declaratory relief
against the financial institution and the Company requesting that the court
declare its settlement agreement with the Company to be valid and binding. In
this declaratory relief action, the payee has requested that the Company and the
financial institution reimburse it for costs and fees associated with the
action. In July 2001, the separately filed lawsuit against the Company filed by
the payee of the checks was dismissed, without prejudice, for lack of
jurisdiction. This matter is scheduled for mediation in April 2002.
F-14
In December 2000, a third party (the "Third Party"), unaffiliated with
the Company, instituted arbitration against the Company in Dallas, Texas based
upon allegations that the Company breached a February 18, 2000 professional
services agreement. The Third Party claimed damages of $308,083 plus
un-liquidated damage amounts for copyright infringement, interest, attorneys'
fees and costs. The Company filed a counterclaim denying the breach and claiming
entitlement to a refund of $73,496 previously paid to the Third Party plus
damages of $250,000 because of the Third Party's breach of its obligations to
the Company. This matter was settled on June 30, 2001, resulting with the
Company making a $175,000 payment to the Third Party. This settlement is
classified as a litigation expense in the statement of operations for the year
ended December 31, 2001.
In April and May 2001, the Company received notice of, or had been served
with, four purported class action lawsuits (Foderaro vs. PartsBase.com, Inc. et
al, Case No.: 01-8319 CIV- FERGUSON; IKCYBERINVESTMENTS vs. PartsBase.com, Inc.
et al, Case No.: 01-8368 CIV-SEITZ; and Webb vs. PartsBase, et.al. Case No.
01-8376 CIV- GRAHAM and Jesus Martin vs. PartsBase.com, Inc. et al, Case No.
01-8526-CIV-UNGARO-BENAGES). These cases were consolidated into one action
entitled, In re: PartsBase.com, Inc. Securities Litigation, Case No.
01-8319-CIV-UNGARO-BENAGES/BROWN currently before the Honorable Ursula
Ungaro-Benages. The consolidated lawsuit names as defendants the Company,
certain of its current and former officers and directors, and the underwriters
of its initial public offering of securities. The consolidated lawsuit alleges
violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and
alleges the Company's March 2000 registration statement misrepresented and
failed to disclose matters related to the Company's business operations and
membership sales. The complaint alleges damages of nearly $42 million. The Court
has recently certified a class consisting of purchasers of the Company's common
stock in the offering during the period from March 22, 2000 through April 25,
2000. The Company continues to believe that the allegations contained in the
consolidated lawsuit are without merit and intends to vigorously defend this
action. Nevertheless, an unfavorable resolution of these lawsuits could have a
material adverse effect on the Company in one or more future periods. The
Company maintains a director and officer's liability insurance policy that
provides $3 million of coverage, with retention of $200,000. As of December 31,
2001, the Company has incurred legal expenses equal to the $200,000 retention
which are included in litigation and other related costs in the consolidated
statement of operations for the year ended December 31, 2001. The parties are
currently engaged in settlement discussions. The results of the settlement
discussions and ultimate resolution of this matter are uncertain.
In July 2001, the Company was served with a lawsuit filed by an information
technology vendor claiming damages resulting from the Company's alleged breach
of a software sales and service contract in the amount of $126,631 plus
interest, cost and fees. The Company intends to vigorously defend the
allegations contained in this lawsuit. In July 2001, the Company sued the
manufacturer of such software for damages totaling $220,000 as a result of
software malfunction. The Company believes the resolution of this matter will
not have a material impact upon the Company's consolidated financial statements,
results of operations or cash flows.
In March 2001 the Company received notice from counsel to the Business
Software Alliance (the "BSA"), an industry watchdog group representing software
manufacturers, in connection with the BSA's investigation of possible illegal
duplication of certain software companies' proprietary software products by the
Company. Through subsequent correspondence from the BSA, the BSA has alleged
that the Company has installed unauthorized copies of BSA member software
products on Company computers. The correspondence from the BSA provides that the
Company's potential exposure in this matter could be over $1,950,000 if willful
copyright infringement is shown. The Company is currently in negotiations with
the BSA in attempt to resolve the matter. To date the Company is not aware of
any legal proceedings initiated by BSA in this matter.
The Company is not currently aware of any other legal proceedings or claims
that the Company believes are likely to have a material adverse effect on the
Company's financial position, results of operations, or cash flows.
F-15
On February 15, 2002, the Company received notice from the NASDAQ National
Market warning that the Company's stock may be delisted because its common stock
has failed to maintain a minimum bid price of $1 over the last 30 consecutive
trading days and failed to maintain a minimum market value of public float of
$5,000,000. In accordance with MarketPlace Rules, the Company is provided 90
calendar days, or until May 15, 2002 to regain compliance. If the Company is
unable to demonstrate compliance on or before May 15, 2002, NASDAQ staff will
provide the Company with written notification that its securities will be
delisted. At any time, the Company may appeal NASDAQ Staff's decision to a
NASDAQ Listing Qualifications Panel.
The Company is party to a Content License and Reseller Agreement (the
"Agreement") with USA Information Systems Inc. ("USAIS"), an exclusive owner of
an Internet-based government parts, logistic and digital document database,
whereby USAIS provides access to that database to paid subscribers through a Web
site owned, operated and maintained by USAIS (the "Subscription Services"). Per
the Agreement, as amended on March 15, 2001, USAIS licenses to the Company the
non-exclusive rights to resell the Subscription Services and to offer access to
certain segments of the USAIS content to the Company's existing customers. The
Agreement commenced on June 1, 2000 and has an initial term of three years. The
Agreement will be automatically renewed for two one-year terms, unless either
party notifies the other in writing of its intention not to renew the Agreement
within ninety (90) days prior to the expiration of the then-current term. The
Company is obligated to pay USAIS the sum of $100,000 in monthly installments
during the first year of the Agreement. Beginning with the second year and
continuing until the expiration of the Agreement, the Company is obligated to
pay USAIS $60,000 in monthly installments. In conjunction with the amended
Agreement, the Company obtained and delivered to USAIS, on March 21, 2001, an
irrevocable, transferable standby Letter of Credit in the amount of $1,665,000,
collateralized by a certificate of deposit of the same amount that is to
diminish on a dollar for dollar basis as payments are made in accordance with
the amended Agreement. As of December 31, 2001, the Company owed USAIS
$1,020,000. The excess of the certificate amount plus accrued interest as of
December 31, 2001, $704,249, has been classified as cash and cash equivalents on
the consolidated balance sheet at December 31, 2001.
During May 2000 the Company entered into a sublease agreement with an
unaffiliated third party for 35,668 square feet of general office space. The
sublease agreement expired on October 31, 2006. In lieu of a security deposit,
the Company entered into an irrevocable standby letter of credit in favor of the
sublessor in the amount of $500,000. In December 2001, the sublessor filed for
bankruptcy protection and as a result, the sublease was vacated by the
bankruptcy court and the standby letter of credit was returned to the Company by
the sublessor. In January 2002, the Company entered into a new sublease
agreement ("New Sublease Agreement") with another unaffiliated third party for
6,600 square feet of general office space in Boca Raton. The New Sublease
Agreement expires on February 28, 2003.
In September 2001, the Company entered into a lease agreement with an
unaffiliated third party for 1,000 square feet of general office space in Fort
Lauderdale, Florida for the operations of a supplemental nurse staffing agency
office. The lease commenced in November 2001 and expires in November 2004.
F-16
In November 2001, the Company entered into a lease agreement with an
unaffiliated third party for 1,260 square feet of general office space in West
Palm Beach, Florida for the operations of a supplemental nurse staffing agency
office. The lease commenced in December 2001 and expires on November 2004. The
Company may terminate this lease at the end of the first year or the second year
and be liable for 50% of rent due for the balance of the term of the lease.
The following represents the minimum annual contractual rent during the
term of these latter three leases:
Minimum
Year Ending December 31, Annual Rent
------------------------ ------------
2002 $ 854,978
2003 344,766
2004 32,106
---------
$1,231,850
=========
The minimum annual rent above includes the amounts due under the New
Sublease Agreement which was entered into in January 2002. Rent expense for the
years ended December 31, 2001, 2000, and 1999 was $888,946, $573,527, and
$44,859, respectively.
Note 7 - STOCKHOLDERS' EQUITY
Common Stock and Preferred Stock
In March 2000, the Company completed, through an initial public offering
("IPO"), the issuance of an aggregate of 3,500,000 shares of no par common
stock, including over-allotment options granted to the underwriters. The net
proceeds of the offering to the Company were $40.9 million and were used
primarily for working capital, information technology, expansion of sales and
marketing activities, and other general corporate purposes. Between November 1,
1999 and November 17, 1999, the Company sold 855,000 shares of its Series A
Convertible Preferred Stock at $2.50 per share for aggregate net proceeds of
$1,902,375 after commissions of $235,125. The Convertible Preferred Stock had a
beneficial conversion feature totaling $1,902,375, measured as the difference
between the conversion price of $2.50 per share and the fair value of the
underlying common stock at the time of issuance. In connection with the IPO, all
preferred shares were redeemed into 855,000 shares of the Company's no par
common stock.
At the Company's Annual Meeting of Stockholders held on June 20, 2001, the
stockholders approved an amendment to affect a change in the state of
incorporation of the Company from Texas to Delaware. As a Texas corporation, the
Company's shares of preferred and common stock had no par value. As a result of
the reincorporation in Delaware, the Company's shares of preferred and common
stock, each have a $0.001 par value and $14,004 was reclassified from Additional
Paid-In Capital to Common Stock to reflect the par value of the shares of common
stock outstanding. No shares of preferred stock were issued or outstanding at
December 31, 2001 and 2000, respectively.
F-17
In accordance with the Company's share repurchase program implemented in
the fourth quarter of 2000, and second quarter of 2001, 538,120 and 136,685
shares of the Company's common stock were repurchased at a cost of $795,544 and
$330,202 in fiscal 2001 and 2000, respectively. These shares were retired by the
Company in fiscal 2001.
Unearned Compensation
Unearned compensation of $0, $1,206,153 and $10,475,238 was charged to
additional paid-in capital in 2001, 2000 and 1999, respectively, in connection
with the issuance of stock options and restricted stock grants based on the
market value of the Company's common stock at the date of grant. This charge is
amortized to the statements of operations as the underlying options vest. As
unamortized options are forfeited, the unamortized unearned compensation is
reversed against additional paid-in capital. During fiscal years 2001, 2000 and
1999, respectively, $1,124,795, $3,145,536 and $0 was reversed due to forfeited
options. Compensation expense of $320,437, $4,252,838 and $2,698,960 related to
these options was recognized in the consolidated statements of operations during
2001, 2000 and 1999, respectively.
In October 2001, the Company entered into an agreement with a former
officer, whereby in consideration of the officer making himself available and
rendering consultation services relative to financial and legal matters during
his tenure, the Company would allow his outstanding options to vest in
accordance with their grant and to waive any forfeiture provisions as a result
of his departure. As a result of the former officer's change in status, the
Company revalued 12,510 outstanding options as of the date of the agreement to
their fair value resulting in a reduction of unearned compensation and
additional paid-in capital of $137,735.
Warrants
In 1999, the Company, through a Private Placement (the "Private
Placement"), sold and issued 8% Convertible Secured Subordinated Notes to
several investors. In connection with the closing of the private placement, the
placement agent was granted warrants to purchase 200,000 shares of no par common
stock of the Company at an exercise price equal to $2.00 per share until the
expiration date of September 1, 2002. Subsequent to December 31, 1999, an
agreement was reached with the placement agent that reduced the number of
warrants from 200,000 to 175,000. As of December 31, 2001 and 2000, no warrants
had been exercised. In the event of certain consolidations or sales affecting
the Company, the Company is required to call the warrants for cash at a price
based on the greater of the trading price of the Company's common stock or the
value paid by a purchaser for it's no par common stock.
In connection with the IPO in March 2000, stock purchase warrants, at an
exercise price of $21.45 per share, for 262,500 shares of the Company's no par
common stock were issued to representatives of the underwriters. As of December
31, 2001, none of these warrants have been exercised.
1999 Stock Option Plan
On November 2, 1999 the Board of Directors (the "Board") adopted the
PartsBase.com, Inc. 1999 Stock Option Plan (the "Plan"). The Plan is a qualified
F-18
stock option plan in accordance with Section 422 of the Internal Revenue Code
and provides for the issuance of both incentive and non-qualified stock options.
The maximum number of shares of common stock that may be issued upon the
exercise of all options shall not exceed 2,000,000 shares of common stock. The
per share option price of the common stock shall be determined by the Board. The
per share price with respect to any incentive stock options shall not be less
than the fair market value of the common stock on the date of grant. Each option
granted vests in accordance with a vesting schedule established by the Board or
a Committee of the Board. Absent a specific determination of vesting, options
granted shall vest over a forty-eight month period and the period of exercise of
each option shall not exceed ten (10) years from date of grant.
At the Company's Annual Meeting of Stockholders held on June 20, 2001, the
stockholders adopted the PartsBase, Inc. 2001 Stock Plan (the "2001 Plan") The
2001 Plan is a qualified stock option plan in accordance with Section 422 of the
Internal Revenue Code and provides for the issuance of both incentive and
non-qualified stock options and stock grants. The maximum number of shares of
common stock that may be issued or issued upon the exercise of all options under
the 2001 Plan shall not exceed 1,000,000 shares of Common Stock. The per share
option price of the common stock shall be determined by the Board. The per share
price with respect to any incentive stock options shall not be less than the
fair market value of the common stock on the date of grant. Each option granted
vests in accordance with a vesting schedule established by the Board or a
Committee of the Board. As of December 31, 2001, no options to purchase shares
of common stock and no shares of common stock had been granted under the 2001
Plan.
