Prospectus Summary
PROSPECTUS SUMMARY This summary highlights information found in greater detail elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, particularly the risks of investing in our common stock discussed under the caption “Risk Factors” and the financial statements and accompanying notes before you decide to buy our common stock.Our Business
We are a multi-category online discount retailer of high quality new, “close-out” and refurbished brand-name merchandise. We currently offer over 100,000 products in seven merchandise categories, including computer hardware and software, home electronics, digital imaging, watches and jewelry, housewares, DVD movies, and video games. We appeal to a broad range of consumer and small business customers through a unique and convenient buying experience offering two shopping formats: every day low price and our proprietary Bargain Countdown™. This combination of shopping formats helps attract value-conscious customers looking for high quality products at low prices to our eCOST.com website. We also provide rapid response customer service utilizing a strategically located distribution center and third-party fulfillment partners, as well as customer support from online and on-call sales representatives. We offer suppliers an efficient sales channel for merchandise in all stages of the product life cycle. We offer products from leading manufacturers such as Canon, Citizen, Denon, Hewlett-Packard, Nikon, Onkyo, Seiko and Toshiba and have access to a broad and deep selection of merchandise, including deeply discounted close-out and refurbished merchandise. We believe that our extensive selection of merchandise offered across a broad range of categories in a convenient shopping environment, combined with our rapid response service, creates customer loyalty and repeat customer orders.
We use a hybrid order fulfillment model that reduces inventory carrying cost while assuring that our customers experience rapid delivery and a high level of customer service. We use an outsourced distribution center, located near FedEx’s main hub in Memphis, Tennessee, which stocks high sales velocity products as well as special purchases of refurbished and close-out merchandise. For lower velocity products not stocked in inventory, we have access to billions of dollars of merchandise that can be sourced from 11 major distributors through our virtual warehouse technology.
Industry research indicates that the market for online retail sales is growing, an increasing share of the population is relying on the Internet to purchase products, and the average online buyer is spending more each year. According to Jupiter Research, the U.S. market for online retail sales in the merchandise categories in which we currently offer products grew from $3.4 billion in 1998 to $25.3 billion in 2003, representing a compound annual growth rate of 49%. Online retail sales in these same categories are projected to grow to $47.8 billion by 2008, representing a five year compound annual growth rate of 14%. The aggregate online retail market grew from $5.5 billion to $52.6 billion from 1998 to 2003, representing a compound annual growth rate of 57%, and is projected to grow to $117.3 billion by 2008, representing a five year compound annual growth rate of 17%. Jupiter Research also anticipates strong growth in the segment of the U.S. population purchasing products online, from 34% of the population in 2003 to approximately 50% in 2008, or more than 150 million total individuals. At the same time, consumers have increased the average amount they spend online each year from $293 per online buyer in 1998 to $540 per online buyer in 2003. Jupiter Research projects this figure to grow to $779 per online buyer by 2008. The Internet offers consumers several advantages over traditional shopping channels, with no limitations on store location, shelf space or shopping hours. Suppliers are attracted to the Internet due to the ability to provide detailed product information, to cost-effectively display more of their product portfolio, to receive instant feedback on product sell-through, to more effectively sell close-out merchandise and to more easily monitor their channel relationships.
We launched our website in 1999 and had significant operating losses in our first two years of operations as we focused on building brand awareness and growing our customer base. In mid 2000, we changed our focus to emphasize profitability over growth and as a result have reported net income in the past two fiscal years. Over the past three years, we have expanded our merchandise offerings, improved our operations, enhanced our infrastructure, and expanded our customer base.
Our Strengths
We provide consumers and small businesses with quick and convenient access to high quality new, close-out and refurbished brand-name merchandise at discount prices similar to a traditional discount retailer. We offer the following key benefits to customers shopping on our website:
Broad and deep product selection. We sell high quality products across a broad selection of merchandise categories. Most of the products offered on our website are from well-known, brand-name manufacturers. We currently offer over 100,000 different products in seven categories. Our product offerings are updated continually to reflect new product trends, keeping our merchandise selection relevant for our customers so they continue to visit our website.
Compelling price-to-value proposition. As part of our strategy to appeal to the high frequency value-oriented shopper, we offer low prices on new products and steeper discounts on our assortment of close-out and refurbished merchandise. We employ aggressive promotional strategies to provide incentives for our customers to purchase merchandise on our website and build customer loyalty.
Two shopping formats on our website. We appeal to a broad customer base by offering two shopping formats designed to attract frequent visits to our website: every day low price and our proprietary Bargain Countdown™. For the shopper who wants new and recently released products from leading manufacturers, we offer discounted merchandise in an easy-to-use retail format. For the bargain shopper interested in close-out and refurbished merchandise, we market products using our Bargain Countdown™ format which features time- and quantity-limited offers of selected merchandise that is more deeply discounted.
