UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2009
OR
o 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 0-51813
LIQUIDITY SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware |
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52-2209244 |
(State or Other Jurisdiction of |
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(I.R.S. Employer |
Incorporation or Organization) |
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Identification No.) |
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1920 L Street, N.W., 6th Floor, Washington, D.C. |
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20036 |
(Address of Principal Executive Offices) |
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(Zip Code) |
(202) 467-6868
(Registrants Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)
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 o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o |
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Accelerated filer x |
Non-accelerated filer o |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares outstanding of the issuers common stock, par value $.001 per share, as of May 6, 2009 was 27,494,295.
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5 |
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6 |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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12 |
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24 |
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28 |
Item 1. Consolidated Financial Statements.
Liquidity Services, Inc. and Subsidiaries
(Dollars in Thousands)
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March 31, |
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September 30, |
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2009 |
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2008 |
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(Unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
34,204 |
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$ |
51,954 |
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Short-term investments |
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19,759 |
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11,244 |
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Accounts receivable, net of allowance for doubtful accounts of $200 and $519 at March 31, 2009 and September 30, 2008, respectively |
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3,681 |
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4,658 |
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Inventory |
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13,084 |
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13,327 |
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Prepaid expenses, deferred taxes and other current assets |
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8,661 |
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7,653 |
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Total current assets |
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79,389 |
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88,836 |
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Property and equipment, net |
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5,490 |
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4,730 |
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Intangible assets, net |
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4,609 |
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5,561 |
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Goodwill |
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31,834 |
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34,696 |
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Other assets |
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3,043 |
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3,344 |
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Total assets |
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$ |
124,365 |
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$ |
137,167 |
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Liabilities and stockholders equity |
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Current liabilities: |
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Accounts payable |
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$ |
5,869 |
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$ |
8,303 |
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Accrued expenses and other current liabilities |
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10,550 |
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10,314 |
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Profit-sharing distributions payable |
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4,533 |
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10,312 |
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Customer payables |
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6,927 |
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8,841 |
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Current portion of long-term debt and capital lease obligations |
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24 |
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22 |
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Total current liabilities |
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27,903 |
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37,792 |
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Long-term debt and capital lease obligations, net of current portion |
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31 |
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44 |
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Deferred taxes and other long-term liabilities |
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2,842 |
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2,961 |
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Total liabilities |
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30,776 |
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40,797 |
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Stockholders equity: |
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Common stock, $0.001 par value; 120,000,000 shares authorized; 28,096,757 shares issued and 27,389,295 shares outstanding at March 31, 2009; 28,023,361 shares issued and outstanding at September 30, 2008 |
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27 |
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28 |
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Additional paid-in capital |
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69,244 |
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65,973 |
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Treasury Stock |
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(3,873 |
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Accumulated other comprehensive loss |
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(5,572 |
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(1,717 |
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Retained earnings |
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33,763 |
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32,086 |
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Total stockholders equity |
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93,589 |
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96,370 |
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Total liabilities and stockholders equity |
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$ |
124,365 |
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$ |
137,167 |
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See accompanying notes to the unaudited consolidated financial statements.
3
Liquidity Services, Inc. and Subsidiaries
Unaudited Consolidated Statements of Operations
(Dollars in Thousands Except Per Share Data)
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Three Months Ended March 31, |
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Six Months Ended March 31, |
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2009 |
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2008 |
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2009 |
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2008 |
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Revenue |
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$ |
59,676 |
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$ |
62,839 |
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$ |
115,318 |
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$ |
122,105 |
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Costs and expenses: |
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Cost of goods sold (excluding amortization) |
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22,703 |
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16,162 |
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41,292 |
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31,565 |
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Profit-sharing distributions |
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11,797 |
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22,630 |
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26,137 |
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43,436 |
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Technology and operations |
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11,678 |
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10,300 |
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23,606 |
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20,277 |
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Sales and marketing |
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4,474 |
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3,917 |
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8,905 |
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8,050 |
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General and administrative |
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5,131 |
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5,275 |
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10,875 |
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10,114 |
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Amortization of contract intangibles |
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203 |
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203 |
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407 |
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407 |
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Depreciation and amortization |
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678 |
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465 |
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1,316 |
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852 |
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Total costs and expenses |
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56,664 |
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58,952 |
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112,538 |
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114,701 |
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Income from operations |
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3,012 |
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3,887 |
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2,780 |
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7,404 |
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Interest income and other income, net |
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90 |
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621 |
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326 |
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1,109 |
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Income before provision for income taxes |
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3,102 |
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4,508 |
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3,106 |
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8,513 |
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Provision for income taxes |
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(1,427 |
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(1,862 |
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(1,429 |
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(3,504 |
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Net income |
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$ |
1,675 |
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$ |
2,646 |
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$ |
1,677 |
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$ |
5,009 |
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Basic earnings per common share |
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$ |
0.06 |
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$ |
0.10 |
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$ |
0.06 |
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$ |
0.18 |
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Diluted earnings per common share |
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$ |
0.06 |
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$ |
0.10 |
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$ |
0.06 |
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$ |
0.18 |
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Basic weighted average shares outstanding |
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27,777,517 |
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27,951,777 |
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27,901,907 |
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27,947,958 |
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Diluted weighted average shares outstanding |
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27,972,045 |
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28,261,121 |
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27,999,171 |
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28,184,407 |
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See accompanying notes to the unaudited consolidated financial statements.
4
Liquidity Services, Inc. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
(In Thousands)
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Six Months Ended |
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2009 |
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2008 |
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Operating activities |
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Net income |
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$ |
1,677 |
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$ |
5,009 |
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Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
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Depreciation and amortization |
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1,723 |
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1,259 |
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Stock compensation expense |
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3,049 |
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2,263 |
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Provision for doubtful accounts |
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(319 |
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(164 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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1,297 |
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1,991 |
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Inventory |
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243 |
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(294 |
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Prepaid expenses and other assets |
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(707 |
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(1,819 |
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Accounts payable |
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(2,435 |
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1,847 |
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Accrued expenses and other |
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237 |
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(4,570 |
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Profit-sharing distributions payable |
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(5,779 |
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2,591 |
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Customer payables |
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(1,913 |
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2,892 |
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Other liabilities |
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(120 |
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73 |
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Net cash (used in) provided by operating activities |
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(3,047 |
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11,078 |
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Investing activities |
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Purchases of short-term investments |
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(13,915 |
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(24,749 |
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Proceeds from the sale of short-term investments |
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5,400 |
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24,288 |
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Increase in goodwill and intangibles |
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(86 |
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(23 |
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Cash paid for acquisitions, net of cash acquired |
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(9,389 |
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Purchases of property and equipment |
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(1,780 |
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(754 |
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Net cash used in investing activities |
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(10,381 |
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(10,627 |
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Financing activities |
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Principal repayments of capital lease obligations and debt |
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(11 |
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(46 |
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Proceeds from exercise of common stock options and warrants (net of tax) |
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182 |
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93 |
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Incremental tax benefit from exercise of common stock options |
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40 |
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3 |
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Repurchases of common stock |
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(3,874 |
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Net cash (used in) provided by financing activities |
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(3,663 |
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50 |
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Effect of exchange rate differences on cash and cash equivalents |
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(658 |
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(11 |
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Net (decrease) increase in cash and cash equivalents |
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(17,749 |
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490 |
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Cash and cash equivalents at beginning of period |
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51,953 |
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39,954 |
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Cash and cash equivalents at end of period |
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$ |
34,204 |
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$ |
40,444 |
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Supplemental disclosure of cash flow information |
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Cash paid for income taxes |
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$ |
2,896 |
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$ |
7,139 |
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Cash paid for interest |
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27 |
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9 |
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See accompanying notes to the unaudited consolidated financial statements.
5
Liquidity Services, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements
1. Organization
Liquidity Services, Inc. and subsidiaries (LSI or the Company) is a leading online auction marketplace for wholesale, surplus and salvage assets. LSI enables buyers and sellers to transact in an efficient, automated online auction environment offering over 500 product categories. The Companys marketplaces provide professional buyers access to a global, organized supply of wholesale surplus and salvage assets presented with digital images and other relevant product information. Additionally, LSI enables its corporate and government sellers to enhance their financial return on excess assets by providing a liquid marketplace and value-added services that integrate sales and marketing, logistics and transaction settlement into a single offering. LSI organizes its products into categories across major industry verticals such as consumer electronics, general merchandise, apparel, scientific equipment, aerospace parts and equipment, technology hardware, and specialty equipment. The Companys online auction marketplaces are www.liquidation.com, www.govliquidation.com, www.govdeals.com and www.liquibiz.com. LSI also operates a wholesale industry portal, www.goWholesale.com, that connects advertisers with buyers seeking products for resale and related business services.
2. Summary of Significant Accounting Policies
Unaudited Interim Financial Information
The accompanying unaudited consolidated balance sheet as of March 31, 2009, unaudited consolidated statements of operations for the three and six months ended March 31, 2009 and 2008 and the unaudited statements of cash flows for the six months ended March 31, 2009 and 2008 have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal, recurring adjustments, considered necessary for a fair presentation have been included. The information disclosed in the notes to the consolidated financial statements for these periods is unaudited. Operating results for the three and six months ended March 31, 2009 are not necessarily indicative of the results that may be expected for the year ending September 30, 2009 or any future period.
Short-Term Investments
Available-for-sale securities are stated at fair value, with the unrealized gains and losses reported in accumulated other comprehensive income. For the three and six months ended March 31, 2009 and 2008, the amount of unrealized losses reported in accumulated other comprehensive income was $2,000 and $1,000, and $94,000 and $111,000, respectively.
Stock-Based Compensation
The Company accounts for stock-based compensation under Statement 123(R). The Companys income before provision for income taxes and net income for the three and six months ended March 31, 2009 and 2008 was approximately $1,566,000 and $846,000, and $3,049,000 and $1,647,000; and $1,151,000 and $679,000, and $2,263,000 and $1,335,000 lower, respectively, than if it had continued to account for share-based compensation under APB Opinion No. 25. The total compensation cost related to nonvested awards not yet recognized at March 31, 2009 was approximately $16,370,000, which is being recognized over the weighted average vesting period of 29 months. The Company utilizes the Black-Scholes option pricing model to determine its Statement 123(R) expense. Inputs into the Black-Scholes model include volatility rates that ranged from 40% to 68%, dividend rate of 0%, and risk-free interest rates that ranged from 0.91% to 5.05% since October 1, 2005. The Company anticipates a forfeiture rate ranging from 11.4% to 33.4% based on its historical forfeiture rate. As a result of adopting Statement 123(R) on October 1, 2005, the Companys basic and diluted earnings per share for the three and six months ended March 31, 2009 and 2008 were approximately $0.03 and $0.03, and $0.06 and $0.06; and $0.02 and $0.02, and $0.05 and $0.05, respectively, lower than if it had continued to account for share-based compensation under APB Opinion No. 25.
Comprehensive Income
Comprehensive income includes net income adjusted for foreign currency translation and unrealized gains and losses on available-for-sale securities. For the three and six months ended March 31, 2009 and 2008 comprehensive income (loss)was $1,287,000 and ($2,177,000); and $2,650,000 and $4,874,000, respectively.
6
Liquidity
Services, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements (Continued)
Earnings per Share
Basic net income attributable to common stockholders per share is computed by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net income attributable to common stockholders per share includes the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The Company issued 10,292 restricted shares at a price of $11.66 during the three months ended June 30, 2008 and 336,817 restricted shares at prices ranging from $7.48 to $8.57 during the three months ended December 31, 2008, of which only 50,295 and 25,148 shares have been included in the calculation of diluted income per share for the three and six months ended March 31, 2009, respectively, due to the significant difference between the issuance price and the average market price for the period in which they have been outstanding. The Company has also excluded the following stock options in our calculation of diluted income per share because the option exercise prices were greater than the average market prices for the applicable period:
(a) for the three months ended March 31, 2009, 4,464,221 options;
(b) for the six months ended March 31, 2009, 4,464,221 options;
(c) for the three months ended March 31, 2008, 3,124,244 options; and
(d) for the six months ended March 31, 2008, 2,647,985 options.