A summary of the status of the Company's stock option activity, and related
information for the years ended December 31, 2001, and 2000 is presented below:
Weighted-Average
Exercise
Shares Price
----------- ----------------
Outstanding December 31, 1999 919,375 $ 0.63
Granted 983,625 5.13
Exercised (303,415) 0.63
Forfeited (536,720) 3.16
----------- ------
Outstanding December 31, 2000 1,062,865 3.52
Granted 762,660 3.33
Exercised (286,260) 0.63
Forfeited (856,973) 5.18
----------- ------
Outstanding December 31, 2001 682,292 $ 3.10
=========== ======
Options exercisable at December 31, 2001 448,563 $ 3.14
=========== ======
Options exercisable at December 31, 2000 464,166 $ 2.22
========== ======
F-19
The following table summarizes information about stock options outstanding
and exercisable as of December 31, 2001:
Options Outstanding Options Exercisable
----------------------------------------------------------------------- ----------------------------------
Weighted-Average
Remaining
Range of Number Contractual Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- ---------------- ------------ ----------------
$0.63 to $0.65 54,382 7.98 $0.63 51,246 $0.63
$2.00 to $3.00 401,160 9.51 2.08 228,149 2.11
$5.00 to $6.38 226,750 8.82 5.54 169,168 5.37
--------- ----- ---- ------- ----
682,292 9.15 $3.10 448,563 $3.14
========= ===== ==== ======= ====
The Company applies the provisions of APB No. 25 and its related
interpretations in accounting for its stock option plans. Accordingly,
compensation expense recognized was different than what would have been
otherwise recognized under the fair value based method defined in SFAS No. 123.
Had the Company accounted for these plans under SFAS No. 123, the Company's net
loss and net loss per share would have been impacted as follows for the years
ended December 31, 2001, 2000 and 1999:
------------------- --------------------- -------------------
2001 2000 1999
------------------- --------------------- -------------------
Net loss attributable to common stockholders:
As reported $(5,612,233) $(13,453,981) $(7,815,409)
=========== ============ ===========
Proforma $(8,344,679) $(18,546,041) $(6,004,972)
=========== ============ ===========
Basic and diluted loss per share:
As reported $(0.40) $(1.03) $(0.84)
====== ====== ======
Proforma $(0.59) $(1.42) $(0.65)
====== ====== ======
Pro forma information regarding net loss and net loss per share is required
by SFAS 123 and has been determined as if the Company had accounted for its
employee stock options under the fair value method provided for in SFAS 123. The
fair value of options was estimated at the date of grant using the Black-Scholes
option pricing model with the following weighted-average assumptions for options
granted during the years ended December 31, 2001, 2000 and 1999:
--------------------- --------------------- -----------------------
2001 2000 1999
--------------------- --------------------- -----------------------
Risk-free interest rate 4.22% 5.06% 5.88%
Expected life (in years) 4 3 3
Volatility 88% 125% 0%
Dividend yield 0% 0% 0%
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of the options using a
F-20
graded vesting method. The effects of applying SFAS 123 for pro forma
disclosures are not likely to be representative of the effects on reported net
loss for future years.
Note 8 - INCOME TAXES
The Company did not record any benefits for income taxes for the year ended
December 31, 2001 because it incurred a current net operating loss of
approximately $6,985,000. In years prior to December 31, 2001, the Company
incurred a net operating loss of approximately $9,041,000. The Company's net
operating losses will fully expire in the year 2021. The Company also has a net
capital loss carryforward of approximately $172,000 which will expire in 2006.
The Company's effective tax rate for the years ended December 31, 2001,
2000 and 1999 is comprised of the following items:
Year Ended Year Ended Year Ended
December 31, 2001 December 31, 2000 December 31, 1999
--------------------- ----------------------- ----------------------
Statutory U.S. income
tax rate 34.00 % $(1,908,159) 34.00 % $(4,574,353) 34.00 % $(2,010,432)
Stock compensation 0.00 % -- 0.00 % -- 4.50 % (266,137)
Operations prior to
inception 0.00 % -- 0.00 % -- (0.33)% 19,774
Nondeductible
permanent
differences 1.40 % (78,331) (0.09)% 12,286 (0.00)% --
Change in valuation
allowance (35.40)% 1,986,490 (33.95)% 4,567,071 (41.66)% 2,463,662
Other 0.00 % -- 0.04 % (5,004) 3.49 % (206,867)
-------- ----------- -------- ----------- -------- -----------
0.00 % $ -- 0.00 % $ -- 0.00 % $ --
======== =========== ======== =========== ======== ============
F-21
Temporary differences and carryforwards that cause significant portions of
deferred tax assets and liabilities are as follows:
December 31, December 31,
2001 2000
------------- -------------
Deferred tax assets:
Net operating loss $ 6,559,028 $ 3,401,807
Deferred revenue 835,130 1,211,468
Stock compensation 11,686 2,349,149
Allowance for bad debts -- 83,373
Capital loss 64,705 --
Provision for losses 21,772 --
Deferred rent 36,732 33,512
------------ ------------
Total deferred tax assets 7,529,053 7,079,309
------------ ------------
Deferred tax liabilities:
Property and equipment 154,038 7,068
Web development costs -- 33,878
------------ ------------
Total deferred tax liabilities 154,038 40,946
------------ ------------
Less: Valuation allowance (7,375,015) (7,038,363)
------------ ------------
Net deferred tax asset $ -- $ --
============ ============
Management believes there is no assurance that the Company will generate
sufficient taxable income to utilize all of its deferred tax assets. Therefore,
a valuation allowance has been established to offset the net deferred tax
assets.
Note 9 - RELATED PARTY TRANSACTIONS
Contract Services
A company owned and operated by one of the Company's former directors and
minority stockholders provided significant services designing and maintaining
the Company's web site during 1999. Services performed totaled $260,000, of
which approximately $216,075 was capitalized as web site development costs and
approximately $40,000 was expensed as cost of sales for the year ended December
31, 1999. Such company did not provide any services during 2001 and 2000 and
there were no amounts owed this company as of December 31, 2001 and 2000,
respectively.
In addition, a company owned and operated by another of the Company's
directors provided services in connection with the design of the Company's
advertising brochures and other marketing materials. The total amount of
payments made by the Company for such services performed for the years ended
December 31, 2001, 2000 and 1999 was $0, $34,200 and $53,263 respectively, and
there were no amounts owed this company as of December 31, 2001 and 2000,
respectively.
F-22
NOTE 10 - Quarterly Financial Information (Unaudited)
(000's, except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
Net revenues:
2001 $ 1,599 $ 1,354 $ 1,344 $ 1,322
2000 550 935 1,200 1,413
1999 14 23 85 240
Gross profit (loss):
2001 110 278 459 73 *
2000 (845) (13) (434) (3,060)**
1999 4 (41) (427) (2,385)***
Operating loss:
2001 (2,197) (2,365) (1,081) (1,192)*
2000 (3,593) (3,131) (3,993) (4,499)**
1999 (43) (137) (1,380) (3,483)***
Net loss:
2001 (1,699) (2,066) (778) (1,069)
2000 (3,577) (2,531) (3,341) (4,005)
1999 (43) (137) (2,178) (3,555)
Net loss per share:
Basic
2001 (0.12) (0.15) (0.06) (0.07)
2000 (0.36) (0.18) (0.24) (0.25)
1999 (0.00) (0.01) (0.24) (0.59)
Diluted
2001 (0.12) (0.15) (0.06) (0.07)
2000 (0.36) (0.18) (0.24) (0.25)
1999 (0.00) (0.01) (0.24) (0.59)
* Includes reclassification of approximately $248,000 of stock-based
compensation expense from operating expenses to cost of revenues.
** Includes reclassification of approximately $2,308,000 of stock-based
compensation expense from operating expenses to cost of revenues.
*** Includes reclassification of approximately $1,799,000 of stock-based
compensation expense from operating expenses to cost of revenues.
NOTE 11 - Convertible Notes Payable
For the period from June 9, 1999 to August 31, 1999, the Company, through a
Private Placement, sold and issued 8% Convertible Secured Subordinated Notes due
and payable December 31, 2001 totaling $900,000 (the "Convertible Notes") to
several investors. Terms of the Convertible Notes provided for interest at 8%
payable quarterly. Each note was convertible at any time into common stock at a
conversion price of $2.00 per share at the holder's option. The Convertible
Notes automatically convert upon the filing and closing of an initial public
offering of the Company's common stock with gross proceeds of $5 million or more
or upon certain mergers and consolidations of the Company. The Convertible Notes
F-23
had a beneficial conversion feature totaling $787,500, measured as the
difference between the conversion price of $2.00 per share and the fair value of
the underlying common stock at the time of issuance limited to the amount of
proceeds received. The beneficial conversion feature has been recorded as a
charge to interest expense with a corresponding credit to additional paid-in
capital. The value of the beneficial conversion feature was recognized
immediately because the Convertible Notes were immediately convertible at the
option of the holder. The Convertible Notes were secured by substantially all of
the Company's assets.
In November 1999, the Company issued an additional $62,500 of notes having
substantially identical terms to the Convertible Notes to an aggregate of two
investors, including $50,000 sold to the father of one of the Company's
executive officers. These Notes had a beneficial conversion feature of $62,500
measured as the difference between the conversion price of $2.00 per share and
the fair value of the underlying stock at time of issuance, limited to the
amount of proceeds. At the time of issuance, the beneficial conversion feature
was recorded as a charge to interest expense and with a corresponding credit to
additional paid-in capital. The value of the beneficial conversion feature was
recognized immediately because the Convertible Notes are immediately convertible
at the option of the holder.
As a result of the IPO discussed in Note 7 herein, all of the Convertible
Notes were converted into shares of common stock of the Company during fiscal
2000.
Note 12 - Restricted Stock Bonus Plan
In May 1999, the Company adopted the PartsBase.com, Inc. Restricted Stock
Bonus Plan ("Stock Bonus Plan"). Under the Stock Bonus Plan, the Company was
authorized to award or grant to employees, consultants, officers and directors
(except persons serving as directors only) shares of common stock subject to a
substantial risk of forfeiture. The Board of Directors had the sole authority to
select participants, to establish the terms and conditions of the stock,
including vesting provisions, and to grant the stock. The maximum number of
shares of common stock which could have been granted under the Stock Bonus Plan
was 1,200,000 shares. In the event a stock grant recipient was terminated, any
unvested portion of the shares that were subject to the stock grant was
canceled. Each stock grant recipient has all the rights of a shareholder with
respect to stock received pursuant to the Stock Bonus Plan, including the right
to vote such shares and receive all dividends and other distributions.
On November 17, 1999 the Company entered into an agreement with all of the
employees who received restricted stock awards. The agreement calls for the
employee to return all shares received and the termination of the Restricted
Stock Agreement between the employee and the Company as it relates to the
restricted stock award. As part of the terminated restricted stock award each
employee participating in the restricted stock grant plan received one (1)
nonqualified option to purchase one (1) share of common stock for each
restricted stock terminated. The options granted are part of the PartsBase.Com,
Inc. 1999 Stock Option Plan and vested over a twenty-four month period and the
period of exercise shall not exceed ten (10) years from date of the grant. The
options were granted at $0.63 per share. The number of shares of restricted
stock and options granted as part of this agreement totaled 824,000. As a result
of the termination of the restricted stock and issuance of the nonqualified
stock options, additional unearned compensation of approximately $3,500,000 was
F-24
charged to stockholders' equity in November 1999. The additional unearned
compensation was determined as the amount by which the intrinsic value of the
options issued exceeded the amount of unearned compensation recorded prior to
the termination of the restricted stock based on the market value of the
Company's common stock at the date of grant. Prior to termination, stock grants
totaling 1,075,250 were outstanding. An aggregate of 251,250 shares of
restricted stock remain outstanding under the Stock Bonus Plan. Such stock is
held by a total of four persons, including 250,000 shares held by Steven
Spencer, a former director and former executive officer. Mr. Spencer's stock
grant vested with respect to 50,000 shares upon commencement of employment. Of
the remaining 200,000 shares, 100,000 shares vested upon the IPO and the other
100,000 shares vest in 24 equal monthly installments.
The Company applies the provisions of APB No. 25 and its related
interpretations in accounting for its employee stock grant plan. As the stock
grants were recorded at their fair value at the date of grant, compensation
expense recognized was no different than what would have been otherwise
recognized under the fair value based method defined in SFAS No. 123.
F-25
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ --------------------------------------------------------------------
1.1(3) Form of Underwriting Agreement
3.1(3) Form of Amended and Restated Articles of Incorporation
3.2(3) Form of Amended and Restated Bylaws
3.3(7) Form of Certificate of Incorporation
3.4(7) Form of Bylaws
3.5(8) Form of Articles of Incorporation- Olympus Staffing, Inc.
3.6(8) Form of Amendment to Articles of Incorporation-Olympus Staffing, Inc.
3.7(8) Form of Bylaws- Olympus Staffing, Inc.