Rapid response order fulfillment. We ship a substantial majority of our customer orders from inventory at an outsourced distribution facility located near the FedEx main hub in Memphis, Tennessee. Approximately 99% of orders in stock at the Memphis facility placed as late as 10:00 p.m. Eastern Time ship the same day for delivery at the customer’s request by 10:30 a.m. the next day for most domestic locations. We also utilize virtual warehouse technology to access merchandise that is not in stock at our outsourced distribution facility.
Responsive customer service and positive shopping experience. We believe that our customer service differentiates the buying experience for our customers. Our experienced team of 11 inbound sales representatives and 12 customer service representatives assists our consumer customers by telephone and e-mail. We also have 25 relationship managers who are assigned to many of our small business customers to service their needs and increase future sales opportunities. Our website contains helpful features such as in-depth product information, inventory levels and order status. In addition, we continually monitor website traffic and order activity and periodically update our website to enhance the shopping experience for our customers.
Appealing features for small business customers. We offer our small business customers a convenient and differentiated way to purchase products through their own secure personalized website, which enables them to receive customized pricing and product offerings and which increases the efficiency of their shopping experience. Other helpful features for our business customers include purchasing and payment history, software licensing, custom hardware configurations and flexible payment alternatives, including net 30-day payment terms and lease financing through third-party sources. We also assign relationship managers to provide personalized service to many of our business customers.
We offer manufacturers and vendors the following key benefits:
Single point of distribution. Manufacturers often use separate channels to sell new, refurbished and close-out products because most retailers offer products in only one stage of the product life cycle. Through our two shopping formats, we offer vendors the flexibility to use eCOST.com to sell products in a brand sensitive manner in any stage of the product life cycle. Additionally, our Bargain Countdown™ capabilities allow our vendors to liquidate small quantities of merchandise without disappointing customers due to the limited availability of such products.
Efficient channel partner. Our centralized distribution capability reduces vendor costs in shipping product to us. Our ability to rapidly sell inventory benefits those vendors that offer us protection against price erosion. Our centralized product management and feedback to vendors on product sell-through and inventory position allow vendors to efficiently monitor product movement and placement, eliminating the need for frequent visits by vendor representatives to physical retail locations.
Customized manufacturer stores. With our in-house design and merchandising team, we provide manufacturers with the opportunity to showcase their full assortment of products and accessories by establishing virtual stores on our website that are specific to individual manufacturers. We believe this allows manufacturers to maximize sales and branding of their products. We promote these manufacturer stores to our customer base through our integrated marketing strategy, including targeted e-mails highlighting a specific manufacturer and its products and directing customers to that manufacturer store on our website.
Speed to market for newly released products. We respond rapidly to new product releases from manufacturers through our ability to quickly post and market new products on our website and satisfy immediate customer demand through our rapid response order fulfillment capabilities.
Our Growth Strategy
Our objective is to become a leading discount online retailer of nationally branded, high quality merchandise across multiple categories by providing a superior customer experience. Key elements of our growth strategy include:
Expand product offerings and merchandise categories. We plan to selectively expand our merchandise categories into new and profitable product lines. We currently offer over 100,000 products across multiple categories including computer hardware and software, home electronics, digital imaging, watches and jewelry, housewares, DVD movies, and video games. We plan to expand into additional categories in order to attract new customers and offer a broader variety of merchandise to our existing customers. Current categories under consideration include apparel, books, gifts, music, sporting goods, and travel/luggage.
Acquire new customers. We focus the majority of our marketing efforts on online campaigns that we believe are the most cost-effective means to direct visitors to our website. We plan to continue to utilize these techniques and test and implement additional techniques in online advertising and traditional offline advertising methods, including print, media and direct mail.
Expand sales to existing customers. We plan to increase sales to existing customers through multiple strategies. We will encourage repeat visits and purchases by expanding our merchandise categories and product offerings, continually changing our merchandise assortment, and continuing to offer attractive new and promotional offers in each of our shopping formats. We will continue to market to our existing customer base using online advertising, targeted e-mails and catalog mailings. We plan to increase sales to our business customers by hiring and training new relationship managers and assigning these managers to additional business customers. We also plan to introduce a fee-based membership program before the end of 2004 to provide participating customers with additional exclusive product and service offerings in order to further enhance customer loyalty and potential recurring revenue.
Increase eCOST.com brand awareness. The advertising programs we employ to acquire and retain customers also serve as a tool to increase our brand awareness. As we continue to utilize these techniques and test and implement additional programs, we believe that our brand awareness will continue to increase. We intend to test offline advertising in traditional media to further develop our brand.