The following summarizes the potential outstanding common stock of the Company as of the dates set forth below:
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Three Months Ended March 31, |
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Six Months Ended March 31, |
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2009 |
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2008 |
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2009 |
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2008 |
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(unaudited) |
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(dollars in thousands, except per share amounts) |
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Weighted average shares calculation: |
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Basic weighted average shares outstanding |
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27,777,517 |
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27,951,777 |
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27,901,907 |
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27,947,958 |
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Treasury stock effect of options and restricted stock |
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194,528 |
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309,344 |
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97,264 |
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236,449 |
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Diluted weighted average common shares outstanding |
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27,972,045 |
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28,261,121 |
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27,999,171 |
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28,184,407 |
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Net income |
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$ |
1,675 |
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$ |
2,646 |
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$ |
1,677 |
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$ |
5,009 |
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Net income per common share: |
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Basic income per common share |
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$ |
0.06 |
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$ |
0.10 |
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$ |
0.06 |
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$ |
0.18 |
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Diluted income per common share |
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$ |
0.06 |
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$ |
0.10 |
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$ |
0.06 |
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$ |
0.18 |
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3. Defense Reutilization and Marketing Service Contracts and U.K. Disposal Service Agency Contract
Defense Reutilization and Marketing Service (DRMS) Contracts
The Companys original Surplus Contract with DRMS expired on December 17, 2008. The Company responded to a RFP from DRMS regarding a renewal of the Surplus Contract, and has been awarded the new Surplus Contract. Operations began under the new Surplus Contract during February 2009. The new Surplus Contract expires in February 2012, subject to DoDs right to extend it for two additional one-year terms. Under the terms of the original contract, the Company distributes to DRMS a fixed percentage of the profits realized from the ultimate sale of the inventory, after deduction for allowable expenses and profit-sharing distributions, as provided for under the terms of the contract. Under the new Surplus Contract, the Company is required to purchase all usable surplus property offered to the Company by the DoD at a fixed percentage equal to 1.8% of the DoDs original acquisition value. The Company retains 100% of the profits from the resale of the property and bears all of the costs for the merchandising and sale of the property.
As a result of the Surplus Contract, the Company is the sole remarketer of all DoD surplus turned into DRMS available for sale within the United States, Puerto Rico, and Guam.
7
Liquidity
Services, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements (Continued)
The Companys Scrap Contract with DRMS expires in June 2012. Under the terms of the Scrap Contract, the Company is required to purchase all scrap government property referred to it by DRMS. As a result of this contract, the Company is the sole remarketer of all U.S. Department of Defense scrap turned into DRMS available for sale within the United States, Puerto Rico, and Guam.
The Scrap Contract may be terminated by either the Company or DRMS if the rate of return performance ratio does not exceed specified benchmark ratios for two consecutive quarterly periods and the preceding twelve months. The Company has performed in excess of the benchmark ratios throughout the contract period through March 31, 2009. The new Surplus Contract also contains a provision providing for a mutual termination of the contract for convenience.
Based on the sales price of the inventory, after reduction for allowable expenses and other disbursements under the original Surplus Contract with DRMS, the Company was required to disburse to DRMS 78.2%, and to Kormendi/Gardener Partners (KGP), 1.8% of the profits from the sale of goods under this contract. In addition, disbursements to DRMS/KGP are only required to the extent the Company has distributable cash surplus, as defined under the original Surplus Contract. On September 12, 2006, the DoD agreed to increase the profit-sharing distribution for the original Surplus Contract in exchange for the Companys agreement to implement additional inventory assurance processes and procedures with respect to the sale of demilitarized property. From August 1, 2006 until November 30, 2006, the Company was entitled to receive 27.5% of the profits and DRMS was entitled to 72.5% of the profits from the sale of goods under the original Surplus Contract. For property received from November 30, 2006 through June 18, 2008, the Company was entitled to receive between 25% and 30.5% of the profits, based on the results of an audit of the effectiveness of the inventory controls the Company implemented under the original Surplus Contract modification, which is referred to as the original Surplus Contract incentive. On June 1, 2007, the Company agreed, as provided in the modification to the original Surplus Contract that became effective as of September 12, 2006, to provide additional value-added services with respect to demilitarized property that is returned to the DoD for reutilization. In exchange for the agreement to provide these services, the DoD exercised its existing option to increase the Companys share of net proceeds under the original Surplus Contract by 1%. On May 13, 2008, the DoD agreed to extend the original Surplus Contract through November 1, 2008, as well as increase the Companys share of net proceeds under the original Surplus Contract to 39.5% on property received after June 18, 2008. On November 6, 2008, the DoD agreed to further extend the original Surplus Contract through December 17, 2008. Operations commenced under the new Surplus Contract on December 18, 2008. Profit-sharing distributions will continue to be made during the original Surplus Contract wind-down period, which the Company expects will continue through fiscal 2009. Profit-sharing distributions to DRMS/KGP under the original Surplus Contract for the three and six months ended March 31, 2009 and 2008 were $6,834,000 and $15,594,000; and $11,066,000 and $19,621,000, respectively, including accrued amounts, as of March 31, 2009 and 2008, of $1,817,000 and $3,818,000, respectively.
Under the terms of the Scrap Contract, the Company was required to disburse to DRMS 78.2%, and to KGP 1.8% of the profits realized from the ultimate sale of the inventory, after deduction for allowable expenses, calculated in a similar manner to that of the original Surplus Contract. Under the Scrap Contract, the Company also has a performance incentive that allows it to receive up to an additional 2% of the profit sharing distribution. This incentive is measured annually on June 30th, and is applied to the prior 12 months. On May 21, 2007, the DoD agreed to increase the profit-sharing distribution for the Scrap Contract, from 20% to 23% effective June 1, 2007, in exchange for the Companys agreement to implement additional inventory assurance processes and procedures with respect to the mutilation of demilitarized scrap property sold by the Company. For the three and six months ended March 31, 2009 and 2008, profit-sharing distributions to the DRMS under the Scrap Contract amounted to $4,562,000 and $9,740,000; and $11,238,000 and $22,959,000, respectively, including accrued amounts, as of March 31, 2009 and 2008, of $2,716,000 and $5,628,000, respectively.
U.K. Disposal Services Agency (DSA) Contract
Under the contract with the DSA, the Company is required to disburse to DSA a percentage that varies based on the total annual sales volume. Distributions to DSA for the three and six months ended March 31, 2009 and 2008 were $401,000 and $803,000; and $326,000 and $864,000, respectively, including accrued amounts, as of March 31, 2009 and 2008, of $0 and $64,000, respectively.
8
Liquidity
Services, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements (Continued)
4. Goodwill and Intangible Assets
The carrying amount of goodwill is net of a $2,862,000 decrease due to foreign currency translation.
Intangible assets at March 31, 2009 consisted of the following:
|
|
Useful |
|
Gross |
|
Accumulated |
|
Net |
|
|||
|
|
(dollars in thousands) |
|
|||||||||
Contract intangible |
|
7 |
|
$ |
5,694 |
|
$ |
(2,982 |
) |
$ |
2,712 |
|
Brand and technology |
|
3 - 5 |
|
688 |
|
(200 |
) |
488 |
|
|||
Covenants not to compete |
|
3 - 5 |
|
2,385 |
|
(1,114 |
) |
1,271 |
|
|||
Patent and trademarks |
|
3 - 10 |
|
185 |
|
(47 |
) |
138 |
|
|||
Total intangible assets, net |
|
|
|
|
|
|
|
$ |
4,609 |
|
||
Future expected amortization of intangible assets at March 31, 2009 was as follows:
Years ending September 30, |
|
(in thousands) |
|
|
2009 (remaining six months) |
|
$ |
803 |
|
2010 |
|
1,458 |
|
|
2011 |
|
1,312 |
|
|
2012 |
|
917 |
|
|
2013 and after |
|
119 |
|
|
5. Debt
Senior Credit Facility
In December 2002, and as subsequently amended, the Company entered into a senior credit facility (the Agreement) with a bank, which provides for borrowings up to $30.0 million. This senior credit facility will expire in March 2010.
Borrowings under the Agreement bear interest at an annual rate equal to the LIBOR rate plus 1.5% (3.472% at March 31, 2009) due monthly. As of March 31, 2009 and September 30, 2008, the Company had no outstanding borrowings under the Agreement.
Borrowings under the Agreement are secured by substantially all of the assets of the Company. The Agreement contains certain financial and non-financial restrictive covenants including, among others, the requirements to maintain a minimum level of earnings before interest, income taxes, depreciation and amortization (EBITDA). As of March 31, 2009, the Company was in compliance with these covenants.
9
Liquidity
Services, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements (Continued)
6. Income Taxes
The Companys interim effective income tax rate is based on managements best current estimate of the expected annual effective income tax rate. Based on current projections of taxable income for the year ending September 30, 2009, the Company expects that it will have an effective income tax rate of 46%.
As of March 31, 2009, the Companys deferred tax assets exceeded its deferred tax liabilities. The Company had a net deferred tax asset of approximately $5.5 million at March 31, 2009.
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48) on October 1, 2007. The adoption of FIN 48 did not impact the Companys financial position or results of operations. The Company has concluded that there were no uncertain tax positions identified during its analysis. The Companys policy is to recognize interest and penalties in the period in which they occur in the income tax provision. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, various state and local jurisdictions and in foreign jurisdictions, primarily the UK and Germany. The Company is no longer subject to U.S. federal, state and local, or foreign income tax examinations by tax authorities for years before fiscal 2005, although carryforward of tax attributes that were generated prior to fiscal 2005 may still be adjusted upon examination by tax authorities if they are utilized.
The Company is not currently under audit for income taxes in any jurisdiction.
7. Stockholders Equity
Common Stock
On February 23, 2006, the Company issued 5,000,000 shares of common stock for net proceeds of $43,977,000 in conjunction with its initial public offering. On March 13, 2007, the Company issued 100,000 shares of common stock for net proceeds of $1,070,000 in conjunction with its follow-on offering.
Share Repurchase Program
On December 2, 2008, the Companys Board of Directors approved a stock repurchase program. Under the program, the Company is authorized to repurchase up to $10 million of the issued and outstanding shares of its common stock. Share repurchases may be made through open market purchases, privately negotiated transactions or otherwise, at times and in such amounts as management deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements and other market conditions. The repurchase program may be discontinued or suspended at any time, and will be funded using the Companys available cash. The Companys Board of Directors reviews the share repurchase program periodically, the last such review having occurred in March 2009. During the three months ended March 31, 2009, 707,462 shares were purchased under the program for approximately $3,874,000. As of March 31, 2009, approximately $6,126,000 may yet be expended under the program.
2006 Omnibus Long-Term Incentive Plan (the 2006 Plan)
5,000,000 shares of common stock were initially reserved for issuance under the 2006 Plan. At September 30, 2007, there were 3,459,229 shares remaining reserved for issuance in connection with awards under the 2006 Plan. During fiscal year 2008, the Company issued options to purchase 2,459,232 shares to employees and directors with exercise prices between $8.40 and $13.48; options to purchase 487,834 shares have been forfeited; and 10,292 restricted shares have been issued at a price of $11.66. At September 30, 2008, there were 1,477,539 shares remaining reserved for issuance in connection with awards under the 2006 Plan. During the six months ended March 31, 2009, the Company issued options to purchase 891,000 shares to employees and directors with exercise prices between $5.53 and $8.23, and options to purchase 126,124 shares were forfeited. During the six months ended March 31, 2009, the Company issued 344,117 restricted shares to employees and directors at prices ranging from $7.48 to $8.57, and 7,300 restricted shares were forfeited. In February 2009, at the Companys annual meeting of stockholders, the stockholders approved an increase of 5,000,000 shares of the Companys common stock to the shares available for issuance under the 2006 Plan. At March 31, 2009, there were 5,375,846 shares remaining reserved for issuance in connection with awards under the 2006 Plan. The maximum number of shares subject to options or stock appreciation rights that can be awarded under the 2006 Plan to any person is 1,000,000 per year. The maximum number of shares that can be awarded under the 2006 Plan to any person, other than pursuant to an option or stock appreciation right, is 700,000 per year.