4.1(3) Form of Common Stock Certificate
4.2(3) Form of Representative's Warrant
4.3(2) Form of Warrant Agreement, dated as of August 31, 1998, in favor
of Gunn Allen
4.4(2) Form of Subscription Document for August 1999 Private Placement
4.5(2) Form of Subscription Document for November 1999 Private Placement
4.6(2) Form of convertible Promissory Note
10.1(2) PartsBase.com, Inc. Amended Restricted Stock Bonus Plan
10.2(1) PartsBase.com, Inc. Stock Option Plan
10.3(2) Lease Agreement with respect to office space in Boca Raton,
Florida
10.4(3) Form of Indemnification Agreement
10.5(2) Employment Agreement of Robert Hammond, Jr.
10.6(2) Employment Agreement of Steven Spencer
1
EXHIBIT INDEX- continued
EXHIBIT
NUMBER DESCRIPTION
------ --------------------------------------------------------------------
10.7(2) Employment Agreement of Kevin Steil
10.8(2) Employment Agreement of Michael Siegel
10.9(2) Employment Agreement of Yves Duplan
10.10(2) Consulting Agreement with Plan Three Solutions, L.L.C.
10.11(2) Software License Agreement with Tradex Technologies, Inc.
10.12(2) Software License Agreement with Trading Dynamics, Inc.
10.13(4) Sublease Agreement dated April 2000 between Alamo Rent-A-Car LLC
and the Company
10.14(4) Content License and Reseller Agreement between USA Information
Systems, Inc. and the Company
10.15(6) Amendment to the Content License and Reseller Agreement between
USA Information Systems, Inc. and the Company
17.1(5) Resignation letter of Louis W. Storms IV as a member of the
company's Board of Directors
21.1(8) List of Subsidiaries
23.1(8) Independent Auditors' Consent
99.1(7) Audit Committee Charter
--------------------------------------------------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (File No. 333-94337), filed on January 10, 2000.
(2) Incorporated by reference to the Registrant's Amendment No.1 to the
Registration Statement on Form S-1 (File No. 333-94337), filed on
February 2, 2000.
(3) Incorporated by reference to the Registrant's Amendment No.2 to the
Registration Statement on Form S-1 (File No. 333-94337), filed on
March 16, 2000.
2
EXHIBIT INDEX- continued
(4) Incorporated by reference to the Registrant's Form 10-Q for the period
ended June 30, 2000 filed on August 14, 2000.
(5) Incorporated by reference to the Registrant's Form 8-K dated
October 26, 2000.
(6) Incorporated by reference to the Registrant's Form 10-K for the fiscal year
ended December 31, 2000.
(7) Incorporated by reference to the Registrant's Definitive Proxy Statement
dated May 22, 2001.
(8) Filed herewith.
APPENDIX E
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
________________________Commission File Number 000-29727________________________
PartsBase, Inc.
(Exact name of registrant as specified in its charter)
Delaware 76-0604158
------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
905 Clint Moore Road
Boca Raton, Florida 33487-8242
----------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: 561.953.0700
----------------------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days: Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The registrant had an aggregate of 14,012,302 shares of its common stock,
$0.001 par value, outstanding as of the close of business on November 1, 2002.
PARTSBASE, INC.
TABLE OF CONTENTS
Page
PART I- FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. Financial Statements .......................................... 3
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................... 12
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk ..... 17
ITEM 4 Controls and Procedures ....................................... 17
PART II- OTHER INFORMATION
ITEM 1. Legal Proceedings ............................................. 17
ITEM 2. Changes in Securities ......................................... 19
ITEM 3. Default Upon Senior Securities ................................ 19
ITEM 4. Submission of Matters to a Vote of Security Holders ........... 19
ITEM 5. Other Information ............................................. 19
ITEM 6. Exhibits and Reports on Form 8-K .............................. 20
SIGNATURES ................................................................ 21
E-2
PART I FINANCIAL INFORMATION
PARTSBASE, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2002 2001
--------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 22,594,237 $ 23,851,593
Accounts receivable, net 1,185,411 403,969
Investments, at amortized cost - 900,073
Prepaid expenses and other current assets 307,740 330,966
------------- ------------
Total current assets 24,087,388 25,486,601
Property and equipment, net 1,919,276 2,570,330
Certificate of deposit - restricted cash 480,000 1,070,000
Other assets 52,074 36,839
------------- ------------
Total assets $ 26,538,738 $ 29,163,770
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 213,674 $ 87,060
Accrued expenses and other current liabilities 829,826 406,147
Deferred revenue, net 2,251,843 2,231,076
------------- ------------
Total current liabilities 3,295,433 2,724,283
------------- ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value, 2,000,000
shares authorized, shares issued and
outstanding in 2002 and 2001 - -
Common stock, $0.001 par value; 30,000,000 shares
authorized, issued and outstanding 14,012,302 in
2002 and 14,003,620 in 2001 14,012 14,004
Additional paid-in capital 53,254,279 53,255,465
Accumulated deficit (30,024,986) (26,828,892)
Unearned compensation - (1,090)
------------- ------------
Total stockholders' equity 23,243,305 26,439,487
------------- ------------
Total liabilities and stockholders' equity $ 26,538,738 $ 29,163,770
============= ============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
E-3
PARTSBASE, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------- ------------- -------------
Net revenues $ 2,529,493 $ 1,343,649 $ 6,678,587 $ 4,296,715
Cost of revenues 2,054,261 885,225 5,558,768 3,450,026
------------ ------------ ------------ ------------
Gross profit 475,232 458,424 1,119,819 846,689
------------ ------------ ------------ ------------
Operating expenses:
General and administrative expenses 1,265,239 1,441,207 3,713,783 5,755,774
Stock-based compensation expense - 98,610 1,090 276,614
Litigation and other related costs - - 150,000 457,500
Relocation expenses and abandonment costs - - 281,906 -
------------ ------------ ------------ ------------
Total operating expenses 1,265,239 1,539,817 4,146,779 6,489,888
------------ ------------ ------------ ------------
Operating loss (790,007) (1,081,393) (3,026,960) (5,643,199)
Privatization expenses (236,092) - (506,092) -
Other income, net 94,052 303,522 336,958 1,100,622
------------ ------------ ------------ ------------
Net loss $ (932,047) $ (777,871) $ (3,196,094) $ (4,542,577)
============ ============ ============ ============
Basic and diluted net loss per share $ (0.07) $ (0.06) $ (0.23) $ (0.32)
============ ============= ============ ============
Weighted average common shares outstanding 14,012,302 14,029,387 13,996,665 14,144,372
============ ============= ============ ============
The accompanying notes are an integral part of these consolidated condensed financial statements.
E-4
PARTSBASE, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
-----------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
---------------- ---------------
Cash flows from operating activities:
Net loss $ (3,196,094) $ (4,542,577)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation 580,515 660,989
Loss on property abandonments 251,498 -
Provision for doubtful accounts 72,952 674,805
Provision for litigation and other related costs 150,000 457,500
Recognition of stock based compensation 1,090 276,614
Change in assets and liabilities:
Accounts receivable, net (850,701) (4,038)
Prepaid and other current assets 23,226 439,767
Other assets (15,798) 497,119
Accounts payable 126,703 (491,208)
Accrued expenses and other accrued liabilities 273,679 (438,750)
Deferred revenue, net 17,075 (329,024)
Other liabilities - (6,006)
------------ ------------
Net cash used in operating activities (2,565,855) (2,804,809)
------------ ------------
Cash flows from investing activities:
Capital expenditures (180,396) (161,817)
Maturities of marketable debt securities 900,073 4,118,965
Purchase of marketable debt securities - (13,872,550)
Purchase of certificate of deposit-restricted cash - (1,629,250)
Redemption of certificate of deposit-restricted
cash 590,000 -
------------ ------------
Net cash provided by (used in) investing
activities 1,309,677 (11,544,652)
------------- ------------
Cash flows from financing activities:
Purchase of treasury stock (22,838) (795,544)
Exercise of employee non-qualified stock options 21,660 178,926
------------- ------------
Net cash used in financing activities (1,178) (616,618)
------------- ------------
Net decrease in cash and cash equivalents (1,257,356) (14,966,079)
Cash and cash equivalents at beginning of period 23,851,593 23,045,491
------------- ------------
Cash and cash equivalents at end of period $ 22,594,237 $ 8,079,412
============= ============
Noncash financing activities:
Retirement of treasury stock $ 22,838 $ -
============= ============
The accompanying notes are an integral part of these consolidated condensed financial statements.
E-5
PARTSBASE, INC. AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements
(Unaudited)
The Company and Basis of Presentation
PartsBase, Inc. and subsidiary ("PartsBase" or the "Company") operates in
two business segments; an online provider of aviation e-commerce business and a
supplemental nurse staffing agency.
At the Company's Annual Meeting of Stockholders held on June 20, 2001, the
stockholders approved an amendment to change the state of incorporation of the
Company from Texas to Delaware and changed the name of the Company from
PartsBase.com, Inc. to PartsBase, Inc.
PartsBase's global e-marketplace provides a means for aviation parts buyers
and sellers to buy and sell new, repaired or overhauled aviation parts and list
products and services.
In September 2001, PartsBase, Inc. formed RNpartners, Inc., a Florida
corporation, ("RNpartners"), as a wholly owned subsidiary of PartsBase, which
operates as a supplemental nurse staffing agency. RNpartners commenced
operations on October 1, 2001 as a provider of critical care registered nurses
for temporary assignment to hospitals in Miami-Dade, Palm Beach, Orange,
Hillsborough and Broward counties of the State of Florida.
The accompanying unaudited consolidated condensed interim financial
statements reflect all adjustments, (consisting only of normal recurring
accruals) which in the opinion of management are necessary for a fair
presentation of the consolidated results of operations for the periods shown.
The consolidated results of operations for the three month and nine month
periods ended September 30, 2002 are not necessarily indicative of the results
expected for the full fiscal year or for any future period.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted as permitted by
Article 10 of Regulation S-X of the Securities and Exchange Commission. These
consolidated condensed financial statements should be read in conjunction with
the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
PartsBase, Inc. and its wholly owned subsidiary, RNpartners, Inc. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Revenue Recognition
PartsBase recognizes subscription and banner advertising revenue, related
to its e-commerce business, over the life of the subscription, which is
typically 12 months. Sales costs, including commissions, are expensed as
incurred, and are included in the cost of revenues. Net revenue represents that
portion of gross revenue, related to subscriptions sold pertaining to its
e-commerce business, that was earned during the period presented. Therefore,
during quarters with significant gross revenue growth, gross margins will be
negatively impacted due to the effect of sales costs being expensed in their
entirety, whereas the corresponding sales are amortized over the subscription
term. Nurse staffing revenues and the related labor costs and payroll taxes are
recorded in the period in which staffing services are performed.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments purchased
with an original maturity of three months or less.
Basic and Diluted Net Loss per Share
Basic net loss per share is computed using the weighted average number of
common shares outstanding during the period. Diluted net loss per share, when
E-6
not anti-dilutive, is computed using the weighted average number of common and
common equivalent shares outstanding during the period. Common equivalent shares
consist of the incremental common shares issuable upon the exercise of stock
options and warrants (using the treasury stock method). For the three and nine
month periods ended September 30, 2002 and 2001, common share equivalents are
not included in the computation of diluted loss per share since inclusion of
such shares would be anti-dilutive.
Reclassifications
Certain amounts in the prior year's financial statements have been
reclassified to conform to the current year presentation.
Relocation expenses and abandonment costs
During May 2000 the Company entered into a sublease agreement with an
unaffiliated third party for 35,668 square feet of general office space. The
sublease agreement was to expire on October 31, 2006. In December 2001, the
sublessor filed for bankruptcy protection and as a result, the sublease was
vacated by the bankruptcy court. In January 2002, the Company entered into a new
sublease agreement with another unaffiliated third party for 6,600 square feet
of general office space in Boca Raton. In conjunction with the move to the new
and smaller office space in February 2002, the Company incurred moving expenses
totaling $30,408 and a loss on abandoned furniture, fixtures and trailing
technology computer equipment and software with a net book value of $251,498.
Segment Information
Based on the criteria established by the Financial Accounting Standards
Board, Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," management assesses Company
performance and allocates resources principally on the basis of two segments:
(i) aviation e-commerce segment which develops and markets an online marketplace
for the purchasing and distribution of aviation products, globally and (ii) the
supplemental nurse staffing agency currently operating in Florida. The latter
segment was formed in September 2001 as a wholly-owned subsidiary of the Company
and commenced operations in October 2001. Accordingly, the Company operated in
one business line in the nine months ended September 30, 2001.
The online marketplace for the purchasing and distribution of aviation
products provides a means for aviation parts buyers and sellers to buy and sell
new, repaired or overhauled aviation parts, list products, services and
catalogs. The primary source of revenues is from the sales of subscriptions,
generally one year in term and recognized over the life of the subscription.
Additionally, the Company recognizes revenue from advertising sales, principally
banner ads which run from three months to one year in duration during which
revenue is recognized ratably over the run period. Cost of revenues include the
commissions paid to salespersons who sell subscriptions and banner advertising
and direct costs of operating the web site, the related depreciation and the
overhead associated with managing the website.
The supplemental nurse staffing agency provides registered nurses to
hospitals in Miami-Dade, Broward, Hillsborough, Orange and Palm Beach counties
of Florida to supplement their existing nursing staffs based on need. The sole
source of revenue is derived from the hourly fees charged to the hospitals for
the services rendered by the Company's registered nurse employees. Cost of
revenues include the wages paid to these nurses as well as the cost of
recruitment.