Our Relationship with PC Mall
We are currently a wholly-owned subsidiary of PC Mall, Inc., which, through its subsidiaries, is a rapid response supplier of technology solutions for businesses and government and educational institutions, as well as consumers. Unless we indicate otherwise, references to “PC Mall” in this prospectus, refer to our parent company PC Mall, Inc. and/or its subsidiaries excluding eCOST.com, Inc. After the completion of this offering, PC Mall will own approximately % of the outstanding shares of our common stock, or approximately % if the underwriters exercise their over-allotment option in full.
PC Mall has advised us that it intends to distribute its remaining ownership interest in our company to its common stockholders, which we refer to in this prospectus as the “distribution” or “spin-off.” PC Mall expects the distribution to take the form of a spin-off by means of a special dividend to its common stockholders of all of our common stock owned by PC Mall approximately six months after completion of this offering. Completion of the distribution is contingent upon the satisfaction or waiver of a variety of conditions described elsewhere in this prospectus, including the receipt of a favorable opinion of PC Mall’s tax counsel as to the tax-free nature of the distribution for U.S. federal income tax purposes. The distribution may not occur by the contemplated time or may not occur at all. For a discussion of the conditions to and the timing of the distribution, see “Certain Relationships and Related Transactions—Master Separation and Distribution Agreement” and “Shares Eligible for Future Sale.” This two-step process, consisting of the initial public offering described in this prospectus, including the repayment of a note to PC Mall using a portion of the proceeds from this offering, followed by a distribution by PC Mall of our common stock to PC Mall stockholders, enables us to raise capital while at the same time achieving the benefits of our separation from PC Mall in a tax-efficient manner. For a description of use of the proceeds of this offering, please see “Use of Proceeds.”
We believe that our separation from PC Mall will enable us to realize the following benefits:
As a subsidiary of PC Mall, we have received services provided by PC Mall, including administrative services (accounting, human resources, tax services, legal and treasury), inventory management and order fulfillment, credit card processing, information systems operation and administration, and advertising services and use of office space. In consideration for these services, PC Mall has historically allocated and charged to us a portion of its related overhead costs. We expect that we will incur incremental additional operating expenses and capital expenses as a result of becoming a stand-alone public company. These stand-alone costs include certain administrative costs for services currently performed for us by PC Mall, costs to establish our own inventory management and order fulfillment capabilities, as well as other incremental costs we will incur.
Prior to the completion of this offering, we will enter into agreements with PC Mall related to the separation of our business operations from PC Mall. These agreements will provide for, among other things, administrative services, office space, inventory management and order fulfillment, information systems operation and administration, employee benefits, customer database management, intellectual property matters, and other ongoing relationships. We expect to establish our own inventory management and order fulfillment capabilities prior to the completion of the distribution. With limited exceptions, the other services to be provided under our agreements with PC Mall are not expected to extend beyond 12 months from the completion of this offering. Each of these agreements with PC Mall have been or will be entered into while we are a wholly-owned subsidiary of PC Mall. All of the agreements relating to our separation from PC Mall will be made in the context of a parent-subsidiary relationship and will be entered into in the overall context of our separation from PC Mall. While we believe the agreements are fair to us, had these agreements been negotiated with unaffiliated third parties, they might have been more favorable to us. See “Risk Factors—Risks Related to Our Relationship with PC Mall” and “Certain Relationships and Related Transactions” for a more detailed discussion of our relationship with PC Mall.
Company Information
We were incorporated in Delaware in February 1999 as a wholly-owned subsidiary of PC Mall. Our principal executive offices are located at 2555 West 190th Street, Suite 106, Torrance, California 90504. Our telephone number at that location is (310) 225-4044. Our fiscal year ends December 31. Our website is www.ecost.com. The information and other content contained on our website are not part of this prospectus.
The Offering
The number of shares of our common stock to be outstanding after this offering is based on 10,000,000 shares of our common stock outstanding as of April 30, 2004. This calculation:
In connection with our spin-off from PC Mall, each outstanding option to purchase PC Mall common stock will be converted into an adjusted PC Mall option and an option to purchase a number of shares of eCOST.com common stock based on the distribution ratio. As of April 30, 2004 there were options to purchase shares of PC Mall common stock outstanding. For a discussion of the treatment of outstanding PC Mall options, please see “Management—Employee Benefit Plans—Treatment of Outstanding PC Mall Options.”
For a more detailed discussion of our capital stock and stock option plans, please refer to note 6 to the financial statements, “Management—Employee Benefit Plans” on page 70 and “Description of Capital Stock” on page 87.
Unless we indicate otherwise, all information contained in this prospectus assumes:
Summary Financial and Operating Data
(in thousands, except per share and operating data)
The following table sets forth our summary financial and operating data for the periods indicated. You should read this information together with our financial statements and related notes appearing elsewhere in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The summary operating data for all periods presented are unaudited and have been derived from internal records of our operations. The historical financial information may not be indicative of our future performance and may not reflect what our financial position and results of operations would have been had we operated as a separate, stand-alone entity during the periods presented.