10
Liquidity
Services, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements (Continued)
Stock Option Activity
A summary of the Companys stock option activity for the year ended September 30, 2008 and the three months ended December 31, 2008 and March 31, 2009 is as follows:
|
|
Options |
|
Weighted- |
|
|
Options outstanding at September 30, 2007 |
|
2,150,971 |
|
$ |
11.72 |
|
Options granted |
|
2,459,232 |
|
12.21 |
|
|
Options exercised |
|
(84,302 |
) |
4.09 |
|
|
Options canceled |
|
(496,576 |
) |
15.44 |
|
|
Options outstanding at September 30, 2008 |
|
4,029,325 |
|
11.72 |
|
|
Options granted (unaudited) |
|
850,000 |
|
7.55 |
|
|
Options exercised (unaudited) |
|
(10,500 |
) |
5.00 |
|
|
Options canceled (unaudited) |
|
(19,683 |
) |
15.44 |
|
|
Options outstanding at December 31, 2008 (unaudited) |
|
4,849,142 |
|
10.99 |
|
|
Options granted (unaudited) |
|
41,000 |
|
6.12 |
|
|
Options exercised (unaudited) |
|
(62,896 |
) |
2.07 |
|
|
Options canceled (unaudited) |
|
(112,698 |
) |
12.58 |
|
|
Options outstanding at March 31, 2009 (unaudited) |
|
4,714,548 |
|
11.03 |
|
|
Options exercisable at March 31, 2009 (unaudited) |
|
1,835,386 |
|
11.44 |
|
|
The intrinsic value of outstanding and exercisable options at March 31, 2009 is approximately $942,000 and $856,000, respectively, based on a stock price of $6.99 on March 31, 2009.
8. Fair Value Measurement
The Company measures and records in the accompanying condensed consolidated financial statements certain assets and liabilities at fair value on a recurring basis. SFAS No. 157 establishes a fair value hierarchy for those instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Companys assumptions (unobservable inputs). The hierarchy consists of three levels:
Level 1 |
|
Quoted market prices in active markets for identical assets or liabilities; |
Level 2 |
|
Inputs other than Level 1 inputs that are either directly or indirectly observable; and |
Level 3 |
|
Unobservable inputs developed using estimates and assumptions developed by the Company, which reflect those that a market participant would use. |
As of March 31, 2009, the Companys Level 1 short-term investments of $19,759,000, are the only financial instruments measured at fair value.
9. Contingencies
In January 2008, KGP commenced litigation against Government Liquidation.com (GL) and Surplus Acquisition Venture, LLC (SAV), two of the Companys subsidiaries, seeking $1.5 million in damages. KGP claims it is entitled to these damages because of actions GL and SAV took at the direction of DRMS pursuant to an amendment to the original Surplus Contract entered into in August 2006. GL and SAV have filed a motion to dismiss this litigation in its entirety and believe they have meritorious defenses in this litigation. In addition, SAV and GL believe they likely would be able to recover their costs and damages arising out of this litigation from DRMS under the terms of the Surplus Contract.
11
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements. These statements are only predictions. The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks and other factors include but are not limited to the factors set forth in our Annual Report on Form 10-K for the year ended September 30, 2008. You can identify forward-looking statements by terminology such as may, will, should, could, would, expects, intends, plans, anticipates, believes, estimates, predicts, potential, continues or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. There may be other factors of which we are currently unaware or deem immaterial that may cause our actual results to differ materially from the forward-looking statements.
All forward-looking statements attributable to us or persons acting on our behalf apply only as of the date of this document and are expressly qualified in their entirety by the cautionary statements included in this document. Except as may be required by law, we undertake no obligation to publicly update or revise any forward-looking statement to reflect events or circumstances occurring after the date of this document or to reflect the occurrence of unanticipated events.
The following discussion should be read in conjunction with our consolidated financial statements and related notes and the information contained elsewhere in this document.
Overview
About us. We are a leading online auction marketplace for wholesale surplus and salvage assets. We enable buyers and sellers to transact in an efficient, automated online auction environment offering over 500 product categories. Our marketplaces provide professional buyers access to a global, organized supply of wholesale surplus and salvage assets presented with digital images and other relevant product information. Additionally, we enable our corporate and government sellers to enhance their financial return on excess assets by providing a liquid marketplace and value-added services that integrate sales and marketing, logistics and transaction settlement into a single offering. We organize our products into categories across major industry verticals such as consumer electronics, general merchandise, apparel, scientific equipment, aerospace parts and equipment, technology hardware, and specialty equipment. Our online auction marketplaces are www.liquidation.com, www.govliquidation.com, www.govdeals.com and www.liquibiz.com. We also operate a wholesale industry portal, www.goWholesale.com that connects advertisers with buyers seeking products for resale and related business services.
We believe our ability to create liquid marketplaces for wholesale surplus and salvage assets generates a continuous flow of goods from our corporate and government sellers. This flow of goods in turn attracts an increasing number of professional buyers to our marketplaces. During the last 12 months, the number of registered buyers grew from approximately 892,000 to approximately 1,111,000, or 24.5%.
Recent initiatives. On May 13, 2008, the DoD agreed to extend the original Surplus Contract through November 1, 2008, as well as increase our share of net proceeds under the Surplus Contract to 39.5% on property received after June 18, 2008. On November 6, 2008, the DoD extended the original Surplus Contract through December 17, 2008, thus we will receive 39.5% of the net proceeds on property received up until December 17, 2008 through the Contract wind down period, which we anticipate will extend through fiscal year 2009. We responded to a RFP from the DRMS regarding a renewal of the Surplus Contract, and have been awarded the contract. Under the new Surplus Contract, under which we commenced operations on December 18, 2008, we are not required to distribute any portion of the profits realized under the Contract, as the new Contract structure requires a fixed 3.26% price, of the DRMS acquisition value, to be paid for the property and allows us to retain all of the profits from the sale of property. On February 4, 2009, the DoD agreed to amend the new Surplus Contract, such that the fixed 3.26% price, of the DRMS acquisition value, to be paid for the property, will be 1.8%. In addition. the new Surplus Contract performance period will start from the time property was delivered during February 2009.
12
Our revenue. We generate substantially all of our revenue by retaining a percentage of the proceeds from the sales we manage for our sellers. We offer our sellers three primary transaction models: a profit-sharing model, a consignment model and a purchase model.
· Profit-sharing model. Under our profit-sharing model, we purchase inventory from our suppliers and share with them a portion of the profits received from a completed sale in the form of a distribution. Distributions are calculated based on the value received from the sale after deducting direct costs, such as sales and marketing, technology and operations and other general and administrative costs. Because we are the primary obligor, and take general and physical inventory risks and credit risk under this transaction model, we recognize as revenue the sale price paid by the buyer upon completion of a transaction. Revenue from our profit-sharing model accounted for approximately 43.0% and 49.1% of our total revenue for the three and six months ended March 31, 2009, respectively. The merchandise sold under our profit-sharing model accounted for approximately 28.2% and 32.6% of our gross merchandise volume, or GMV, for the three and six months ended March 31, 2009, respectively.
· Consignment model. Under our consignment model, we recognize commission revenue from sales of merchandise in our marketplaces that is owned by others. These commissions, which we refer to as seller commissions, represent a percentage of the sale price the buyer pays upon completion of a transaction. We vary the percentage amount of the seller commission depending on the various value-added services we provide to the seller to facilitate the transaction. For example, we generally increase the percentage amount of the commission if we take possession, handle, ship or provide enhanced product information for the merchandise. We collect the seller commission by deducting the appropriate amount from the sales proceeds prior to their distribution to the seller after completion of the transaction. Revenue from our consignment model accounted for approximately 12.2% and 11.5% of our total revenue for the three and six months ended March 31, 2009, respectively. The merchandise sold under our consignment model accounted for approximately 42.9% and 41.5% of our GMV for the three and six months ended March 31, 2009, respectively.
· Purchase model. Under our purchase model, we offer our sellers a fixed amount or the option to share a portion of the proceeds received from our completed sales in the form of a distribution. Distributions are calculated based on the value we receive from the sale after deducting a required return to us that we have negotiated with the seller. Because we are the primary obligor, and take general and physical inventory risks and credit risk under this transaction model, we recognize as revenue the sale price paid by the buyer upon completion of a transaction. Revenue from our purchase model accounted for approximately 42.1% and 36.4% of our total revenue for the three and six months ended March 31, 2009, respectively. The merchandise sold under our purchase model accounted for approximately 27.6% and 24.3% of our GMV for the three and six months ended March 31, 2009, respectively.
We collect a buyer premium on substantially all of our transactions under all of our transaction models. Buyer premiums are calculated as a percentage of the sale price of the merchandise sold and are paid to us by the buyer. Buyer premiums are in addition to the price of the merchandise. Under our profit-sharing model, we typically share the proceeds of any buyer premiums with our sellers.
In the three months ended March 31, 2009, we generated less than 1% of our revenue from advertisements on our wholesale industry portals.
Industry trends. We believe there are several industry trends impacting the growth of our business including: (1) the increase in the adoption of the Internet by businesses to conduct e-commerce both in the United States and abroad; (2) product innovation in the retail supply chain that has increased the pace of product obsolescence and, therefore, the supply of surplus assets; (3) the increase in the volume of returned merchandise handled by both online and offline retailers; (4) the increase in government regulations necessitating verifiable recycling and remarketing of surplus assets; (5) the increase in outsourcing by corporate and government organizations of disposition activities for surplus and end-of-life assets; and (6) as a result of the recent economic downturn, an increase in buyer demand for surplus merchandise as consumers trade down by purchasing less expensive goods and seek greater value from their purchases.
13
Our Seller Agreements
Our DoD agreements. We have three contracts with the DoD pursuant to which we acquire, manage and sell excess property:
· Surplus Contract. In June 2001, we were awarded the Surplus Contract, a competitive-bid exclusive contract under which we acquire, manage and sell all usable DoD surplus personal property turned into the DRMS. Surplus property generally consists of items determined by the DoD to be no longer needed, and not claimed for reuse by, any federal agency, such as computers, electronics, office supplies, scientific and medical equipment, aircraft parts, clothing and textiles. On November 6, 2008, the DoD extended the original Surplus Contract through December 17, 2008, thus we will receive 39.5% of the net proceeds on property received up until December 17, 2008 through the Contract wind down period, which we anticipate will extend through fiscal year 2009. We responded to a RFP from the DRMS regarding a renewal of the Surplus Contract, and have been awarded the contract. We began operations under the new Contract on December 18, 2008. The new Surplus Contract expires in February 2012, subject to DoDs right to extend it for two additional one-year terms. Revenue from our Surplus Contracts (including buyer premiums) accounted for approximately 32.3% and 34.5% of our total revenue for the three and six months ended March 31, 2009, respectively. The property sold under our Surplus Contracts accounted for approximately 21.2% and 22.9% of our GMV for the three and six months ended March 31, 2009, respectively.
· Scrap Contract. In June 2005, we were awarded a competitive-bid exclusive contract under which we acquire, manage and sell substantially all scrap property of the DoD turned into the DRMS. Scrap property generally consists of items determined by DoD to have no use beyond their base material content, such as metals, alloys, and building materials. We were required to pay $5.7 million to the DoD in fiscal 2005 for the right to manage the operations and remarket scrap material in connection with the Scrap Contract. The Scrap Contract expires in June 2012, subject to DoDs right to extend it for three additional one-year terms. Revenue from our Scrap Contract (including buyer premiums) accounted for approximately 15.9% and 17.6% of our total revenue for the three and six months ended March 31, 2009, respectively. The property sold under our Scrap Contract accounted for approximately 10.4% and 11.7% of our GMV for the three and six months ended March 31, 2009, respectively.