Revenues, expenses and assets are accounted for in accordance with the
accounting policies set forth as noted above. Revenues and non-overhead expenses
for each business line are those that directly relate to those operations.
Overhead expenses, such as general, corporate and administrative expenses, are
allocated to each business line based on management's best estimate of the
resources utilized in the management and operations of each segment. Total
assets are those assets directly used in the Company's operations in each line
of business. Other than the online marketplace funding the operations of the
supplemental nurse staffing agency, there are no significant transfers between
segments.
The following schedule provides segment information for the three and nine
month periods ended September 30, 2002. During the three and nine month periods
ended September 30, 2001, the Company only operated in one segment and therefore
no segment information is provided for such periods of time.
E-7
For the nine months ended September 30, 2002
----------------------------------------------------------
Aviation
e-commerce Supplemental Corporate
(In thousands) business Nurse Staffing and other Total
------------ -------------- ----------- ----------
Subscription revenues $ 3,217 $ 3,217
Advertising 106 106
Nurse staffing services - $ 3,326 3,326
Other 30 - 30
--------- ---------- ---------
Total revenues 3,353 3,326 6,679
--------- ---------- ---------
Cost of revenues, excluding
depreciation and amortization 2,145 3,085 5,230
General and administrative,
excluding depreciation and
amortization 1,339 1,460 $ 664 3,463
Depreciation and amortization 513 67 - 580
Stock based compensation 1 - - 1
Litigation and other related costs - - 150 150
Relocation and other related
costs - - 282 282
--------- ---------- ------- ---------
Total cost of revenues and
operating expenses 3,998 4,612 1,096 9,706
--------- ---------- ------- ---------
Operating loss $ (645) $ (1,286) $(1,096) $ (3,027)
========= ========== ======= =========
Privatization costs and expenses $ - $ - $ 506 $ 506
========= ========== ======= =========
Interest income $ - $ - $ 4 $ 4
========= ========== ======= =========
Other Income, net $ - $ - $ 2 $ 2
========= ========== ======= =========
Capital expenditures $ 73 $ 107 $ - $ 1
========= ========== ======= =========
Total assets $ 25,325 $ 1,214 $ - $ 26,539
========= ========== ======= =========
E-8
For the three months ended September 30, 2002
----------------------------------------------------------
Aviation
e-commerce Supplemental Corporate
(In thousands) business Nurse Staffing and other Total
------------ -------------- ----------- ----------
Subscription revenues $ 1,062 $ 1,062
Advertising 30 30
Nurse staffing services - $ 1,422 1,422
Other 15 - 15
--------- ---------- ---------
Total revenues 1,107 3,326 2,529
--------- ---------- ---------
Cost of revenues, excluding
depreciation and amortization 687 1,258 1,945
General and administrative,
excluding depreciation and
amortization 380 555 $ 245 1,180
Depreciation and amortization 170 24 - 194
--------- ---------- ------- ---------
Total cost of revenues and
operating expenses 1,237 1,837 245 3,319
--------- ---------- ------- ---------
Operating loss $ (130) $ (415) $ (245) $ (790)
========= ========== ======= =========
Privatization costs and expenses $ - $ - $ 236 $ 236
========= ========== ======= =========
Interest income $ - $ - $ 4 $ 4
========= ========== ======= =========
Other Income, net $ - $ - $ 90 $ 90
========= ========== ======= =========
Capital expenditures $ 6 $ 3 $ - $ 9
========= ========== ======= =========
All of the Company's long-lived assets are geographically located in the
United States. Management does not review revenues by geographical locations.
Commitments and Contingencies
In September 2000 the Company sued a third party financial institution
because such financial institution paid a check in the amount of $161,000
despite a stop payment order duly issued by the Company. The payee cashed the
check, along with a replacement check. Before the Company learned that the payee
had cashed both checks, the Company entered into a binding settlement with the
payee ending the Company's business relationship with the payee. The payee
refused to return the amounts and the financial institution failed to credit the
Company's account. The Company filed suit, and discovery has commenced. The
financial institution joined the payee as a defendant in the matter. The payee
countersued the Company claiming the financial institution's action breached a
settlement agreement between the payee and the Company and that the Company must
indemnify the payee for any losses that may be sustained in the matter. The
claims against the Company in this matter are the financial institution's demand
for legal fees if the financial institution prevails and the payee's claims for
indemnity and legal fees. This matter is scheduled for trial in January 2003.
In April and May 2001, the Company received notice of, or had been served
with, four purported class action lawsuits (Foderaro vs. PartsBase.com, Inc. et
al, Case No.: 01-8319 CIV- FERGUSON; IKCYBERINVESTMENTS vs. PartsBase.com, Inc.
et al, Case No.: 01-8368 CIV-SEITZ; and Webb vs. PartsBase, et.al. Case No.
01-8376 CIV- GRAHAM and Jesus Martin vs. PartsBase.com, Inc. et al, Case No.
01-8526-CIV-UNGARO-BENAGES). These cases were consolidated into one action
entitled, In re: PartsBase.com, Inc. Securities Litigation, Case No.
01-8319-CIV-UNGARO-BENAGES/BROWN. The consolidated lawsuit named as defendants
the Company, certain of its current and former officers and directors, and the
underwriters of its initial public offering of securities. The consolidated
lawsuit alleged violations of Sections 11, 12(a)(2) and 15 of the Securities Act
of 1933 and alleged the Company's March 2000 registration statement
misrepresented and failed to disclose matters related to the Company's business
operations and membership sales. The complaint alleged damages of nearly $42
million. The Court certified a class consisting of purchasers of the Company's
E-9
common stock in the offering during the period from March 22, 2000 through April
25, 2000. The Company maintained a director and officer's liability insurance
policy that provides $3 million of coverage, with a retention of $200,000. As of
September 30, 2002, the Company had incurred and previously charged the
retention of $200,000 to expense. In May 2002, the Company reached an agreement
in principle for the settlement of the consolidated class action. The plaintiffs
in the case and the defendants, entered into a Memorandum of Understanding
outlining the general terms of the proposed settlement. The Memorandum of
Understanding provided for, among other things, a settlement amount of $1.5
million in cash, plus interest, payable to the class under an insurance policy
and for the plaintiffs' dismissal of the class action with prejudice as well as
a broad form of release in favor of PartsBase and the other defendants in the
class action which, among other things, will have the effect of barring all
claims by the plaintiffs and the members of the class other than those who opt
out, arising out of the purchase and sale of the Company's common stock in the
Company's initial public offering of securities.
In September 2002, the matter was settled and final judgment was entered by
the U.S. District Court for the Southern District of Florida dismissing the case
with prejudice and otherwise confirming the settlement terms contained in the
Memorandum of Understanding. The settlement releases the directors, management
personnel, underwriters and securities firms named as defendants in the
litigation from further liability relating to the IPO; however, stockholders of
119,000 shares of PRTS opted out of the settlement, and one such stockholder has
filed a lawsuit in California State Court. The Company believes that the
allegations contained in this lawsuit are without merit and intends to
vigorously defend this action. The Company believes the resolution of this
matter will not have a material impact upon the Company's consolidated financial
statements, results of operations or cash flows.
In July 2001, the Company was served with a lawsuit filed by an information
technology vendor claiming damages resulting from the Company's alleged breach
of a software sales and service contract in the amount of $126,631 plus
interest, cost and fees. The Company intends to vigorously defend the
allegations contained in this lawsuit. In July 2001, the Company sued the
manufacturer of such software for damages totaling $220,000 as a result of
software malfunction. The cases have been consolidated in the Southern District
of Florida; however, a tentative trial date of September 2002 has been continued
and no new trial date has been set. The consolidated matter was scheduled for
court ordered mediation amongst the three parties in September 2002 but was
canceled by the plaintiff. A new mediation date is expected to be rescheduled.
The Company believes the resolution of this matter will not have a material
impact upon the Company's consolidated financial statements, results of
operations or cash flows.
In March 2001 the Company received notice from counsel to the Business
Software Alliance (the "BSA"), an industry watchdog group representing software
manufacturers, in connection with the BSA's investigation of possible illegal
duplication of certain software companies' proprietary software products by the
Company. Through subsequent correspondence from the BSA, the BSA has alleged
that the Company has installed unauthorized copies of BSA member software
products on Company computers. The correspondence from the BSA provides that the
Company's potential exposure in this matter could be over $1,950,000 if willful
copyright infringement is shown. The Company is currently in negotiations with
the BSA in an attempt to resolve the matter. To date the Company is not aware of
any legal proceedings initiated by BSA in this matter. The Company believes that
the resolution of this matter will not have a material impact upon the Company's
consolidated financial position, results of operations and cash flows.
During May 2000 the Company entered into a sublease agreement with an
unaffiliated third party for 35,668 square feet of general office space. The
sublease agreement was to expire on October 31, 2006. In December 2001, the
sublessor filed for bankruptcy protection and as a result, the sublease was
voided by the bankruptcy court. The Company continued to occupy the premises
until February 2002, at which time, the Company moved to new subleased 6,600
square feet office space in Boca Raton from an unaffiliated party. On March 26,
2002, the lessor of the former property filed a complaint for damages in the
amount of $92,910 plus interest, costs and fees, representing the value of the
time the Company occupied the premises from the date the sublease was voided by
the bankruptcy court through the date the Company vacated the premises in
accordance with rent provisions of the voided sublease. The lessor subsequently
amended the complaint and the Company filed a motion to dismiss the complaint.
The motion to dismiss the complaint was heard in November 2002, at which time
the Court granted the plaintiff additional time to amend the complaint. The
Company believes the resolution of this matter will not have a material impact
upon the Company's consolidated financial statements, results of operations or
cash flows.
On April 8, 2002, the Company received a proposal from the
Company's Chairman of the Board, President, CEO and majority stockholder (the
E-10
"Company's Chairman ") and a limited partnership controlled by the Company's
Chairman to acquire the remaining shares of the Company's common stock,
approximately 5,000,000 shares or approximately 36% of the shares currently
outstanding that the Company's Chairman does not own or control. On August 26,
2002 the Company and entities controlled by the Company's Chairman entered into
a definitive agreement regarding the transaction for a per share purchase price
of $1.41 per share.
On April 16 and 17, May 8 and June 11, 2002, the Company received notices
of, or had been served with, four purported class action lawsuits, two of which
were filed in the Circuit Court in and for Palm Beach County, Florida and the
other two which was filed in the Court of Chancery of the State of Delaware (
Cliff Gordon vs. PartsBase, Inc. et.al, Case No. 024277, Hughes Rousseau vs.
PartsBase, Inc. et.al Case No. 0205368 in Palm Beach County, Florida and Key
Equity Investors vs. PartsBase, Inc., et.al. C.A. 19546 and Paul Berger vs.
PartsBase, Inc. et.al, C.A. 19693 in Delaware). The lawsuits name as
defendants the Company and certain of its current officers and directors.
The lawsuits allege the directors have breached their fiduciary duty to the
plaintiffs and the purported class and seek to enjoin the Company from entering
into a proposed going-private transaction by the Company's Chairman and a
related limited partnership and to recover unspecified damages resulting from
the alleged breach of fiduciary duty. The Company intends to vigorously
defend these actions. Nevertheless, an unfavorable resolution of these
lawsuits could have a material adverse effect on the Company in one or more
future periods. The Company maintains a director and officer's liability
insurance policy that provides $3 million of coverage, with a retention of
$150,000. The Company fully expects its legal expenses to exceed the retention
amount. Therefore at June 30, 2002, the Company recorded a litigation reserve
for $150,000 to cover the expected retention. This reserve has been classified
as a litigation and other related costs in the statement of operations for the
nine months ended September 30, 2002.
The two lawsuits filed in Delaware have been informally stayed pending the
resolution of the lawsuits filed in Florida. In October 2002, the Florida Court
approved consolidation of the two lawsuits filed in Florida as a single action.
In October 2002, the parties to the Florida lawsuits entered into a Memorandum
of Understanding, which provides for an agreement-in-principle to settle the
class action lawsuits. The Memorandum of Understanding provides for the parties
to enter a joint stipulation and such other documentation as may be required to
obtain final approval of the Florida Court. The Company believes the resolution
of this matter will not have a material impact upon the Company's consolidated
financial statements, results of operations or cash flows.
In September 2002, the Company received notice that a complaint had been
filed in the United States District Court for the Western District of Tennessee
by a subsidiary of a competitor of the Company. The complaint alleges that the
Company violated the Computer Fraud and Abuse Act and various related torts. The
Company's counsel has filed a motion to dismiss the complaint and to transfer
venue to Florida. The Company intends to vigorously defend the allegations
contained in this lawsuit. The Company believes the resolution of this matter
will not have a material impact upon the Company's consolidated financial
statements, results of operations or cash flows.
The Company is not currently aware of any other legal proceedings or claims
that the Company believes are likely to have a material adverse effect on the
Company's financial position, results of operations, or cash flows.