Under the original Surplus Contract, we were obligated to purchase all DoD surplus property at set prices representing a percentage of the original acquisition cost, which varied depending on the type of surplus property being purchased. Under the Scrap Contract, we acquire scrap property at a per pound price. We were initially entitled to approximately 20% of the profits of sale (defined as gross proceeds of sale less allowable operating expenses) under the Contracts, and the DoD was entitled to approximately 80% of the profits. We refer to these disbursement payments to DoD as profit-sharing distributions. As a result of these arrangements, we recognize as revenue the gross proceeds from these sales. DoD also reimburses us for actual costs incurred for packing, loading and shipping property under the Scrap and original Surplus Contracts that we are obligated to pick up from non-DoD locations. On September 12, 2006, we entered into a bilateral contract modification under which the DoD agreed to increase our profit-sharing percentage under the original Surplus Contract in exchange for our agreement to implement additional inventory assurance processes and procedures with respect to the sale of demilitarized property. Under the terms of the Contract modification, for property received from November 30, 2006 through June 18, 2008, we were entitled to receive between 25% and 30.5% of the profits and thus the DoD received between 69.5% and 75% of the profits, based on the results of an audit of the effectiveness of the inventory controls we implemented under the Contract modification, which was referred to as the original Surplus Contract incentive. This incentive was measured quarterly. On June 1, 2007, we agreed, as provided in the modification to the original Surplus Contract that became effective as of September 12, 2006, to provide additional value-added services with respect to demilitarized property that is returned to the DoD for reutilization. In exchange for our agreement to provide these services, the DoD exercised its existing option to increase our share of net proceeds under the original Surplus Contract by 1%. On May 13, 2008, the DoD agreed to extend the original Surplus Contract through November 1, 2008, as well as increase our share of net proceeds under the original Surplus Contract to 39.5% on property received after June 18, 2008. On November 6, 2008, the DoD extended the original Surplus Contract through December 17, 2008. Under the new Surplus Contract, which began on December 18, 2008, we are not required to distribute any portion of the profits realized under the Contract, as the new Contract contains a higher fixed percentage price of 1.8%, of the DRMS acquisition value, to be paid for the property.
Under the Scrap Contract, we also have a small business performance incentive based on the number of scrap buyers that are small businesses that allows us to receive up to an additional 2% of the profit sharing distribution. On May 21, 2007, we entered into a bilateral contract modification under which the DoD agreed to increase the profit-sharing distribution for the Scrap Contract from 20% to 23% effective June 1, 2007, in exchange for our agreement to implement additional inventory assurance processes and procedures with respect to the mutilation of demilitarized scrap property sold.
In January 2006, we were awarded a contract to purchase DoD surplus property located in Germany. This contract generated less than 1% of our revenue in the three months ended March 31, 2009. This contract expired in January 2009; as such we are in the process of winding down operations, which will be substantially completed by June 30, 2009.
14
Our UK MoD agreement. In July 2003, we were awarded a contract to manage and sell surplus property from the United Kingdom Ministry of Defence. This contract generated less than 2% of our revenue in the three months ended March 31, 2009. This contract expires in July 2009, subject to the Ministrys right to extend the contract for an additional one-year term.
Our commercial agreements. We have over 400 corporate clients each of which have sold in excess of $10,000 of wholesale surplus and salvage assets in our marketplaces during the last twelve months. Our agreements with these clients are generally terminable at will by either party.
Key Business Metrics
Our management periodically reviews certain key business metrics for operational planning purposes and to evaluate the effectiveness of our operational strategies, allocation of resources and our capacity to fund capital expenditures and expand our business. These key business metrics include:
Gross merchandise volume. Gross merchandise volume, or GMV, is the total sales value of all merchandise sold through our marketplaces during a given period. We review GMV because it provides a measure of the volume of goods being sold in our marketplaces and thus the activity of those marketplaces. GMV also provides a means to evaluate the effectiveness of investments that we have made and continue to make, including in the areas of customer support, value-added services, product development, sales and marketing, and operations. The GMV of goods sold in our marketplaces during the three and six months ended March 31, 2009 totaled $91.2 million and $173.3 million, respectively.
Completed transactions. Completed transactions represents the number of auctions in a given period from which we have recorded revenue. Similar to GMV, we believe that completed transactions is a key business metric because it provides an additional measurement of the volume of activity flowing through our marketplaces. During the three and six months ended March 31, 2009 we completed approximately 120,000 and 228,000 transactions, respectively.
Total registered buyers. We grow our buyer base through a combination of marketing and promotional efforts. A person becomes a registered buyer by completing an online registration process on one of our marketplaces. As part of this process, we collect business and personal information, including name, title, company name, business address and contact information, and information on how the person intends to use our marketplaces. Each prospective buyer must also accept our terms and conditions of use. Following the completion of the online registration process, we verify each prospective buyers e-mail address and confirm that the person is not listed on any banned persons list maintained internally or by the U.S. federal government. After the verification process, which is completed generally within 24 hours, the registration is approved and activated and the prospective buyer is added to our registered buyer list.
Total registered buyers as of a given date represents the aggregate number of persons or entities who have registered on one of our marketplaces. We use this metric to evaluate how well our marketing and promotional efforts are performing. Total registered buyers excludes duplicate registrations, buyers who are suspended from utilizing our marketplaces and those buyers who have voluntarily removed themselves from our registration database. In addition, if we become aware of registered buyers that are no longer in business, we remove them from our database. As of March 31, 2009, we had approximately 1,111,000 registered buyers.
Total auction participants. For each auction we manage, the number of auction participants represents the total number of registered buyers who have bid one or more times in that auction. As a result, a registered buyer who bids, or participates, in more than one auction is counted as an auction participant in each auction in which he or she participates. Thus, total auction participants for a given period is the sum of the auction participants in each auction conducted during that period. We use this metric to allow us to compare our online auction marketplaces to our competitors, including other online auction sites and traditional on-site auctioneers. In addition, we measure total auction participants on a periodic basis to evaluate the activity level of our base of registered buyers and to measure the performance of our marketing and promotional efforts. For the three and six months ended March 31, 2009, approximately 557,000 and 1,049,000 total auction participants participated in auctions on our marketplaces, respectively.
Non-GAAP Financial Measures
EBITDA and adjusted EBITDA. EBITDA is a supplemental non-GAAP financial measure and is equal to net income less (a) interest income and other income, net; plus (b) provision for income taxes; (c) amortization of contract intangibles; and (d) depreciation and amortization. Our definition of adjusted EBITDA differs from EBITDA because we further adjust EBITDA for stock-based compensation expense.
15
We believe EBITDA and adjusted EBITDA are useful to an investor in evaluating our performance for the following reasons:
· The amortization of contract intangibles relates to amortization of the Scrap Contract beginning in June 2005. Depreciation and amortization expense primarily relates to property and equipment. Both of these expenses are non-cash charges that have fluctuated significantly over the past five years. As a result, we believe that adding back these non-cash charges to net income is useful in evaluating the operating performance of our business on a consistent basis from year-to-year.
· As a result of varying federal and state income tax rates, we believe that presenting a financial measure that adjusts net income for provision for income taxes is useful to investors when evaluating the operating performance of our business.
· In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment, or Statement 123(R), which is a revision of SFAS No. 123. Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their estimated fair values. Pro forma disclosure is no longer an alternative. We adopted the provisions of Statement 123(R) on October 1, 2005, using the prospective method. Unvested stock based awards issued prior to October 1, 2005, the date that we adopted the provisions of Statement 123(R), are accounted for at the date of adoption using the intrinsic value method originally applied to those awards. Accordingly, we believe adjusting net income for this non-cash stock based compensation expense is useful to investors when evaluating the operating performance of our business.
· We believe these measures are important indicators of our operational strength and the performance of our business because they provide a link between profitability and operating cash flow.
· We also believe that analysts and investors use EBITDA and adjusted EBITDA as supplemental measures to evaluate the overall operating performance of companies in our industry.
Our management uses EBITDA and adjusted EBITDA:
· as measurements of operating performance because they assist us in comparing our operating performance on a consistent basis as they remove the impact of items not directly resulting from our core operations;
· for planning purposes, including the preparation of our internal annual operating budget;
· to allocate resources to enhance the financial performance of our business;
· to evaluate the effectiveness of our operational strategies; and
· to evaluate our capacity to fund capital expenditures and expand our business.
EBITDA and adjusted EBITDA as calculated by us are not necessarily comparable to similarly titled measures used by other companies. In addition, EBITDA and adjusted EBITDA: (a) do not represent net income or cash flows from operating activities as defined by GAAP; (b) are not necessarily indicative of cash available to fund our cash flow needs; and (c) should not be considered as alternatives to net income, income from operations, cash provided by operating activities or our other financial information as determined under GAAP.
We prepare adjusted EBITDA by adjusting EBITDA to eliminate the impact of items that we do not consider indicative of our core operating performance. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. As an analytical tool, adjusted EBITDA is subject to all of the limitations applicable to EBITDA. Our presentation of adjusted EBITDA should not be construed as an implication that our future results will be unaffected by unusual or non-recurring items.
16
The table below reconciles net income to EBITDA and adjusted EBITDA for the periods presented.
|
|
Three Months |
|
Six Months |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
|
|
(in thousands) (unaudited) |
|
||||||||||
Net income |
|
$ |
1,675 |
|
$ |
2,646 |
|
$ |
1,677 |
|
$ |
5,009 |
|
Interest income and other income, net |
|
(90 |
) |
(621 |
) |
(326 |
) |
(1,109 |
) |
||||
Provision for income taxes |
|
1,427 |
|
1,862 |
|
1,429 |
|
3,504 |
|
||||
Amortization of contract intangibles |
|
203 |
|
203 |
|
407 |
|
407 |
|
||||
Depreciation and amortization |
|
678 |
|
465 |
|
1,316 |
|
852 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
EBITDA |
|
3,893 |
|
4,555 |
|
4,503 |
|
8,663 |
|
||||
Stock compensation expense |
|
1,566 |
|
1,151 |
|
3,049 |
|
2,263 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Adjusted EBITDA |
|
$ |
5,459 |
|
$ |
5,706 |
|
$ |
7,552 |
|
$ |
10,926 |
|
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. A critical accounting estimate is one which is both important to the portrayal of our financial condition and results and requires managements most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We continuously evaluate our critical accounting estimates. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Revenue recognition. We recognize revenue in accordance with the provisions of Staff Accounting Bulletin No. 104, Revenue Recognition. For transactions in our online marketplaces, which generate substantially all of our revenue, we recognize revenue when all of the following criteria are met:
· a buyer submits the winning bid in an auction and, as a result, evidence of an arrangement exists and the sale price has been determined;
· title has passed to a buyer and the buyer has assumed risks and rewards of ownership;
· for arrangements with an inspection period, the buyer has received the merchandise and has not notified us within that period that it is dissatisfied with the merchandise; and
· collection is reasonably assured.
Substantially all of our sales are recorded subsequent to payment authorization being received, utilizing credit cards, wire transfers and PayPal, an Internet based payment system, as methods of payments. As a result, we are not subject to significant collection risk, as goods are generally not shipped before payment is received.
Revenue is also evaluated in accordance with EITF 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent, for reporting revenue of gross proceeds as the principal in the arrangement or net of commissions as an agent. In arrangements in which we are deemed to be the primary obligor, bear physical and general inventory risk, and credit risk, we recognize as revenue the gross proceeds from the sale, including buyers premiums. Arrangements in which we act as an agent or broker on a consignment basis, without taking general or physical inventory risk, revenue is recognized based on the sales commissions that are paid to us by the sellers for utilizing our services; in this situation, sales commissions represent a percentage of the gross proceeds from the sale that the seller pays to us upon completion of the transaction.
17
We have evaluated our revenue recognition policy related to sales under our profit-sharing model and determined it is appropriate to account for these sales on a gross basis using the criteria outlined in EITF 99-19. The following factors were most heavily relied upon in our determination:
· We are the primary obligor in the arrangement.
· We are the seller in substance and in appearance to the buyer; the buyer contacts us if there is a problem with the purchase. Only we and the buyer are parties to the sales contract and the buyer has no recourse to the supplier. If the buyer has a problem, he or she looks to us, not the supplier.
· The buyer does not and cannot look to the supplier for fulfillment or for product acceptability concerns.
· We have general inventory risk.
· We take title to the inventory upon paying the amount set forth in the contract with the supplier. Such amount is generally a percentage of the suppliers original acquisition cost and varies depending on the type of the inventory purchased.