The Company is party to a Content License and Reseller Agreement (the
"Agreement") with USA Information Systems Inc. ("USAIS"), an exclusive owner of
an Internet-based government parts, logistic and digital document database,
whereby USAIS provides access to that database to paid subscribers through a Web
site owned, operated and maintained by USAIS (the "Subscription Services"). Per
the Agreement, as amended on March 15, 2001 and March 15, 2002, respectively,
USAIS licenses to the Company the non-exclusive rights to resell the
Subscription Services and to offer access to certain segments of the USAIS
content to the Company's existing customers. The Agreement commenced on June 1,
2000 and has an initial term of three years. The Agreement will be automatically
renewed for two one-year terms, unless either party notifies the other in
writing of its intention not to renew the Agreement within ninety (90) days
prior to the expiration of the then-current term. The Company is obligated to
pay USAIS the sum of $100,000 in monthly installments during the first year of
the Agreement. Beginning with the second year and continuing until the
expiration of the Agreement, the Company is obligated to pay USAIS $60,000 in
monthly installments. In conjunction with the amended Agreement, the Company
obtained and delivered to USAIS, on March 21, 2002, an irrevocable, transferable
standby Letter of Credit in the amount of $840,000, collateralized by a
certificate of deposit of the same amount that is to diminish on a dollar for
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dollar basis as payments are made in accordance with the amended Agreement. As
of September 30, 2002, the Company owed USAIS $480,000.
Proposed Privatization Transaction
On April 8, 2002, the Company received a proposal from the
Company's Chairman of the Board, President, CEO and majority stockholder (the
"Company's Chairman") and a limited partnership controlled by the Company's
Chairman to acquire the remaining shares of the Company's common stock,
approximately 5,000,000 shares or approximately 36% of the shares currently
outstanding that the Company's Chairman does not own or control (the
"Non-Chairman's Shares"). On August 26, 2002, the Company and the entities
controlled by the Company's Chairman entered into a definitive merger agreement,
providing for, among other things, entities controlled by the Company's Chairman
to acquire the Non-Chairman Shares at a price of $1.41 per share. The merger
agreement and the consummation of the transactions contemplated thereunder are
subject to, among other things, approval of the shareholders of PartsBase, Inc.
In November 2002, the Company filed a Preliminary Proxy Statement and related
Transaction Statement with the Securities and Exchange Commission relating to
the contemplated transaction.
As of September 30, 2002, the Special Committee has incurred $506,092 in
expenses, primarily for legal and financial advice and a stipend for each of the
three members of the Special Committee approved by the Company's Board of
Directors. Such expenses have been classified as Privatization Expenses in the
Company's Condensed Consolidated Statements of Operations for the three months
and nine months ended September 30, 2002, respectively.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including, without limitation, statements regarding the
Company's expectations, beliefs, intentions or future strategies that are
signified by the words "expects", "anticipates", "intends", "believes", or
similar language. All forward-looking statements included in this document are
based on information available to the Company on the date hereof, and the
Company assumes no obligation to update any such forward-looking statements.
Actual results could differ materially from those projected in the
forward-looking statements as a result of a number of factors including but not
limited to those set forth under "Risk Factors" included in Exhibit 99.1
elsewhere in this report.
Overview
We currently operate in two business segments: (i) we provide
business-to-business e-commerce services for the aviation industry and (ii)
since October 2001 we have provided, for a fee, registered nurses for temporary
assignment to hospitals located in Broward County, Miami-Dade County,
Hillsborough County, Orange County and Palm Beach County, Florida.
We were incorporated in Texas on April 27, 1999 and prior to such date
operated as a division of Aviation Laboratories, Inc. At the Company's Annual
Meeting of Stockholders held on June 20, 2001, the stockholders approved an
amendment to change the state of incorporation of the Company from Texas to
Delaware and changed the name of the Company from PartsBase.com, Inc. to
PartsBase, Inc. As a Texas corporation, the Company's shares of common stock had
no par value. As a result of the reincorporation in Delaware, the Company's
shares of preferred and common stock, each have a $0.001 par value and $14,004
was reclassified from Additional Paid-In Capital to Common Stock to reflect the
par value of the shares of common stock outstanding at such time. No shares of
preferred stock were issued or outstanding at September 30, 2002 and December
31, 2001, respectively.
The Aviation E-commerce Business and Corporate
Results of Operations
Net Revenues
Net revenues consist of subscription fees charged to subscribers and, to a
lesser extent, banner-advertising and product listings revenue. Net revenues
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were $1,106,933 and $3,352,915 for the third quarter and first nine months of
2002, respectively, compared to $1,343,649 and $4,296,715 for the same periods
in 2001, a decrease of 18% and 22%, respectively. During the third quarter and
first nine months of 2002, PartsBase signed up 180 and 547 new subscribers at an
average subscription fee of $1,985 and $2,022, respectively. During the same
periods, 501 and 1,382 subscribers renewed their subscription for another year
at an average subscription fee of $1,606 and $1,634, respectively. The aggregate
average subscription fee of both new and renewal subscribers during the third
quarter and first nine months of 2002 was $1,706 and $1,744, respectively.
During the third quarter and first nine months of 2001, PartsBase signed up
282 and 1,435 new subscribers at an average subscription fee of $1,675 and
$1,490, respectively. In addition, during the third quarter and first nine
months of 2001, 427 and 1,155 members renewed their subscriptions for another
year at the average renewal fee of $1,368 and $1,316 respectively. The average
subscription fee increased during the 2002 nine month period over the same
period in 2001, due to higher prices charged for competing services, and
PartsBase's ability to offer additional value added services to its subscribers,
such as government procurement data and enhanced parts search. The aggregate
average subscription fee of both new and renewal subscribers during the third
quarter and first nine months of 2001 was $1,547 and $1,312, respectively.
At September 30, 2002, PartsBase had 2,375 paying subscribers as compared
to 2,466 paying subscribers at June 30, 2002, 2,749 paying subscribers at March
31, 2002, 2,926 paying subscribers at December 31, 2001 and 3,315 paying
subscribers at September 30, 2001. The subscriber count decreased during the
second quarter of 2002 compared to the prior quarter, as former subscribers who
utilized the site on a marginal basis and paid below average subscription fees
did not renew their membership. Of the 1,382 subscribers who renewed their
subscriptions during the first nine months of 2002, 689 represent those
subscribers renewing for the second time, representing 26% of the new
subscribers initially signed during the first nine months of 2000 and 48% of the
new subscribers signed up during the first nine months of 2001. The Company
expects that the renewal rate for third year subscriptions will be higher than
that experienced for second year renewals, although there can be no assurances
that future renewal rates will be higher than that experienced for the second
year. A paid subscriber is defined as a member of the PartsBase web site who has
purchased a subscription that is currently active, and therefore, does not
include subscribers whose subscriptions have expired, or potential subscribers
who are trialing the service.
Gross revenues were $1,212,208 and $3,505,942 for the third quarter and
first nine months of 2002, respectively, compared to $1,125,229 and $3,993,137
for the same periods in 2001, an increase of 8% and a decrease of 12%,
respectively. The increase in gross revenue during the current quarter as
compared to the same quarter of the prior year is attributable to an increase in
subscription fees charged to subscribers during the current quarter. The
decrease in the 2002 nine month period as compared to the comparable period of
the prior year is attributable to finite number of members in the aerospace
community and fewer renewals of initial subscribers who utilized the site on an
infrequent basis, in 2002.
PartsBase recognizes earned subscription and banner advertising revenue
over the life of the subscription, which is typically 12 months. Gross revenue
represents total subscription and advertising sales made during the period
presented, for which a portion is deferred and recognized as earned. Net
revenues represent that portion of gross revenues of all periods that was earned
during the current period presented. Sales costs, including commissions, are
expensed as incurred, and are included in the cost of revenues. Deferred revenue
increased to $2,251,843 at September 30, 2002 compared to $2,207,485 at June 30,
2002, $2,308,109 as of March 31, 2002, $2,231,076 at December 31, 2001 and
$2,412,787 at September 30, 2001.
The following table sets forth gross revenue by product line for the last
five quarters, as well as operating data and sequential quarter-to-quarter
revenue growth (decline) percentages for the same period.
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PartsBase, Inc.
Revenue Detail by Quarter (000's)
09/30/01 12/31/01 03/31/02 06/30/02 09/30/02
-------- -------- -------- -------- --------
New Subscriptions $ 492 $ 381 $ 451 $ 298 $ 357
Renewal Subscriptions 591 833 772 682 805
Advertising 27 26 31 46 33
Other 15 2 5 9 17
-------- -------- -------- -------- --------
Total Gross Revenue $ 1,125 $ 1,242 $ 1,259 $ 1,035 $ 1,212
======== ======== ======== ======== =========
Sequential Gross Rev. Growth -7% 10% 1% -18% 17%
======== ======== ======== ======== =========
Total Net Revenue $ 1,344 $ 1,224 $ 1,158 $ 1,088 $ 1,107
======== ======== ======== ======== =========
Sequential Net Rev. Growth -1% -9% -5% -6% 2%
======== ======== ======== ======== =========
Salesperson Compensation $ 398 $ 422 $ 441 $ 394 $ 399
======== ======== ======== ======== =========
Sales Comp/Gross Revenue 35% 34% 35% 38% 33%
======== ======== ======== ======== =========
Deferred Revenue Balance $ 2,413 $ 2,231 $ 2,308 $ 2,207 $ 2,252
======== ======== ======== ======== =========
Cost of Revenues
Cost of revenues consists of compensation for sales and marketing
personnel, telephone expenses, amortization and maintenance of web site
development costs, contract payments to a third party for procurement data
functionality and a proportion of rent and office expenses. Compensation costs
for sales and marketing personnel are incurred in the month paid while the
revenue is pro-rated over the related subscription period, generally a 12-month
period. Therefore, during quarters with negative gross revenue growth, gross
margins will be positively impacted due to the effect of a smaller pool of sales
commissions being expensed in their entirety during the quarter, whereas sales
from prior quarters with larger gross revenues are being amortized over the
subscription term. Costs of revenues, exclusive of depreciation and
amortization, were $686,788 and $2,144,512 for the third quarter and first nine
months of 2002, respectively, compared to $835,919 and $3,308,926 for the same
periods in 2001. As a percent of net revenues, costs of revenues were 62% and
64% for the third quarter and first nine months of 2002, respectively, compared
to 62% and 77% for the same periods in 2001. Salesperson compensation in the
third quarter and first nine months of 2002 as a percentage of gross revenue was
33% and 35%, respectively. This compares to 35% and 40%, respectively, in the
third quarter and first nine months of 2001. Salesperson compensation as a
percentage of gross revenue is continuing to trend back downwards, as renewals,
for which the commission rate is substantially lower than new subscriptions,
comprise a greater portion of gross revenues.
At September 30, 2002, PartsBase employed 43 persons in sales and customer
service, compared to 83 persons at September 30, 2001. Additionally, included in
cost of revenues in the third quarter and first nine months of 2002 was $180,000
and $549,050, respectively, for contract payments to a third party for
government procurement data as opposed to $180,000 and $749,083 for the same
periods of 2001.
General and Administrative Expenses
For the third quarter and nine months ended September 30, 2002 ,
respectively, aviation e-commerce general and administrative expenses, excluding
stock-based compensation expense ($0 and $1,090 in the third quarter and first
nine months of 2002 and $98,610 and $276,614 for the same periods in 2001),
depreciation and amortization (of $61,111 and $184,114 in the third quarter and
first nine months of 2002 and $147,918 and $453,340 for the same periods in
2001) and unallocated corporate general and administrative expenses ($245,449
and $663,723 in the third quarter and first nine months of 2002 and $0 during
both periods in 2001) were $379,915 and $1,339,165 in 2002 as compared to
$1,293,289 and $5,302,434 in 2001, respectively; a decrease of 71% and $913,374
from the third quarter of 2001 and 75% and $3,963,269 from the first nine months
of 2001.
General and administrative expenses were 34% of net revenues, for the third
quarter of 2002, and 96% of net revenues, for the third quarter of 2001,
respectively, exclusive of stock based compensation expense, depreciation and
amortization and unallocated corporate general and administrative expenses.
E-14
General and administrative expenses consisted primarily of personnel costs of
$308,127 and $765,832, rent expense of $5,795 and $150,519, bad debt expense of
$7,831 and $123,560, and other costs totaling $58,162 and $253,378 consisting of
professional fees, utilities, supplies and other related administrative costs,
for the third quarter of 2002 and 2001, respectively.
General and administrative expenses were 40% of net revenues, for the first
nine months of 2002, and 123% of net revenues, for the first nine months of
2001, respectively, exclusive of stock based compensation expense, depreciation
and amortization and unallocated corporate general and administrative expenses.
General and administrative expenses consisted primarily of personnel costs of
$1,058,338 and $3,339,450, rent expense of $46,222 and $529,876 advertising
costs of $17,939 and $96,843, bad debt expense of $44,968 and $674,805 and other
costs totaling $171,698 and $661,460 consisting of professional fees, utilities,
supplies and other related administrative costs, for the first nine months of
2002 and 2001, respectively.
The Company made significant personnel reductions during 2001 and 2002. In
addition, depending on salary level, all remaining salaried personnel took a pay
reduction, ranging from 5%-30% during the second quarter of 2001. The Company
expects that its personnel costs will continue to decrease during 2002 but at a
smaller rate. The decrease in bad debt expense compared to the same period of
the prior year relates to the Company's former policy of paying sales
commissions upon signing a Company sales order, rather than upon cash receipt,
which increased the possibility that sales orders of lesser quality would be
submitted. Although the Company can recover commissions paid to sales
representatives if the customer does not pay, the Company's high turnover has
made it difficult to collect on a portion of subscriptions sold. During the
third quarter of 2001, the Company significantly tightened its deal verification
processes, thereby causing its bad debt expense to decrease in 2002.
The Company was comprised of one business segment until October 1, 2001
with the commencement of operations of RNpartners, Inc. into the nurse staffing
business. As a result , there was no corporate component prior to such time. For
the quarter ended and nine months ended September 30, 2002 unallocated corporate
general and administrative expenses, excluding stock-based compensation of $0
and $1,090, respectively, were $245,448 and $663,723. Corporate general and
administrative expenses for the quarter ended and nine months ended September
30, 2002 consisted primarily of executive compensation of $126,796 and $376,324,
professional and directors' fees of $69,015 and $176,176 and directors' and
officers' liability insurance premiums of $26,375 and $67,414.
At September 30, 2002, we employed 17 persons in administrative,
information technology and executive management positions (inclusive of
corporate positions) as compared to 28 persons at September 30, 2001.
Depreciation and Amortization
Depreciation and amortization expenses for the quarter and nine months
ended September 30, 2002 totaled $170,173 and $512,856, respectively, as
compared to $197,224 and $594,440 for the similar 2001 periods. The decrease in
the 2002 periods primarily results from the depreciation and amortization
recorded in 2001 associated with furniture, fixtures and trailing technology
computer equipment and software abandoned during the corporate relocation in
2002.
Corporate Relocation Expenses and Abandonment Costs
As a result of the Company's former sublessor filing for bankruptcy
protection in December 2001, the Company's sublease for 35,668 square feet of
office space in Boca Raton was vacated by the bankruptcy court. In January 2002,
the Company entered into a new sublease agreement with another unaffiliated
third party for 6,600 square feet of general office space in Boca Raton. In
conjunction with the move to the new and smaller office space in February 2002,
the Company incurred moving expenses totaling $30,408 and abandoned furniture,
fixtures and trailing technology computer equipment and software with a net book
value of $251,498. Rent savings will be approximately $700,000 per annum. No
additional costs were incurred during the third quarter of 2002.
Stock-Based Compensation Expense
In connection with the issuance of employee stock options issued prior to
our IPO, stock-based compensation expense of $0 and $98,610 was recognized in
E-15
the third quarter 2002 and 2001, respectively, and $1,090 and $276,614 during
the first nine months of 2002 and 2001, respectively. There are no remaining
charges to be recognized in future periods related to pre-IPO grants as there
are no non-vested options outstanding whose exercise price are below the market
price on the date of grant.
Litigation and Other Related Costs
Litigation and other related costs of $150,000 and $457,500 for the nine
months September 30, 2002 and 2001, respectively, consist of a provision for
$150,000 to cover expected retention costs associated with class action lawsuits
the Company is party to in conjunction with a proposed "going private"
transaction during the 2002 period. The 2001 expense consisted of a provision
for $200,000 to cover retention costs associated with class action lawsuits the
Company is party to in conjunction with the Company's March 2000 registration
statement as well as $257,500 during the first six months of 2001 to settle or
accrue for litigation and other related costs. The class action lawsuit relating
to the Company's March 2000 registration statement has been settled pending
final approval by the court. There were no litigation and related costs incurred
during the quarters ended September 30, 2002 and 2001, respectively.
Privatization Expenses
During the quarter ended June 30, 2002, the Company received three offers
from three separate groups, one headed by the Company's Chairman and the other
two offers from unrelated parties, to take the Company private. The Company's
Board of Directors ("Board") formed a Special Committee to evaluate these offers
consisting of three independent members of the Board. The Special Committee
retained legal and financial advisors to assists it with the evaluation of the
respective offers. The Special Committee has incurred $236,092 during the
quarter ended September 30,2002 and $506,092 for the nine months ended September
30, 2002, consisting primarily of professional fees and a Board approved stipend
for each member of the Special Committee.
Other Income
Other income, net, consisting primarily of interest and dividend income,
was $94,052 and $336,958 for the third quarter and nine months ended September
30, 2002, respectively, compared to $303,522 and $1,100,622 for the third
quarter and nine months ended September 30, 2001, respectively. The decrease in
other income, net for the current periods compared to the comparable periods of
the prior year is attributable to lower cash balances and interest rates on the
Company's cash equivalents.
Net Loss
As a result of the foregoing, the net loss decreased to $517,431 and
$1,909,471 for the third quarter and first nine months of 2002, compared to
$777,871 and $4,542,577 for same periods in 2001.
The Nurse Staffing Business
Results of Operations
Comparison of Three and Nine Months Ended September 30, 2002
Net Revenues
We commenced our nurse staffing operations on October 1, 2001. During the
quarter and nine months ended September 30, 2002, we earned $1,422,560 and
$3,325,672 in net revenues from the placement of our registered nurse employees
working as supplemental nursing staff in hospitals in Miami-Dade County, Palm
Beach County, Broward County, Hillsborough County and Orange County Florida.
Approximately 55% of these revenues for the respective periods were derived from
four clients. As of September 30, 2002 we provided supplemental nurse staffing
services to 39 clients; none of the remaining 35 clients individually comprised
in excess of 9% of the total revenues for the nine months ended September 30,
2002.
E-16
Cost of Revenues
Cost of revenues consists of compensation for our registered nurse
employees, uniforms and costs incurred in the recruitment of qualified
professional healthcare professionals. For the three months ended and nine
months ended September 30, 2002 our total cost of revenues totaled $1,258,411
and $3,085,514, respectively, or 88% and 93% of net revenues. Registered nurse
compensation as a percentage of cost of revenues totaled 97% and 96% for the
three months and nine months ended September 30, 2002. As of September 30, 2002,
103 registered nurses, affiliated with us, had worked at least one shift for the
week then ended.
General and Administrative Expenses
For the quarter and nine months ended September 30, 2002, general and
administrative expenses totaled $578,765 and $1,526,781 respectively. General
and administrative expenses for the quarter ended and nine months ended
September 30, 2002 consisted primarily of personnel costs of $419,564 and
$1,053,140 rent of $31,502 and $88,141 and other costs totaling $127,699 and
$385,500 consisting of marketing expenses, bad debts, depreciation, phone and
utilities, supplies and other related administrative costs, respectively. At
September 30, 2002, we employed 51 persons in administrative, and executive
management positions in our nurse staffing operations.
Operating Loss
As a result of the foregoing, the operating loss incurred during the
quarter and nine months ended September 30, 2002 totaled $414,616 and
$1,286,623.
Liquidity and Capital Resources
Financial Condition
As of September 30, 2002, the Company had $22,594,237 of cash and cash
equivalents and restricted cash totaling $480,000. At September 30, 2002, the
Company had $20,791,955 of working capital.
The Company currently anticipates that its operating expenses will be a
material use of its cash resources. Additionally, the Company will continue to
evaluate possible acquisitions of, or investments in, businesses, products, and
technologies, which may require the use of cash. The Company believes that its
existing cash and cash equivalents and marketable debt securities will be
sufficient to meet its anticipated cash needs for working capital and capital
expenditures for at least the next twelve months.
Cash Flows
Net cash used in operating activities totaled $2,565,855 for the nine
months ended September 30, 2002 compared to net cash used in operating
activities of $2,804,809 for the comparable period of the prior year. The
current period decrease in cash used in operations as compared to the same
period of last year reflects a decrease in the loss for the period of $1,346,483
offset by an increase in accounts receivable of $846,663, primarily the result
of the operations of RNpartners. These items are offset by an increase of
$617,911 in accounts payable primarily as a result of a significant paydown of
accounts payable during the first nine months of 2001.
Net cash provided by investing activities totaled $1,309,677 for the nine
months ended September 30, 2002 compared to net cash used by investing
activities of $11,544,652 for the comparable period of the prior year. The
current period increase of $12,854,329 in cash provided from investing
activities as compared to last year is primarily the result of a decrease in
purchases of marketable debt securities totaling $13,872,550 during the prior
year period as opposed to the redemption of a certificate of deposit-restricted
cash of $590,000 during the first nine months of 2002.
Net cash used in financing activities totaled $1,178 for the nine months
ended September 30, 2002, compared to net cash used financing activities
totaling $616,618 for the comparable period of 2001. The decrease of $615,440 in
cash used during the current period as compared to last year is primarily
because during the nine months ended September 30, 2002, the Company repurchased
538,120 shares of its common stock at a cost of $795,544 whereas the Company
E-17
repurchased 25,700 shares of its common stock for $22,838 during the nine months
ended September 30, 2002.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to the impact of interest rate changes.
Interest Rate Risk
The primary objective of investment activities is to preserve principal
while at the same time maximizing yields without significantly increasing risk.
At September 30, 2002, PartsBase's portfolio consisted of investments in
institutional money market funds. PartsBase's investment policy is focused on
ensuring that PartsBase has liquid cash balances available to meet its
day-to-day operating cash needs. The policy establishes guidelines for the
investment of surplus cash balances that will maximize return with minimum
credit and liquidity risk. All investments are held in U.S. dollars. Specific
instruments approved for inclusion in the portfolio are limited to: obligations
issued by the U.S. Treasury and U.S. Federal Agencies, obligations of U.S.
commercial banks such as bankers' acceptances and certificates of deposit and
obligations of major corporations and bank holding companies such as direct
issue commercial paper, medium term notes and investment grade bond funds.
The Company intends to hold its investments until maturity; however, it is
exposed to the impact of interest rate changes. Investments in both fixed rate
and floating rate interest earning instruments carries a degree of interest rate
risk. Fixed rate securities may have their fair market value adversely impacted
due to a rise in interest rates, while floating rate securities may produce less
income than expected if interest rates fall. Due in part to these factors, the
Company's future investment income may fall short of expectations due to changes
in interest rates.
Foreign Exchange Risk
The Company has minimal exposure to foreign exchange risk as all of its
sales to customers outside of the United States are collected in U.S. dollars.
Item 4. Controls and Procedures
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, have conducted an evaluation of the effectiveness of
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. In
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated can provide only reasonable assurance of achieving the desired control
objectives. Based on that evaluation, the Chief Executive Officer and the Chief
Financial Officer concluded that the disclosure controls and procedures are
effective in ensuring that all material information required to be filed in this
quarterly report has been made known to them in a timely fashion. There have
been no significant changes in internal controls, or in other factors that could
significantly affect internal controls, subsequent to the date the Chairman of
the Board and Chief Financial Officer completed their evaluation.
PART II---OTHER INFORMATION
Item 1. Legal Proceedings
In September 2000 the Company sued a third party financial institution
because such financial institution paid a check in the amount of $161,000
despite a stop payment order duly issued by the Company. The payee cashed the
check, along with a replacement check. Before the Company learned that the payee
had cashed both checks, the Company entered into a binding settlement with the
payee ending the Company's business relationship with the payee. The payee
refused to return the amounts and the financial institution failed to credit the
Company's account. The Company filed suit, and discovery has commenced. The
financial institution joined the payee as a defendant in the matter. The payee
countersued the Company claiming the financial institution's action breached a
settlement agreement between the payee and the Company and that the Company must
indemnify the payee for any losses that may be sustained in the matter. The
claims against the Company in this matter are the financial institution's demand
E-18
for legal fees if the financial institution prevails and the payee's claims for
indemnity and legal fees. This matter is scheduled for trial in January 2003.
In April and May 2001, the Company received notice of, or had been served
with, four purported class action lawsuits (Foderaro vs. PartsBase.com, Inc. et
al, Case No.: 01-8319 CIV- FERGUSON; IKCYBERINVESTMENTS vs. PartsBase.com, Inc.
et al, Case No.: 01-8368 CIV-SEITZ; and Webb vs. PartsBase, et.al. Case No.
01-8376 CIV- GRAHAM and Jesus Martin vs. PartsBase.com, Inc. et al, Case No.
01-8526-CIV-UNGARO-BENAGES). These cases were consolidated into one action
entitled, In re: PartsBase.com, Inc. Securities Litigation, Case No.
01-8319-CIV-UNGARO-BENAGES/BROWN. The consolidated lawsuit named as defendants
the Company, certain of its current and former officers and directors, and the
underwriters of its initial public offering of securities. The consolidated
lawsuit alleged violations of Sections 11, 12(a)(2) and 15 of the Securities Act
of 1933 and alleged the Company's March 2000 registration statement
misrepresented and failed to disclose matters related to the Company's business
operations and membership sales. The complaint alleged damages of nearly $42
million. The Court certified a class consisting of purchasers of the Company's
common stock in the offering during the period from March 22, 2000 through April
25, 2000. The Company maintained a director and officer's liability insurance
policy that provides $3 million of coverage, with a retention of $200,000. As of
September 30, 2002, the Company had incurred and previously charged the
retention of $200,000 to expense. In May 2002, the Company reached an agreement
in principle for the settlement of the consolidated class action. The plaintiffs
in the case and the defendants, entered into a Memorandum of Understanding
outlining the general terms of the proposed settlement. The Memorandum of
Understanding provided for, among other things, a settlement amount of $1.5
million in cash, plus interest, payable to the class under an insurance policy
and for the plaintiffs' dismissal of the class action with prejudice as well as
a broad form of release in favor of PartsBase and the other defendants in the
class action which, among other things, will have the effect of barring all
claims by the plaintiffs and the members of the class other than those who opt
out, arising out of the purchase and sale of the Company's common stock in the
Company's initial public offering of securities.