· We are at risk of loss for all amounts paid to the supplier in the event the property is damaged or otherwise becomes unsaleable. In addition, as payments made for inventory are excluded from the calculation for the profit-sharing distribution under our DoD contracts, we effectively bear inventory risk for the full amount paid to acquire the property (i.e., there is no sharing of inventory risk).
Valuation of goodwill and other intangible assets. In accordance with Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations, we identify and value intangible assets that we acquire in business combinations, such as customer arrangements, customer relationships and non-compete agreements, that arise from contractual or other legal rights or that are capable of being separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged. The fair value of identified intangible assets is based upon an estimate of the future economic benefits expected to result from ownership, which represents the amount at which the assets could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale.
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, we test our goodwill and other intangible assets for impairment annually or more frequently if events or circumstances indicate impairment may exist. Examples of such events or circumstances could include a significant change in business climate or a loss of significant customers. We apply a two-step fair value-based test to assess goodwill for impairment. The first step compares the fair value of a reporting unit to its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the second step is then performed. The second step compares the carrying amount of the reporting units goodwill to the fair value of the goodwill. If the fair value of the goodwill is less than the carrying amount, an impairment loss would be recorded in our statements of operations. Intangible assets with definite lives are amortized over their estimated useful lives and are also reviewed for impairment if events or changes in circumstances indicate that their carrying amount may not be realizable.
Our management makes certain estimates and assumptions in order to determine the fair value of net assets and liabilities, including, among other things, an assessment of market conditions, projected cash flows, cost of capital and growth rates, which could significantly impact the reported value of goodwill and other intangible assets. Estimating future cash flows requires significant judgment, and our projections may vary from cash flows eventually realized. The valuations employ a combination of present value techniques to measure fair value, corroborated by comparisons to estimated market multiples. These valuations are based on a discount rate determined by our management to be consistent with industry discount rates and the risks inherent in our current business model.
We cannot predict the occurrence of certain future events that might adversely affect the reported value of goodwill and other intangible assets, which totaled $36.4 million at March 31, 2009. Such events may include strategic decisions made in response to economic and competitive conditions, the impact of the economic environment on our base of buyers and sellers or material negative changes in our relationships with material customers.
Income taxes. We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. This statement requires an asset and liability approach for measuring deferred taxes based on temporary differences between the financial statement and income tax bases of assets and liabilities existing at each balance sheet date using enacted tax rates for the years in which the taxes are expected to be paid or recovered. A valuation allowance is provided to reduce the deferred tax assets to a level that we believe will more likely than not be realized. The resulting net deferred tax asset reflects managements estimate of the amount that will be realized.
18
We adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48) on October 1, 2007. The adoption of FIN 48 did not impact our financial position or results of operations. We have concluded that there were no uncertain tax positions identified during our analysis.
We provide for income taxes based on our estimate of federal and state tax liabilities. These estimates include, among other items, effective rates for state and local income taxes, estimates related to depreciation and amortization expense allowable for tax purposes, and the tax deductibility of certain other items. Our estimates are based on the information available to us at the time we prepare the income tax provision. We generally file our annual income tax returns several months after our fiscal year-end. Income tax returns are subject to audit by federal, state and local governments, generally years after the returns are filed. These returns could be subject to material adjustments or differing interpretations of the tax laws.
Stock-based compensation. We account for stock-based compensation in accordance with SFAS No. 123 (revised 2004), Share-Based Payment (Statement 123(R)), which is a revision of SFAS No. 123. Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their estimated fair values. We use the Black-Scholes option pricing model to estimate the fair values of share-based payments.
The above list is not intended to be a comprehensive list of all of our accounting estimates. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP, with little need for managements judgment in their application. There are also areas in which managements judgment in selecting any available alternative would not produce a materially different result. See our audited financial statements and related notes, which contain accounting policies and other disclosures required by GAAP.
Components of Revenue and Expenses
Revenue. We generate substantially all of our revenue from sales of merchandise held in inventory and by retaining a percentage of the proceeds from the sales. Our revenue recognition practices are discussed in more detail in the section above entitled Critical Accounting Estimates.
Cost of goods sold (excluding amortization). Cost of goods sold includes the costs of purchasing and transporting property for auction, as well as credit card transaction fees.
Profit-sharing distributions. Our Scrap and original Surplus Contracts with the DoD have been structured as profit-sharing arrangements in which we purchase and take possession of all goods we receive from the DoD at a contractual percentage of the original acquisition cost of those goods. After deducting allowable operating expenses, we disburse to the DoD on a monthly basis a percentage of the profits of the aggregate monthly sales. We retain the remaining percentage of these profits after the DoDs disbursement. We refer to these disbursement payments to DoD as profit-sharing distributions.
Technology and operations. Technology expenses consist primarily of personnel costs related to our programming staff who develop and deploy new marketplaces, such as liquibiz.com, and continuously enhance existing marketplaces. These personnel also develop and upgrade the software systems that support our operations, such as sales processing. Because our marketplaces and support systems require frequent upgrades and enhancements to maintain viability, we have determined that the useful life for substantially all of our internally developed software is less than one year. As a result, we expense these costs as incurred.
Operations expenses consist primarily of operating costs, including buyer relations, shipping logistics and distribution center operating costs.
Sales and marketing. Sales and marketing expenses include the cost of our sales and marketing personnel as well as the cost of marketing and promotional activities. These activities include online marketing campaigns such as paid search advertising.
General and administrative. General and administrative expenses include all corporate and administrative functions that support our operations and provide an infrastructure to facilitate our future growth. Components of these expenses include executive management and staff salaries, bonuses and related taxes and employee benefits; travel; headquarters rent and related occupancy costs; and legal and accounting fees. The salaries, bonus and employee benefits costs included as general and administrative expenses are generally more fixed in nature than our operating expenses and do not vary directly with the volume of merchandise sold through our marketplaces.
Amortization of contract intangibles. Amortization of contract intangibles expense consists of the amortization of our Scrap Contract award during June 2005. This contract required us to purchase the rights to operate the scrap operations of the DoD during the seven year base term of the contract. The intangible asset created from the $5.7 million purchase is being amortized over 84 months on a straight-line basis. The amortization period is correlated to the base term of the contract, exclusive of renewal periods.
19
Depreciation and amortization. Depreciation and amortization expenses consist primarily of the depreciation and amortization of amounts recorded in connection with the purchase of furniture, fixtures and equipment.
Interest income and other income, net. Interest income and expense and other income, net consists primarily of interest income on cash and short-term investments and interest expense on borrowings under our notes payable and realized gains or losses on short-term investments.
Income taxes. During fiscal years 2006, 2007 and 2008, we had an effective income tax rate of approximately 40%, 40% and 43%, respectively, which included federal and state income taxes. We estimate that our fiscal year 2009 effective income tax rate will be approximately 46%, an increase as a result of non-deductable stock based compensation costs increasing in proportion to our U.S. based taxable income. We expect this trend to reverse when our employees are able to exercise incentive stock options, which are currently out of the money, and we will be able to deduct the related stock based compensation costs.
Results of Operations
The following table sets forth, for the periods indicated, selected statement of operations data expressed as a percentage of revenue.
|
|
Three Months Ended |
|
Six Months Ended |
|
||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Revenue |
|
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
Costs and expenses: |
|
|
|
|
|
|
|
|
|
Cost of goods sold (excluding amortization) |
|
38.0 |
|
25.7 |
|
35.8 |
|
25.8 |
|
Profit-sharing distributions |
|
19.8 |
|
36.0 |
|
22.7 |
|
35.5 |
|
Technology and operations |
|
19.6 |
|
16.4 |
|
20.5 |
|
16.6 |
|
Sales and marketing |
|
7.5 |
|
6.2 |
|
7.7 |
|
6.7 |
|
General and administrative |
|
8.6 |
|
8.4 |
|
9.4 |
|
8.3 |
|
Amortization of contract intangibles |
|
0.4 |
|
0.4 |
|
0.4 |
|
0.4 |
|
Depreciation and amortization |
|
1.1 |
|
0.7 |
|
1.1 |
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
95.0 |
|
93.8 |
|
97.6 |
|
93.9 |
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
5.0 |
|
6.2 |
|
2.4 |
|
6.1 |
|
Interest income and other income, net |
|
0.2 |
|
1.0 |
|
0.3 |
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
5.2 |
|
7.2 |
|
2.7 |
|
7.0 |
|
Provision for income taxes |
|
(2.4 |
) |
(3.0 |
) |
(1.2 |
) |
(2.9 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
2.8 |
% |
4.2 |
% |
1.5 |
% |
4.1 |
% |
Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008
Revenue. Revenue decreased $3.1 million, or 5.0%, to $59.7 million for the three months ended March 31, 2009 from $62.8 million for the three months ended March 31, 2008. This was primarily due to a 48.2% decrease in our scrap business, which utilizes the profit sharing model, as a result of decreasing commodity prices. This business generated 15.9% of our revenue and 10.4% of our GMV for the three months ended March 31, 2009, as compared to 29.1% and 20.7%, respectively, for the three months ended March 31, 2008. The amount of gross merchandise volume increased $3.0 million, or 3.4%, to $91.2 million for the three months ended March 31, 2009 from $88.2 million for the three months ended March 31, 2008, primarily due to (1) our commercial business, which grew 21.7% and generated 41.3% of our revenue and 42.3% of our GMV for the three months ended March 31, 2009, as compared to 32.1% and 35.9%, respectively, for the three months ended March 31, 2008; (2) our GovDeals business, which grew 21.7% and generated 2.4% of our revenue and 21.2% of our GMV for the three months ended March 31, 2009, as compared to 1.8% and 18.0%, respectively, for the three months ended March 31, 2008;and (3) the acquisition of Geneva, completed on May 1, 2008, which generated 5.4% of our revenue and 3.6% of our GMV for the three months ended March 31, 2009. We also benefited from our ability to more effectively market assets to potential buyers; our marketing and other related efforts resulted in an approximate 24.5% increase in registered buyers to approximately 1,111,000 at March 31, 2009 from approximately 892,000 at March 31, 2008.
20
Cost of goods sold (excluding amortization). Cost of goods sold (excluding amortization) increased $6.5 million, or 40.5%, to $22.7 million for the three months ended March 31, 2009 from $16.2 million for the three months ended March 31, 2008. As a percentage of revenue, cost of goods sold (excluding amortization) increased to 38.0% from 25.7%. These increases are primarily due to (1) the acquisition of Geneva, which was completed on May 1, 2008 and utilizes the purchase model, which has a higher cost of goods sold than the profit sharing model; (2) the decrease in our scrap business revenue, which utilizes the profit sharing model and (3) the new Surplus Contract which began significant sales during March 2009 and also utilizes the purchase model.
Profit-sharing distributions. Profit-sharing distributions decreased $10.8 million, or 47.9%, to $11.8 million for the three months ended March 31, 2009 from $22.6 million for the three months ended March 31, 2008. As a percentage of revenue, profit-sharing distributions decreased to 19.8% from 36.0%. These decreases are primarily due to a 48.2% decrease in our scrap business.
Technology and operations expenses. Technology and operations expenses increased $1.4 million, or 13.4%, to $11.7 million for the three months ended March 31, 2009 from $10.3 million for the three months ended March 31, 2008. As a percentage of revenue, these expenses increased to 19.6% from 16.4%. These increases are primarily due to (1) the decrease of 48.2% in revenue from our scrap business, while incurring similar operational costs as pounds of scrap sold during the two periods were not materially different; (2) the roll out of operations associated with our new Surplus Contract; (3) expenses of $0.9 million associated with our commercial business needed to support its 21.7% growth; and (4) expenses of $0.4 million associated with Geneva, which was acquired on May 1, 2008.
Sales and marketing expenses. Sales and marketing expenses increased $0.6 million, or 14.2%, to $4.5 million for the three months ended March 31, 2009 from $3.9 million for the three months ended March 31, 2008. As a percentage of revenue, these expenses increased to 7.5% from 6.2%. These increases are primarily due to our hiring of 29 additional sales and marketing personnel.
General and administrative expenses. General and administrative expenses decreased $0.2 million, or 2.7%, to $5.1 million for the three months ended March 31, 2009 from $5.3 million for the three months ended March 31, 2008, primarily due to a decrease in executive bonuses, which are tied to the profitability and growth of the Company. As a percentage of revenue, these expenses increased to 8.6% from 8.4%, primarily due to the 5.0% decrease in revenue.
Amortization of contract intangibles. Amortization of contract intangibles was $0.2 million for the three months ended March 31, 2009 and 2008, as a result of our DoD Scrap Contract award during June 2005. This contract required us to purchase the rights to operate the scrap operations of the DoD during the seven-year base term of the contract. The intangible asset created from the $5.7 million purchase is being amortized on a straight-line basis over 84 months, which began in August 2005.
Depreciation and amortization expenses. Depreciation and amortization expenses increased $0.2 million, or 46.0%, to $0.7 million for the three months ended March 31, 2009 from $0.5 million for the three months ended March 31, 2008, primarily due to additional depreciation expense resulting from the purchase of $1.7 million of property and equipment during the fiscal year ended September 30, 2008.
Interest income and other income, net. Interest income and expense and other income, net decreased $0.5 million, or 85.4%, to $0.1 million for the three months ended March 31, 2009 from $0.6 million for the three months ended March 31, 2008, primarily due to a reduction in short term interest rates.
Provision for income tax expense. Income tax expense decreased $0.5 million, or 23.4%, to $1.4 million for the three months ended March 31, 2009 from $1.9 million for the three months ended March 31, 2008, primarily due to the decrease in income before provision for income taxes.
Net income. Net income decreased $0.9 million, or 36.7%, to $1.7 million for the three months ended March 31, 2009 from $2.6 for the three months ended March 31, 2008.
21
Six Months Ended March 31, 2009 Compared to Six Months Ended March 31, 2008
Revenue. Revenue decreased $6.8 million, or 5.6%, to $115.3 million for the six months ended March 31, 2009 from $122.1 million for the six months ended March 31, 2008. This was primarily due to a 46.5% decrease in our scrap business, which utilizes the profit sharing model, as a result of decreasing commodity prices. This business generated 17.6% of our revenue and 11.7% of our GMV for the six months ended March 31, 2009, as compared to 31.1% and 24.4%, respectively, for the six months ended March 31, 2008. The amount of gross merchandise volume increased $17.5 million, or 11.2%, to $173.3 million for the six months ended March 31, 2009 from $155.8 million for the six months ended March 31, 2008, primarily due to (1) our commercial business, which grew 13.9% and generated 36.4% of our revenue and 39.5% of our GMV for the six months ended March 31, 2009, as compared to 32.3% and 38.6%, respectively, for the six months ended March 31, 2008; (2) our GovDeals business, which was acquired in January 2008, increased 119.7% and generated 2.3% of our revenue and 20.1% of our GMV for the six months ended March 31, 2009, as compared to 0.9% and 10.2%, respectively, for the six months ended March 31, 2008;and (3) the acquisition of Geneva, completed on May 1, 2008, which generated 6.2% of our revenue and 4.2% of our GMV for the six months ended March 31, 2009.
Cost of goods sold (excluding amortization). Cost of goods sold (excluding amortization) increased $9.7 million, or 30.8%, to $41.3 million for the six months ended March 31, 2009 from $31.6 million for the six months ended March 31, 2008. As a percentage of revenue, cost of goods sold (excluding amortization) increased to 35.8% from 25.8%. These increases are primarily due to (1) the acquisition of Geneva, which was completed on May 1, 2008 and utilizes the purchase model, which has a higher cost of goods sold than the profit sharing model and (2) the decrease in our scrap business revenue, which utilizes the profit sharing model.
Profit-sharing distributions. Profit-sharing distributions decreased $17.3 million, or 39.8%, to $26.1 million for the six months ended March 31, 2009 from $43.4 million for the six months ended March 31, 2008. As a percentage of revenue, profit-sharing distributions decreased to 22.7% from 35.5%. These decreases are primarily due to a 46.5% decrease in our scrap business.
Technology and operations expenses. Technology and operations expenses increased $3.3 million, or 16.4%, to $23.6 million for the six months ended March 31, 2009 from $20.3 million for the six months ended March 31, 2008. As a percentage of revenue, these expenses increased to 20.5% from 16.6%. These increases are primarily due to (1) the decrease of 46.5% in revenue from our scrap business, while incurring similar operational costs as pounds of scrap sold during the two periods were not materially different; (2) expenses of $0.5 million associated with the roll out of operations for our new Surplus Contract; (3) expenses of $1.7 million associated with our commercial business needed to support its 13.9% growth; and (4) expenses of $0.9 million associated with Geneva, which was acquired on May 1, 2008.
Sales and marketing expenses. Sales and marketing expenses increased $0.8 million, or 10.6%, to $8.9 million for the six months ended March 31, 2009 from $8.1 million for the six months ended March 31, 2008. As a percentage of revenue, these expenses increased to 7.7% from 6.7%. These increases are primarily due to our hiring of 29 additional sales and marketing personnel.
General and administrative expenses. General and administrative expenses increased $0.8 million, or 7.5%, to $10.9 million for the six months ended March 31, 2009 from $10.1 million for the six months ended March 31, 2008. As a percentage of revenue, these expenses increased to 9.4% from 8.3%. These increases are primarily due to expenses of $0.8 million associated with Geneva, which was acquired on May 1, 2008.
Amortization of contract intangibles. Amortization of contract intangibles was $0.4 million for the six months ended March 31, 2009 and 2008, as a result of our DoD Scrap Contract award during June 2005. This contract required us to purchase the rights to operate the scrap operations of the DoD during the seven-year base term of the contract. The intangible asset created from the $5.7 million purchase is being amortized on a straight-line basis over 84 months, which began in August 2005.
Depreciation and amortization expenses. Depreciation and amortization expenses increased $0.4 million, or 54.6%, to $1.3 million for the six months ended March 31, 2009 from $0.9 million for the six months ended March 31, 2008, primarily due to additional depreciation expense resulting from the purchase of $1.7 million of property and equipment during the fiscal year ended September 30, 2008.
Interest income and other income, net. Interest income and expense and other income, net decreased $0.8 million, or70.6%, to $0.3 million for the six months ended March 31, 2009 from $1.1 million for the six months ended March 31, 2008, primarily due to a reduction in short term interest rates.
Provision for income tax expense. Income tax expense decreased $2.1 million, or 59.2%, to $1.4 million for the six months ended March 31, 2009 from $3.5 million for the six months ended March 31, 2008, primarily due to the decrease in income before provision for income taxes.
22
Net income. Net income decreased $3.3 million, or 66.5%, to $1.7 million for the six months ended March 31, 2009 from $5.0 million for the six months ended March 31, 2008.
Liquidity and Capital Resources
Historically, our primary cash needs have been working capital (including capital used for inventory purchases), which we have funded primarily through cash generated from operations. As of March 31, 2009, we had approximately $34.2 million in cash and cash equivalents, $19.8 million in short-term investments and $21.4 million available under our $30.0 million senior credit facility, due to issued letters of credit for $8.6 million; $1.0 million of our availability under this facility is set aside as a contractual obligation under our DoD Scrap Contract.
On December 2, 2008, our Board of Directors approved a stock repurchase program. Under the program, we are authorized to repurchase up to $10 million of our issued and outstanding shares of common stock. Share repurchases may be made through open market purchases, privately negotiated transactions or otherwise, at times and in such amounts as management deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements and other market conditions. The repurchase program may be discontinued or suspended at any time, and will be funded using our available cash. Our Board of Directors reviews the share repurchase program periodically, the last such review having occurred in March 2009. During the three months ended March 31, 2009, 707,462 shares were purchased under the program for approximately $3.9 million. As of March 31, 2009, approximately $6.1 million may yet be expended under the program.
Substantially all of our sales are recorded subsequent to receipt of payment authorization, utilizing credit cards, wire transfers and PayPal, an Internet based payment system, as methods of payments. As a result, we are not subject to significant collection risk, as goods are generally not shipped before payment is received.
Changes in Cash Flows: Six Months Ended December 31, 2009 Compared to Six Months Ended December 31, 2008
Net cash used in operating activities was $3.0 million for the six months ended March 31, 2009 compared to $11.1 million of net cash provided by operating activities for the six months ended March 31, 2008. For the six months ended March 31, 2009 net cash used in operating activities primarily consisted of a decrease in the provision for doubtful accounts of $0.3 million and a net decrease in accounts payable, accrued expenses and other liabilities of $10.0 million ($5.8 million resulted from a decrease in our payable to the DoD related the decrease in our scrap business), offset in part by net income of $1.7 million, depreciation and amortization expense of $1.7 million, stock compensation expense of $3.1 million and a net decrease in accounts receivable, inventory and prepaid assets of $0.8 million. For the six months ended March 31, 2008, net cash provided by operating activities primarily consisted of net income of $5.0 million, depreciation and amortization expense of $1.3 million, stock compensation expense of $2.3 million, and a net increase in accounts payable, accrued expenses and other liabilities of $2.8 million, offset in part by a net increase in accounts receivable, inventory and prepaid assets of $0.1 million and a decrease in the provision for doubtful accounts of $0.2 million.
Net cash used in investing activities was $10.4 million for the six months ended March 31, 2009 and $10.6 million for the six months ended March 31, 2008. Net cash used in investing activities for the six months ended March 31, 2009 consisted primarily of net purchases of short-term investments of $8.5 million, increase in goodwill and intangible assets of $0.1 million, and capital expenditures of $1.8 million for purchases of equipment and leasehold improvements. Net cash used in investing activities for the six months ended March 31, 2008 consisted primarily of net purchases of short-term investments of $0.5 million, $9.4 million for the purchase of GovDeals and capital expenditures of $0.7 million for purchases of equipment and leasehold improvements.
Net cash used in financing activities was $3.7 million for the six months ended March 31, 2009 and $0.1 million for the six months ended March 31, 2008. Net cash used in financing activities for the six months ended March 31, 2009 consisted primarily of $3.9 million for stock repurchases, offset in part by proceeds from the exercise of common stock options including the tax benefit of $0.2 million.
Capital Expenditures. Our capital expenditures consist primarily of computers and purchased software, office equipment, furniture and fixtures, and leasehold improvements. The timing and volume of such capital expenditures in the future will be affected by the addition of new customers or expansion of existing customer relationships. We expect capital expenditures to range from $3.0 million to $3.5 million in the fiscal year ending September 30, 2009. We intend to fund those expenditures primarily from operating cash flows. Our capital expenditures for the six months ended March 31, 2009 were $1.8 million. As of March 31, 2009, we had no outstanding commitments for capital expenditures.
23
Senior credit facility. We maintain a $30.0 million senior credit facility due March 31, 2010. The senior credit facility bears an annual interest rate of LIBOR plus 1.5%. As of March 31, 2009, we had no outstanding indebtedness under our senior credit facility and our borrowing availability was $21.4 million due to issued letters of credit for $8.6 million; $1.0 million of our availability under this facility is set aside as a contractual obligation under our DoD Scrap Contract. The obligations under our senior credit facility are unconditionally guaranteed by us and each of our existing and subsequently acquired or organized subsidiaries (other than our subsidiaries organized to service our DoD contracts) and secured on a first priority basis by security interests (subject to permitted liens) in substantially all assets owned by us, and each of our other domestic subsidiaries, subject to limited exceptions. Our credit agreement contains a number of affirmative and restrictive covenants including limitations on mergers, consolidations and dissolutions, sales of assets, investments and acquisitions, indebtedness and liens, and dividends and other restricted payments. As of March 31, 2009, we were in full compliance with the terms and conditions of our credit agreement.
We believe that our existing cash and cash equivalents and short term investments will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our future capital requirements will depend on many factors including our rate of revenue growth, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the development and deployment of new marketplaces, the introduction of new value added services and the costs to establish additional distribution centers. We may enter into definitive agreements with respect to potential investments in, or acquisitions of, complementary businesses, products or technologies in the future, which could also require us to seek additional equity or debt financing. The sale of additional equity securities or convertible debt securities would result in additional dilution to our stockholders. Additional debt would result in increased interest expense and could result in covenants that would restrict our operations. There is no assurance that such financing, if required, will be available in amounts or on terms acceptable to us, if at all.