In September 2002, the matter was settled and final judgment was entered by
the U.S. District Court for the Southern District of Florida dismissing the case
with prejudice and otherwise confirming the settlement terms contained in the
Memorandum of Understanding. The settlement releases the directors, management
personnel, underwriters and securities firms named as defendants in the
litigation from further liability relating to the IPO; however, stockholders of
119,000 shares of PRTS opted out of the settlement, and one such stockholder has
filed a lawsuit in California State Court. The Company believes that the
allegations contained in this lawsuit are without merit and intends to
vigorously defend this action. The Company believes the resolution of this
matter will not have a material impact upon the Company's consolidated financial
statements, results of operations or cash flows.
In July 2001, the Company was served with a lawsuit filed by an information
technology vendor claiming damages resulting from the Company's alleged breach
of a software sales and service contract in the amount of $126,631 plus
interest, cost and fees. The Company intends to vigorously defend the
allegations contained in this lawsuit. In July 2001, the Company sued the
manufacturer of such software for damages totaling $220,000 as a result of
software malfunction. The cases have been consolidated in the Southern District
of Florida; however, a tentative trial date of September 2002 has been continued
and no new trial date has been set. The consolidated matter was scheduled for
court ordered mediation amongst the three parties in September 2002 but was
canceled by the plaintiff. A new mediation date is expected to be rescheduled.
The Company believes the resolution of this matter will not have a material
impact upon the Company's consolidated financial statements, results of
operations or cash flows.
In March 2001 the Company received notice from counsel to the Business
Software Alliance (the "BSA"), an industry watchdog group representing software
manufacturers, in connection with the BSA's investigation of possible illegal
duplication of certain software companies' proprietary software products by the
Company. Through subsequent correspondence from the BSA, the BSA has alleged
that the Company has installed unauthorized copies of BSA member software
products on Company computers. The correspondence from the BSA provides that the
Company's potential exposure in this matter could be over $1,950,000 if willful
copyright infringement is shown. The Company is currently in negotiations with
the BSA in an attempt to resolve the matter. To date the Company is not aware of
any legal proceedings initiated by BSA in this matter. The Company believes that
the resolution of this matter will not have a material impact upon the Company's
consolidated financial position, results of operations and cash flows.
E-19
During May 2000 the Company entered into a sublease agreement with an
unaffiliated third party for 35,668 square feet of general office space. The
sublease agreement was to expire on October 31, 2006. In December 2001, the
sublessor filed for bankruptcy protection and as a result, the sublease was
voided by the bankruptcy court. The Company continued to occupy the premises
until February 2002, at which time, the Company moved to new subleased 6,600
square feet office space in Boca Raton from an unaffiliated party. On March 26,
2002, the lessor of the former property filed a complaint for damages in the
amount of $92,910 plus interest, costs and fees, representing the value of the
time the Company occupied the premises from the date the sublease was voided by
the bankruptcy court through the date the Company vacated the premises in
accordance with rent provisions of the voided sublease. The lessor subsequently
amended the complaint and the Company filed a motion to dismiss the complaint.
The motion to dismiss the complaint was heard in November 2002, at which time
the Court granted the plaintiff additional time to amend the complaint. The
Company believes the resolution of this matter will not have a material impact
upon the Company's consolidated financial statements, results of operations or
cash flows.
On April 8, 2002, the Company received a proposal from the
Company's Chairman of the Board, President, CEO and majority stockholder (the
"Company's Chairman") and a limited partnership controlled by the Company's
Chairman to acquire the remaining shares of the Company's common stock,
approximately 5,000,000 shares or approximately 36% of the shares currently
outstanding that the Company's Chairman does not own or control (the
"Non-Chairman's Shares"). On August 26, 2002, the Company and the entities
controlled by the Company's Chairman entered into a definitive merger agreement,
providing for, among other things, entities controlled by the Company's Chairman
to acquire the Non-Chairman Shares at a price of $1.41 per share. The merger
agreement and the consummation of the transactions contemplated thereunder are
subject to, among other things, approval of the shareholders of PartsBase, Inc.
In November 2002, the Company filed a Preliminary Proxy Statement and related
Transaction Statement with the Securities and Exchange Commission relating to
the contemplated transaction.
On April 16 and 17, May 8 and June 11, 2002, the Company received notices
of, or had been served with, four purported class action lawsuits, two of which
were filed in the Circuit Court in and for Palm Beach County, Florida and the
other two which was filed in the Court of Chancery of the State of Delaware (
Cliff Gordon vs. PartsBase, Inc. et.al, Case No. 024277, Hughes Rousseau vs.
PartsBase, Inc. et.al Case No. 0205368 in Palm Beach County, Florida and Key
Equity Investors vs. PartsBase, Inc., et.al. C.A. 19546 and Paul Berger vs.
PartsBase, Inc. et.al, C.A. 19693 in Delaware). The lawsuits name as
defendants the Company and certain of its current officers and directors.
The lawsuits allege the directors have breached their fiduciary duty to the
plaintiffs and the purported class and seek to enjoin the Company from entering
into a proposed going-private transaction by the Company's Chairman and a
related limited partnership and to recover unspecified damages resulting from
the alleged breach of fiduciary duty. The Company intends to vigorously
defend these actions. Nevertheless, an unfavorable resolution of these
lawsuits could have a material adverse effect on the Company in one or more
future periods. The Company maintains a director and officer's liability
insurance policy that provides $3 million of coverage, with a retention of
$150,000. The Company fully expects its legal expenses to exceed the retention
amount. Therefore at June 30, 2002, the Company recorded a litigation reserve
for $150,000 to cover the expected retention. This reserve has been classified
as a litigation and other related costs in the statement of operations for the
nine months ended September 30, 2002.
The two lawsuits filed in Delaware have been informally stayed pending the
resolution of the lawsuits filed in Florida. In October 2002, the Florida Court
approved consolidation of the two lawsuits filed in Florida as a single action.
In October 2002, the parties to the Florida lawsuits entered into a Memorandum
of Understanding, which provides for an agreement-in-principle to settle the
class action lawsuits. The Memorandum of Understanding provides for the parties
to enter a joint stipulation and such other documentation as may be required to
obtain final approval of the Florida Court. The Company believes the resolution
of this matter will not have a material impact upon the Company's consolidated
financial statements, results of operations or cash flows.
In September 2002, the Company received notice that a complaint had been
filed in the United States District Court for the Western District of Tennessee
by a subsidiary of a competitor of the Company. The complaint alleges that the
Company violated the Computer Fraud and Abuse Act and various related torts. The
Company's counsel has filed a motion to dismiss the complaint and to transfer
venue to Florida. The Company intends to vigorously defend the allegations
contained in this lawsuit. The Company believes the resolution of this matter
will not have a material impact upon the Company's consolidated financial
statements, results of operations or cash flows.
E-20
The Company is not currently aware of any other legal proceedings or claims
that the Company believes are likely to have a material adverse effect on the
Company's financial position, results of operations, or cash flows.
Item 2. Changes in Securities
During the nine months ended September 30, 2002, the Company repurchased
25,700 shares of its common stock in the open market at an aggregate purchase
price of $22,838, inclusive of brokerage fees. All of these shares were retired
as of March 15, 2002.
In June 2002, a former officer of the Company exercised fully vested
options to purchase 34,382 shares of the Company's common stock at a purchase
price of $21,660.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(1) Exhibits
(a) Exhibit 99.1-Safe Harbor Compliance Statement
(b) Exhibit 99.2-Certification by Chief Executive Officer and
Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
E-21
Signatures
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: November 14, 2002 /s/ Robert A. Hammond
---------------------
ROBERT A. HAMMOND, JR.
President, Chief Executive Officer,
And Chairman
(Principal Executive Officer)
Date: November 14, 2002 /s/ Mark Weicher
----------------
MARK WEICHER
Chief Financial Officer
(Principal Financial Accounting Officer)
E-22
Certifications Pursuant to
Section 302 of
the Sarbanes-Oxley Act of 2002
I, Robert A. Hammond, Jr. certify that:
1. I have reviewed this quarterly report on Form 10-Q of PartsBase, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/Robert A. Hammond, Jr.
--------------------------
Robert A. Hammond, Jr.
Chief Executive Officer, President
E-23
CERTIFICATION
I, Mark Weicher, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PartsBase, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Mark Weicher
----------------
Mark Weicher
Chief Financial Officer
E-24
PARTSBASE, INC.
Index to Exhibits
Title Exhibit No.
--------------------------------------------------- -----------
Safe Harbor Compliance Statement 99.1
Certification by Chief Executive Officer and Chief
Financial Officer Pursuant to Section 906 of the
Sarbanes - Oxley Act of 2002 99.2
1
APPENDIX F
VOTING AGREEMENT DATED DECEMBER 20, 2002
VOTING AGREEMENT
VOTING AGREEMENT (this "AGREEMENT"), dated as of December 20, 2002, by and
among Hammond Acquisition Corp. ("HAC"), a Delaware corporation and a
wholly-owned subsidiary of Hammond I, Inc., a Florida corporation ("Hammond"),
and the entity listed on the Signature Page hereto (the "Stockholders").
WHEREAS, the Stockholders are, as of the date hereof, have voting power
over the number of shares of common stock, par value $0.01 per share ("Company
Common Stock"), of PartsBase, Inc., a Delaware corporation (the "Company"), set
forth on the Signature Page hereto;
WHEREAS, Hammond and the Company have entered into an Agreement and Plan of
Merger, dated as of August 26, 2002 (the "Merger Agreement"; capitalized terms
used but not defined herein have the meanings ascribed to such terms in the
Merger Agreement), which provides for the merger (the "Merger") of HAC with and
into the Company upon the terms and subject to the conditions set forth in the
Merger Agreement;
WHEREAS, pursuant to the Merger Agreement each share of Company Common
Stock, owned by the stockholders of the Company as of the Effective Time of the
Merger will be converted into the right to receive cash, as set forth therein;
and the Board of Directors of the Company has approved the Merger and the other
transactions contemplated in the Merger Agreement and is recommending that the
Company's stockholders approve the Merger; and
WHEREAS, as a condition to the willingness of Hammond to increase the
Merger consideration to $1.50 per share to induce, the Stockholders have agreed
to enter into this Agreement.
NOW, THEREFORE, in consideration of the execution and delivery by Hammond
of the Merger Agreement and the foregoing and the mutual representations,
warranties, covenants and agreements set forth herein and therein, and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
SECTION 1. Representations, Warranties and Covenants of the Stockholders.
The Stockholders (i) have voting power over the beneficial owners the shares of
Company Common Stock and the options and warrants to purchase shares of Company
Common Stock indicated on the Signature Page hereto, free and clear of any
liens, claims, options, rights of first refusal, co-sale rights, charges or
other encumbrances that, in each case, would deprive Hammond of the benefits of
this Agreement (other than any rights of repurchase held by the Company); (ii)
do not have voting power over the number of shares of Company Common Stock held
for clients in managed accounts indicated on the signature page hereto; (iii) do
not have voting power over any securities of the Company other than the shares
of Company Common Stock and options and warrants to purchase shares of Company
Common Stock indicated on the Signature Page hereto; (iv) have full power and
authority to make, enter into and carry out the terms of this Agreement and the
proxy contained herein; and (iv) will not, and will not permit any "affiliates"
F-1
to: (1) solicit proxies or become a "participant" in a "solicitation" (as such
terms are defined in Regulation 14A under the Exchange Act of 1934, as amended
(the "Exchange Act")) with respect to any action or agreement which would
impede, frustrate, interfere with or prevent the Merger, including any other
Acquisition Proposal, or otherwise encourage or assist any party in taking or
planning any action that would compete with, restrain or otherwise serve to
interfere with or inhibit the timely consummation of the Merger in accordance
with the terms of the Merger Agreement; (2) initiate a stockholder's vote or
action by written consent of the Company stockholders with respect to any action
or agreement which would impede, interfere with or prevent the Merger, including
any other Acquisition Proposal; or (3) become a member of a "group" (as such
term is used in Section 13(d) of the Exchange Act) with respect to any voting
securities of the Company with respect to any action or agreement which would
impede, interfere with or prevent the Merger, including any other Acquisition
Proposal except for a group with Hammond.
SECTION 2. Agreement Not to Transfer Shares.
(a) Prior to the termination of this Agreement, except as otherwise
provided herein, the Stockholders shall not: (i) transfer (which term shall
include, without limitation, for the purposes of this Agreement, any sale, gift,
pledge or other disposition), or consent to any transfer of, any or all of the
Shares (as defined in Section 2(b)); (ii) enter into any contract, option or
other agreement or understanding with respect to any transfer of any or all of
the Shares or any interest therein; (iii) grant any proxy, power-of-attorney or
other authorization or consent in or with respect to the Shares; or (iv) deposit
the Shares into a voting trust or enter into a voting agreement or arrangement
with respect to the Shares.
(b) "SHARES" shall mean: (i) all securities of the Company (including all
shares of Company Common Stock, Preferred Stock and all options, warrants and
other rights to acquire such securities) which the Stockholders having voting
power as of the date of this Agreement; and (ii) all additional securities of
the Company (including all shares of Company Common Stock and all additional
options, warrants and other rights to acquire such securities) of which the
Stockholders acquire voting power during the period from the date of this
Agreement through the Effective Time. In the event of a stock dividend or
distribution, or any change in Company Common Stock or Preferred Stock by reason
of any stock dividend, split-up, recapitalization, combination, exchange of
shares or the like, the term "SHARES" shall be deemed to refer to and include
the Shares as well as all such stock dividends and distributions and any
securities into which or for which any or all of the Shares may be changed or
exchanged or which are received in such transaction.