Off-Balance Sheet Arrangements
We do not have any transactions, obligations or relationships that could be considered material off-balance sheet arrangements.
New Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. This statement changes the accounting for acquisitions specifically eliminating the step acquisition model, changing the recognition of contingent consideration from being recognized when it is probable to being recognized at the time of acquisition, disallowing the capitalization of transaction costs and delays when restructurings related to acquisitions can be recognized. We will adopt this statement for fiscal year beginning October 1, 2009 and it will only impact the accounting for acquisitions we make after its adoption, except for the amendment related to income taxes, which will be applied prospectively as of the adoption date and will apply to business combinations with acquisition dates before the effective date of SFAS No. 141(R).
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Interest rate sensitivity. We did not have any debt as of March 31, 2009 and September 30, 2008 and thus do not have any related interest rate exposure. Our investment policy requires us to invest funds in excess of current operating requirements. The principal objectives of our investment activities are to preserve principal, provide liquidity and maximize income consistent with minimizing risk of material loss.
As of March 31, 2009, our cash and cash equivalents consisted primarily of money market funds and our short term investments consisted primarily of highly rated short term bonds. The recorded carrying amounts of cash and cash equivalents approximate fair value due to their short maturities. Our interest income is sensitive to changes in the general level of interest rates in the United States, particularly since the majority of our investments are short-term in nature. Due to the nature of our short-term investments, which have a duration of three to twelve months, we have concluded that we do not have material market risk exposure.
Exchange rate sensitivity. We consider our exposure to foreign currency exchange rate fluctuations to be minimal, as less than six percent of our GMV is denominated in foreign currencies. We have not engaged in any hedging or other derivative transactions to date.
24
Item 4. Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. 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, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
During the most recent fiscal quarter, there has not occurred any change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
As of March 31, 2009, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective and were operating at the reasonable assurance level.
25
From time to time, we may become involved in litigation relating to claims arising in the ordinary course of our business. There are no claims or actions pending or threatened against us that, if adversely determined, would in our judgment have a material adverse effect on us.
In addition to the other information set forth in this report, you should carefully consider the factors set forth in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended September 30, 2008, which could materially affect our business, financial condition or future results. The risks described in our Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Item 2. Purchases of Equity Securities by the Issuer.
Issuer Purchases of Equity Securities
Period |
|
Total Number of |
|
Average Price Paid |
|
Total Number of |
|
Approximate Dollar |
|
||
January 1 to January 31, 2009 |
|
|
|
|
|
|
|
|
|
||
February 1 to February 28, 2009 |
|
453,910 |
|
$ |
5.35 |
|
453,910 |
|
$ |
8,268,000 |
|
March 1 to March 31, 2009 |
|
253,552 |
|
$ |
5.70 |
|
253,552 |
|
$ |
6,126,000 |
|
Total |
|
707,462 |
|
$ |
5.48 |
|
707,462 |
|
$ |
6,126,000 |
|
Item 4. Submission of Matters to a Vote of Security Holders.
The 2009 Annual Meeting of Stockholders of Liquidity Services, Inc. was held on February 2, 2009.
The stockholders voted on proposals (1) to elect two Class III directors, (2) to approve an amendment to our 2006 Omnibus Long-Term Incentive Plan (the 2006 Plan) to increase the number of shares authorized for issuance and (3) to ratify the Audit Committee of our Board of Directors appointment of Ernst & Young LLP as the Companys independent registered public accounting firm for fiscal year 2009.
Both nominees for election to the Board as Class III directors were elected to serve until the Annual Meeting of Stockholders in 2012 or until their respective successors have been duly elected and qualified, or until the earlier of the directors death, resignation or retirement. The stockholders approved the amendment to the 2006 Plan to increase the number of shares authorized for issuance and ratified the appointment by the Audit Committee of Ernst & Young LLP as the Companys independent registered public accounting firm for the fiscal year 2009.
26
The number of votes cast for, against or withheld and the number of abstentions with respect to each proposal is set forth below:
Election of Directors
Nominee |
|
For |
|
Abstain |
|
Patrick W. Gross |
|
25,334,281 |
|
1,348,036 |
|
|
|
|
|
|
|
Franklin D. Kramer |
|
25,413,548 |
|
1,268,769 |
|
Approval of Amendment |
|
For |
|
Against |
|
Abstain |
|
Amendment to LSIs 2006 Omnibus Long-Term Incentive Plan to approve an increase in the number of shares authorized for issuance. |
|
18,235,124 |
|
6,211,775 |
|
1,400 |
|
Ratification of Appointment |
|
For |
|
Against |
|
Abstain |
|
Ratification of appointment of Ernst & Young LLP as the Companys independent registered public accounting firm for fiscal 2009. |
|
26,621,833 |
|
59,734 |
|
750 |
|
Exhibit No. |
|
Description |
3.1 |
|
Fourth Amended and Restated Certificate of Incorporation, incorporated herein by reference to Exhibit 3.1 to Amendment No. 2 to the Companys Registration Statement on Form S-1 (Registration No. 333-129656), filed with the SEC on January 17, 2006. |
3.2 |
|
Amended and Restated Bylaws, incorporated herein by reference to Exhibit 3.2 to Amendment No. 2 to the Companys Registration Statement on Form S-1 (Registration No. 333-129656), filed with the SEC on January 17, 2006. |
10.1 |
|
Supplemental Agreement 1 (Sales Contract Number 08-0001-0001), incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed with the SEC on February 5, 2009. |
10.2 |
|
2006 Omnibus Long-Term Incentive Plan. |
31.1 |
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. |
31.2 |
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. |
32.1 |
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2 |
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
27
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 on May 6, 2009.
LIQUIDITY SERVICES, INC. |
||
|
|
(Registrant) |
|
|
|
|
|
|
|
By: |
/s/ William P. Angrick, III |
|
|
William P. Angrick, III |
|
|
Chairman of the Board of Directors and Chief Executive Officer |
|
|
|
|
|
|
|
By: |
/s/ James M. Rallo |
|
|
James M. Rallo |
|
|
Chief Financial Officer and Treasurer |
28
Exhibit 10.2
LIQUIDITY SERVICES, INC.
2006 OMNIBUS LONG-TERM INCENTIVE PLAN
TABLE OF CONTENTS
|
|
|
|
|
Page |
1. |
PURPOSE |
|
1 |
||
2. |
DEFINITIONS |
|
1 |
||
3. |
ADMINISTRATIONOFTHEPLAN |
|
4 |
||
|
3.1. |
|
Board |
|
4 |
|
3.2. |
|
Committee |
|
4 |
|
3.3. |
|
TermsofAwards |
|
4 |
|
3.4. |
|
DeferralArrangement |
|
5 |
|
3.5. |
|
NoLiability |
|
5 |
|
3.6. |
|
ShareIssuance |
|
5 |
4. |
STOCKSUBJECTTOTHEPLAN |
|
6 |
||
5. |
EFFECTIVEDATE,DURATIONANDAMENDMENTS |
|
6 |
||
|
5.1. |
|
EffectiveDate |
|
6 |
|
5.2. |
|
Term |
|
6 |
|
5.3. |
|
AmendmentandTerminationofthePlan |
|
6 |
6. |
AWARDELIGIBILITYANDLIMITATIONS |
|
7 |
||
|
6.1. |
|
ServiceProvidersandOtherPersons |
|
7 |
|
6.2. |
|
SuccessiveAwardsandSubstituteAwards |
|
7 |
|
6.3. |
|
LimitationonSharesofStockSubjecttoAwardsandCashAwards |
|
7 |
7. |
AWARDAGREEMENT |
|
7 |
||
8. |
TERMSANDCONDITIONSOFOPTIONS |
|
7 |
||
|
8.1. |
|
OptionPrice |
|
7 |
|
8.2. |
|
Vesting |
|
8 |
|
8.3. |
|
Term |
|
8 |
|
8.4. |
|
TerminationofService |
|
8 |
|
8.5. |
|
LimitationsonExerciseofOption |
|
8 |
|
8.6. |
|
MethodofExercise |
|
8 |
|
8.7. |
|
RightsofHoldersofOptions |
|
8 |
|
8.8. |
|
DeliveryofStockCertificates |
|
9 |
|
8.9. |
|
TransferabilityofOptions |
|
9 |
|
8.10. |
|
FamilyTransfers |
|
9 |
|
8.11. |
|
LimitationsonIncentiveStockOptions |
|
9 |
9. |
TERMSANDCONDITIONSOFSTOCKAPPRECIATIONRIGHTS |
|
9 |
||
|
9.1. |
|
RighttoPaymentandGrantPrice |
|
9 |
|
9.2. |
|
OtherTerms |
|
10 |
10. |
TERMSANDCONDITIONSOFRESTRICTEDSTOCKANDSTOCKUNITS |
|
10 |
||
|
10.1. |
|
GrantofRestrictedStockorStockUnits |
|
10 |
|
10.2. |
|
Restrictions |
|
10 |
|
10.3. |
|
RestrictedStockCertificates |
|
10 |
|
10.4. |
|
RightsofHoldersofRestrictedStock |
|
10 |
|
10.5. |
|
RightsofHoldersofStockUnits |
|
11 |
|
10.5.1 |
|
VotingandDividendRights |
|
11 |
|
10.5.2 |
|
CreditorsRights |
|
11 |
|
10.6. |
|
TerminationofService |
|
11 |
|
10.7. |
|
PurchaseofRestrictedStock |
|
11 |
|
10.8. |
|
DeliveryofStock |
|
11 |
i
|
|
|
|
|
Page |
11. |
TERMSANDCONDITIONSOFUNRESTRICTEDSTOCKAWARDS |
|
11 |
||
12. |
FORMOFPAYMENTFOROPTIONSANDRESTRICTEDSTOCK |
|
12 |
||
|
12.1. |
|
GeneralRule |
|
12 |
|
12.2. |
|
SurrenderofStock |
|
12 |
|
12.3. |
|
CashlessExercise |
|
12 |
|
12.4. |
|
OtherFormsofPayment |
|
12 |
13. |
TERMSANDCONDITIONSOFDIVIDENDEQUIVALENTRIGHTS |
|
12 |
||
|
13.1. |
|
DividendEquivalentRights |
|
12 |
|
13.2. |
|
TerminationofService |
|
13 |
14. |
TERMSANDCONDITIONSOFPERFORMANCEANDANNUALINCENTIVEAWARDS |
|
13 |
||
|
14.1. |
|
PerformanceConditions |
|
13 |
|
14.2. |
|
PerformanceorAnnualIncentiveAwardsGrantedtoDesignatedCoveredEmployees |
|
13 |
|
14.2.1 |
|
PerformanceGoalsGenerally |
|
13 |
|
14.2.2 |
|
BusinessCriteria |
|
13 |
|
14.2.3 |
|
TimingForEstablishingPerformanceGoals |
|
14 |
|
14.2.4 |
|
SettlementofPerformanceorAnnualIncentiveAwards;OtherTerms |
|
14 |
|
14.3. |
|
WrittenDeterminations |
|
14 |
|
14.4. |
|
StatusofSection14.2AwardsUnderCodeSection162(m) |
|
14 |
15. |
PARACHUTELIMITATIONS |
|
15 |
||
16. |
REQUIREMENTSOFLAW |
|
15 |
||
|
16.1. |
|
General |
|
15 |
|
16.2. |
|
Rule16b-3 |
|
16 |
17. |
EFFECTOFCHANGESINCAPITALIZATION |
|
16 |
||
|
17.1. |
|
ChangesinStock |
|
16 |
|
17.2. |
|
ReorganizationinWhichtheCompanyIstheSurvivingEntityWhichdoesnotConstituteaCorporateTransaction |
|
16 |
|
17.3. |
|
CorporateTransaction |
|
17 |
|
17.4. |
|
Adjustments |
|
17 |
|
17.5. |
|
NoLimitationsonCompany |
|
18 |
18. |
GENERALPROVISIONS |
|
18 |
||
|
18.1. |
|
DisclaimerofRights |
|
18 |
|
18.2. |
|
NonexclusivityofthePlan |
|
18 |
|
18.3. |
|
WithholdingTaxes |
|
18 |
|
18.4. |
|
Captions |
|
19 |
|
18.5. |
|
OtherProvisions |
|
19 |
|
18.6. |
|
NumberandGender |
|
19 |
|
18.7. |
|
Severability |
|
19 |
|
18.8. |
|
GoverningLaw |
|
19 |
|
18.9. |
|
Section409AoftheCode |
|
19 |
ii
LIQUIDITY SERVICES, INC.