SECTION 3. Agreement to Vote Shares; Grant of Irrevocable Proxy;
Appointment of Proxy.
(a) Prior to the termination of this Agreement, except as provided herein,
the Stockholders shall vote Stockholders' Shares, in connection with any meeting
or action by written consent of the stockholders of the Company (i) in favor of
the Merger, and (ii) against any action or agreement which would impede,
frustrate, interfere with or prevent the Merger, including any other Acquisition
Proposal. Stockholders agree not, directly or indirectly, to solicit or initiate
F-2
any offer from any party concerning the possible disposition of all or any
substantial portion of the Company's business, assets or capital stock.
(b) Until the termination of this Agreement, the Stockholders hereby
irrevocably grant to, and appoint, Hammond and any nominee thereof, its proxy
and attorney-in-fact (with full power of substitution), for and in the name,
place, and stead of the Stockholders, to vote Stockholders' Shares, or grant a
consent or approval in respect of Stockholders' Shares, in connection with any
meeting or action by written consent of the stockholders of the Company (i) in
favor of the Merger, and (ii) against any action or agreement which would
impede, interfere with or prevent the Merger, including any other Acquisition
Proposal.
(c) The Stockholders represent that any proxies heretofore given in respect
of the Shares are not irrevocable, and that such proxies are hereby revoked.
(d) Subject to Section 5 hereof, the Stockholders hereby affirm that the
proxy set forth in this Section 3 is irrevocable and is given in connection with
the increase in the cash consideration, and that such irrevocable proxy is given
to secure the performances of the duties of the Stockholders under this
Agreement. The Stockholders hereby further affirm that the irrevocable proxy
granted hereby is coupled with an interest in the Shares and, is intended to be
irrevocable in accordance with the provisions of Section 212(e) of the Delaware
General Corporation Law.
(e) The Stockholders will advise its clients to vote shares held by
Stockholder (which the Stockholders do not have voting power) for clients in
managed accounts, the number of such shares is indicated on the Signature Page,
to vote their shares, consistent with the proxy granted under Section 3.
SECTION 4. Further Assurances. From time to time, upon request of the other
party and without further consideration, each party hereto shall execute and
deliver any additional documents and take such further actions as may be
necessary to carry out the provisions hereof. The Stockholders agree, to testify
or provide other assistance in the event this Agreement or the Merger
consideration is challenged, and Hammond shall reimburse Stockholders for their
reasonable out of pocket expenses and costs associated with such assistance
(exclusive of any appearance fees or stipends), however Hammond shall only pay
one-half of such costs and expenses if such action seeks a temporary injunction.
The Stockholders agree to amend the existing Schedule 13D, at their own cost,
stating their firm intent to vote in favor of the Merger; the timing of which
shall be at the discretion of Hammond but in compliance with the rules and
regulations of the Securities and Exchange Commission. Hammond shall also amend
its Schedule 13D, consistent with the terms of this Agreement.
SECTION 5. Termination. Except as otherwise provided in this Agreement,
this Agreement, and all rights and obligations of the parties hereunder, shall
terminate immediately upon the earlier of (i) the termination of the Merger
Agreement in accordance with its terms, unless prior to such termination a
person or entity shall have made an Acquisition Proposal and (ii) the
consummation of the Merger. Sections 3(a) and 3(b) will terminate on the earlier
(x) the date computed in accordance with the previous sentence or (y) by
F-3
September 30, 2003. Nothing in this section shall relieve the Stockholders from
liability or breach of this Agreement. Sections 6 and 8 shall survive any
termination of this Agreement.
SECTION 6. Expenses; Indemnification. All fees and expenses incurred by any
one party hereto shall be borne by the party incurring such fees and expenses
Notwithstanding the foregoing, Hammond shall indemnify Stockholders, and hold
them harmless from and against any expenses and liabilities claimed by any party
in connection with any proceeding associated with Stockholders being deemed to
be a member of the Hammond group or by virtue of granting the irrevocable proxy
pursuant to this Agreement to the fullest extent permitted by applicable law,
the Certificate of Incorporation of the bylaws of Hammond in effect on the date
hereof or as such law, Certificate of Incorporation or bylaws may from time to
time be amended (but, in the case of any such amendment, only to the extent such
amendment permits Hammond to provide broader indemnification rights than the
law, the Certificate of Incorporation or the bylaws permitted Hammond to provide
before such amendment). Without diminishing the scope of the indemnification
provided by this Section 6, Hammond shall indemnify Stockholders whenever they
are a party or are threatened to be made a party to any proceeding, including
without limitation any such proceeding brought by or in the right of PartsBase,
Inc. or stockholders therein, because Stockholders are or were a member of the
Hammond group by virtue of granting the irrevocable proxy with respect to the
Merger, or because of anything done or not done by Stockholders in such
capacity, against expenses and liabilities actually and reasonably incurred by
Stockholders or on their behalf in connection with such proceeding, including
the costs of any investigation, defense, settlement or appeal. In addition to,
and not as a limitation of, the foregoing, the rights of indemnification of
Stockholders provided under this Agreement shall include the advance of all
reasonable expenses (as mutually agreed to by all parties), including attorneys
fees, incurred or to be incurred by or on behalf of Stockholders from time to
time, and shall be paid by Hammond to Stockholders within thirty (30) days after
the receipt by Hammond of a written request for an advance of expenses, whether
prior to or after final disposition of a proceeding.
SECTION 7. Public Announcements. Neither the Stockholders, nor any of their
affiliates shall issue or cause the publication of any press release or other
public announcement with respect to this Agreement or the other transactions
contemplated hereby without the prior written consent of Hammond, except as may
be required by law in which circumstance such announcing party shall make
reasonable efforts to consult with the Hammond to the extent practicable.
SECTION 8. Board Approval. The Board of Directors of the Company has, to
the extent required by applicable law, duly and validly authorized and approved
all necessary corporate action, this Agreement and the transactions contemplated
hereby, so that by the execution and delivery hereof no restrictive provision of
any "fair price," "moratorium," control share acquisition, "interested
shareholders" or similar anti-takeover statute or regulation, restrictive
provision of any applicable takeover provision in the Certificate of
Incorporation or Bylaws of the Company is, or will be applicable to the Company,
the Shares or the transaction contemplated by this Agreement.
F-4
SECTION 9. Miscellaneous.
(a) Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law, or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated herein are not affected in any manner materially
adverse to any party hereto. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in a mutually acceptable
manner.
(b) Binding Effect and Assignment. The provisions of this Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns; no party to this Agreement may assign,
delegate or otherwise transfer any of its rights or obligations under this
Agreement without the prior written consent of the other parties hereto.
(c) Amendments and Modification. Except as may otherwise be provided
herein, any provision of this Agreement may be amended, modified or waived by
the parties hereto if, and only if, such amendment or waiver is in writing and
signed, in the case of an amendment, by the parties hereto, and in the case of a
waiver, by the party against whom the waiver is to be effective.
(d) Specific Performance; Injunctive Relief. The parties hereto acknowledge
that Hammond shall be irreparably harmed and that there shall be no adequate
remedy at law for a violation of any of the covenants or agreements of the
Stockholders set forth herein. Therefore, it is agreed that, in addition to any
other remedies that may be available to Hammond upon any such violation, Hammond
shall have the right to enforce such covenants and agreements by specific
performance, injunctive relief or by any other means available to Hammond at law
or in equity without the necessity of proving the inadequacy of money damages as
a remedy.
(e) Notices. All notices, requests, demands, waivers and other
communications required or permitted to be given under this Agreement to any
party hereunder shall be in writing and deemed given upon (a) personal delivery,
(b) transmitter's confirmation of a receipt of a facsimile transmission, (c)
confirmed delivery by a standard overnight carrier or when delivered by hand or
(d) when mailed in the United States by certified or registered mail, postage
prepaid, addressed at the following addresses (or at such other address for a
party as shall be specified by notice given hereunder):
If to Hammond: Hammond I, Inc.
905 Clint Moore Road
Boca Raton, FL 33487
Attention: Robert A. Hammond, Jr.
Facsimile No.: (561) 953-0787
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With a copy to:
Adorno & Yoss, P.A.
Suite 1700
350 East Las Olas Boulevard
Fort Lauderdale, FL 33301
Attention: Joel D. Mayersohn, Esq.
Facsimile No.: (954) 766-7800
If to the Stockholders: To the address for notice set forth on the
signature page hereof.
With copies to: David C. Adams
Bartel Eng & Schroder
300 Capitol Mall, Suite 1100
Sacramento, California 95814
Facsimile No.: (916) 442-3442
(f) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware (regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof)
as to all matters, including, but not limited to, matters of validity,
construction, effect, performance and remedies.
(g) Entire Agreement. This Agreement constitutes the entire agreement among
the parties hereto with respect to the subject matter hereof and supersedes all
other prior agreements or understandings, both written and oral, between the
parties or any of them with respect to the subject matter hereof.
(h) Effect of Headings. The article and section headings contained in this
Agreement are solely for the purpose of reference, are not part of the agreement
of the parties hereto and shall not in any way affect the meaning or
interpretation of this Agreement.
(i) Counterparts. This Agreement may be signed in any number of
counterparts, each of which shall be deemed an original, with the same effect as
if the signatures thereto and hereto were upon the same instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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The foregoing Agreement is hereby executed as of the date first above
written.
"HAMMOND"
HAMMOND I, INC.,
a Florida corporation
By:/s/Robert A.Hammond Jr.
-----------------------
Name: Robert A. Hammond Jr.
----------------------
Title:President
---------
"STOCKHOLDERS"
ATLAS II, L.P.,
a New York Limited Partnership
By:/s/ Richard Jacinto, II
-----------------------
Name:Richard Jacinto, II
-------------------
Title: General Partner
----------------
Voting Power Over:
------------------
866,800 shares of Company Common
Stock
0 shares of Company Common Stock
issuable upon exercise of options
MARATHON PARTNERS, L.P.,
a New York Limited Partnership
By:/s/ Mario Cibelli
-----------------
Name: Mario Cibelli
--------------
Title: General Partner
----------------
Voting Power Over:
------------------
504,400 shares of Company Common
Stock
0 shares of Company Common Stock
issuable upon exercise of options
100,800 held on behalf of clients'
managed accounts
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PARTSBASE, INC.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
____________, 2003
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
KNOW ALL MEN BY THESE PRESENTS, that the undersigned stockholder of
PARTSBASE, INC., a Delaware corporation, does hereby constitute and appoint
Robert Hammond and Mark Weicher, or any one of them, with full power or
substitution, to act alone and to designate substitutes, the true and lawful
attorneys and proxies of the undersigned for and in the name and stead of the
undersigned, to vote all shares of stock of PartsBase, Inc. that the undersigned
would be entitled to vote if personally present at the Special Meeting of
Stockholders to be held at ______________, on ______________, 2003 at ___ a.m.,
local time, and at any and all adjournments, postponements and continuations
thereof, upon and in respect of the following matters and in accordance with the
following instructions, with discretionary authority as to any and all other
matters which are unknown a reasonable time before the solicitation of proxies
that may properly come before the meeting.
UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR THE
PROPOSALS AS MORE SPECIFICALLY DESCRIBED IN THE PROXY STATEMENT. IF SPECIFIC
INSTRUCTIONS ARE INDICATED, THIS PROXY WILL BE VOTED IN ACCORDANCE THEREWITH.
(CONTINUED, AND TO BE MARKED, DATED AND SIGNED, ON THE OTHER SIDE)
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1 AND 2.
Please mark your vote as indicated in this example [X]
ITEM 1. APPROVAL OF AGREEMENT AND PLAN OF MERGER
To approve and adopt the Agreement and Plan of Merger, dated as of August
26, 2002, as amended December 20, 2002, by and among Robert A. Hammond, Jr.,
Hammond I, Inc., a Florida corporation ("Hammond I"), Hammond Acquisition Corp.
("HAC"), a Delaware corporation and a wholly-owned subsidiary of Hammond I, and
PartsBase, Inc., and the merger contemplated thereby, pursuant to which HAC will
be merged with and into PartsBase, Inc., with PartsBase, Inc. as the surviving
corporation.
FOR AGAINST ABSTAIN
[_] [_] [_]
ITEM 2. POSTPONEMENTS OR ADJOURNMENTS
In their discretion, the proxies are authorized to vote in favor of any
postponements or adjournments of the meeting for the purpose of soliciting
additional proxies, if necessary.
FOR AGAINST ABSTAIN
[_] [_] [_]
NOTE: PLEASE DATE THIS PROXY, SIGN YOUR NAME EXACTLY AS IT APPEARS HEREON, AND
RETURN PROMPTLY USING THE ENCLOSED POSTAGE PAID ENVELOPE.
JOINT OWNERS SHOULD EACH SIGN. WHEN SIGNING AS ATTORNEY, EXECUTOR,
ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. WHEN SIGNING
AS AN ENTITY, PLEASE GIVE NAME OF ENTITY AND HAVE A DULY AUTHORIZED PERSON SIGN,
STATING TITLE.
Signature(s) ___________________________________ Date __________________
Signature(s) ___________________________________ Date __________________