2006 OMNIBUS LONG-TERM INCENTIVE PLAN
Liquidity Services, Inc., a Delaware corporation (the Company), sets forth herein the terms of its 2006 Omnibus Long-Term Incentive Plan (the Plan), as follows:
1. PURPOSE
The Plan is intended to enhance the Companys and its Affiliates (as defined herein) ability to attract and retain highly qualified officers, directors, key employees, and other persons, and to motivate such persons to serve the Company and its Affiliates and to expend maximum effort to improve the business results and earnings of the Company, by providing to such persons an opportunity to acquire or increase a direct proprietary interest in the operations and future success of the Company. To this end, the Plan provides for the grant of stock options, stock appreciation rights, restricted stock, stock units, unrestricted stock, dividend equivalent rights and cash awards. Any of these awards may, but need not, be made as performance incentives to reward attainment of annual or long-term performance goals in accordance with the terms hereof. Stock options granted under the Plan may be non-qualified stock options or incentive stock options, as provided herein.
2. DEFINITIONS
For purposes of interpreting the Plan and related documents (including Award Agreements), the following definitions shall apply:
2.1 Affiliate means, with respect to the Company, any company or other trade or business that controls, is controlled by or is under common control with the Company within the meaning of Rule 405 of Regulation C under the Securities Act, including, without limitation, any Subsidiary.
2.2 Annual Incentive Award means an Award made subject to attainment of performance goals (as described in Section 14) over a performance period of up to one year (the Companys fiscal year, unless otherwise specified by the Committee).
2.3 Award means a grant of an Option, Stock Appreciation Right, Restricted Stock, Unrestricted Stock, Stock Unit, Dividend Equivalent Rights, or cash award under the Plan.
2.4 Award Agreement means the written agreement between the Company and a Grantee that evidences and sets out the terms and conditions of an Award.
2.5 Benefit Arrangement shall have the meaning set forth in Section 15 hereof.
2.6 Board means the Board of Directors of the Company.
2.7 Cause means, as determined by the Board and unless otherwise provided in an applicable agreement with the Company or an Affiliate, (i) gross negligence or willful misconduct in connection with the performance of duties; (ii) conviction of a criminal offense (other than minor traffic offenses); or (iii) material breach of any term of any employment, consulting or other services, confidentiality, intellectual property or non-competition agreements, if any, between the Service Provider and the Company or an Affiliate.
2.8 Code means the Internal Revenue Code of 1986, as now in effect or as hereafter amended.
2.9 Committee means the Compensation Committee of the Board.
2.10 Company means Liquidity Services, Inc.
2.11 Corporate Transaction means (i) the dissolution or liquidation of the Company or a merger, consolidation, or reorganization of the Company with one or more other entities in which the Company is not the surviving entity, (ii) a sale of substantially all of the assets of the Company to
1
another person or entity, or (iii) any transaction (including without limitation a merger or reorganization in which the Company is the surviving entity) which results in any person or entity (other than persons who are stockholders or Affiliates immediately prior to the transaction) owning 50% or more of the combined voting power of all classes of stock of the Company.
2.12 Covered Employee means a Grantee who is a covered employee within the meaning of Section 162(m)(3) of the Code.
2.13 Disability means the Grantee is unable to perform each of the essential duties of such Grantees position by reason of a medically determinable physical or mental impairment which is potentially permanent in character or which can be expected to last for a continuous period of not less than 12 months; provided, however, that, with respect to rules regarding expiration of an Incentive Stock Option following termination of the Grantees Service, Disability shall mean the Grantee is unable to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.
2.14 Dividend Equivalent Right means a right, granted to a Grantee under Section 13 hereof, to receive cash, Stock, other Awards or other property equal in value to dividends paid with respect to a specified number of shares of Stock, or other periodic payments.
2.15 Effective Date means the date of closing of the Companys initial public offering.
2.16 Exchange Act means the Securities Exchange Act of 1934, as now in effect or as hereafter amended.
2.17 Fair Market Value means the value of a share of Stock, determined as follows: if on the Grant Date or other determination date the Stock is listed on an established national or regional stock exchange, is admitted to quotation on The Nasdaq Stock Market, Inc. or is publicly traded on an established securities market, the Fair Market Value of a share of Stock shall be the closing price of the Stock on such exchange or in such market (if there is more than one such exchange or market the Board shall determine the appropriate exchange or market) on the Grant Date or such other determination date (or if there is no such reported closing price, the Fair Market Value shall be the mean between the highest bid and lowest asked prices or between the high and low sale prices on such trading day) or, if no sale of Stock is reported for such trading day, on the next preceding day on which any sale shall have been reported. If the Stock is not listed on such an exchange, quoted on such system or traded on such a market, Fair Market Value shall be the value of the Stock as determined by the Board in good faith.
2.18 Family Member means a person who is a spouse, former spouse, child, stepchild, grandchild, parent, stepparent, grandparent, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother, sister, brother-in-law, or sister-in-law, including adoptive relationships, of the Grantee, any person sharing the Grantees household (other than a tenant or employee), a trust in which any one or more of these persons have more than fifty percent of the beneficial interest, a foundation in which any one or more of these persons (or the Grantee) control the management of assets, and any other entity in which one or more of these persons (or the Grantee) own more than fifty percent of the voting interests.
2.19 Grant Date means, as determined by the Board, the latest to occur of (i) the date as of which the Board approves an Award, (ii) the date on which the recipient of an Award first becomes eligible to receive an Award under Section 6 hereof, or (iii) such other date as may be specified by the Board.
2.20 Grantee means a person who receives or holds an Award under the Plan.
2
2.21 Incentive Stock Option means an incentive stock option within the meaning of Section 422 of the Code, or the corresponding provision of any subsequently enacted tax statute, as amended from time to time.
2.22 Non-qualified Stock Option means an Option that is not an Incentive Stock Option.
2.23 Option means an option to purchase one or more shares of Stock pursuant to the Plan.
2.24 Option Price means the exercise price for each share of Stock subject to an Option.
2.25 Other Agreement shall have the meaning set forth in Section 15 hereof.
2.26 Outside Director means a member of the Board who is not an officer or employee of the Company.
2.27 Performance Award means an Award made subject to the attainment of performance goals (as described in Section 14) over a performance period of up to ten (10) years.
2.28 Plan means this Liquidity Services, Inc. 2006 Omnibus Long-Term Incentive Plan.
2.29 Purchase Price means the purchase price for each share of Stock pursuant to a grant of Restricted Stock or Unrestricted Stock.
2.30 Reporting Person means a person who is required to file reports under Section 16(a) of the Exchange Act.
2.31 Restricted Stock means shares of Stock, awarded to a Grantee pursuant to Section 10 hereof.
2.32 SAR Exercise Price means the per share exercise price of a SAR granted to a Grantee under Section 9 hereof.
2.33 Securities Act means the Securities Act of 1933, as now in effect or as hereafter amended.
2.34 Service means service as a Service Provider to the Company or an Affiliate. Unless otherwise stated in the applicable Award Agreement, a Grantees change in position or duties shall not result in interrupted or terminated Service, so long as such Grantee continues to be a Service Provider to the Company or an Affiliate. Subject to the preceding sentence, whether a termination of Service shall have occurred for purposes of the Plan shall be determined by the Board, which determination shall be final, binding and conclusive.
2.35 Service Provider means an employee, officer or director of the Company or an Affiliate, or a consultant or adviser currently providing services to the Company or an Affiliate.
2.36 Stock means the common stock, par value $.001 per share, of the Company.
2.37 Stock Appreciation Right or SAR means a right granted to a Grantee under Section 9 hereof.
2.38 Stock Unit means a bookkeeping entry representing the equivalent of one share of Stock awarded to a Grantee pursuant to Section 10 hereof.
2.39 Subsidiary means any subsidiary corporation of the Company within the meaning of Section 424(f) of the Code.
2.40 Substitute Awards means Awards granted upon assumption of, or in substitution for, outstanding awards previously granted by a company or other entity acquired by the Company or any Affiliate or with which the Company or any Affiliate combines.
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2.41 Termination Date means the date upon which an Option shall terminate or expire, as set forth in Section 8.3 hereof.
2.42 Ten Percent Stockholder means an individual who owns more than ten percent (10%) of the total combined voting power of all classes of outstanding stock of the Company, its parent or any of its Subsidiaries. In determining stock ownership, the attribution rules of Section 424(d) of the Code shall be applied.
2.43 Unrestricted Stock means an Award pursuant to Section 11 hereof.
3. ADMINISTRATION OF THE PLAN
3.1. Board
The Board shall have such powers and authorities related to the administration of the Plan as are consistent with the Companys certificate of incorporation and by-laws and applicable law. The Board shall have full power and authority to take all actions and to make all determinations required or provided for under the Plan, any Award or any Award Agreement, and shall have full power and authority to take all such other actions and make all such other determinations not inconsistent with the specific terms and provisions of the Plan that the Board deems to be necessary or appropriate to the administration of the Plan, any Award or any Award Agreement. All such actions and determinations shall be by the affirmative vote of a majority of the members of the Board present at a meeting or by unanimous consent of the Board executed in writing in accordance with the Companys certificate of incorporation and by-laws and applicable law. The interpretation and construction by the Board of any provision of the Plan, any Award or any Award Agreement shall be final, binding and conclusive.
3.2. Committee.
The Board from time to time may delegate to the Committee such powers and authorities related to the administration and implementation of the Plan, as set forth in Section 3.1 above and other applicable provisions, as the Board shall determine, consistent with the certificate of incorporation and by-laws of the Company and applicable law.
The Board may also appoint one or more separate committees of the Board, each composed of one or more directors of the Company who need not be Outside Directors, who may administer the Plan with respect to employees or other Service Providers who are not officers or directors of the Company, may grant Awards under the Plan to such employees or other Service Providers, and may determine all terms of such Awards. In the event that the Plan, any Award or any Award Agreement entered into hereunder provides for any action to be taken by or determination to be made by the Board, such action may be taken or such determination may be made by the Committee if the power and authority to do so has been delegated to the Committee by the Board as provided for in this Section. Unless otherwise expressly determined by the Board, any such action or determination by the Committee shall be final, binding and conclusive. To the extent permitted by law, the Committee may delegate its authority under the Plan to a member of the Board.
3.3. Terms of Awards.
Subject to the other terms and conditions of the Plan, the Board shall have full and final authority to:
(i) designate Grantees,
(ii) determine the type or types of Awards to be made to a Grantee,
(iii) determine the number of shares of Stock to be subject to an Award,
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(iv) establish the terms and conditions of each Award (including, but not limited to, the exercise price of any Option, the nature and duration of any restriction or condition (or provision for lapse thereof) relating to the vesting, exercise, transfer, or forfeiture of an Award or the shares of Stock subject thereto, and any terms or conditions that may be necessary to qualify Options as Incentive Stock Options),
(v) prescribe the form of each Award Agreement evidencing an Award, and
(vi) amend, modify, or supplement the terms of any outstanding Award. Such authority specifically includes the authority, in order to effectuate the purposes of the Plan but without amending the Plan, to modify Awards to eligible individuals who are foreign nationals or are individuals who are employed outside the United States to recognize differences in local law, tax policy, or custom. Notwithstanding the foregoing, no amendment, modification or supplement of any Award shall, without the consent of the Grantee, impair the Grantees rights under such Award and no amendment or modification to an Award that would treated as a repricing under the rules of the stock exchange or market on which the Stock is listed or quoted shall be made without approval of the Companys stockholders.
The Company may retain the right in an Award Agreement to cause a forfeiture of the gain realized by a Grantee on account of actions taken by the Grantee in violation or breach of or in conflict with any employment agreement, non-competition agreement, any agreement prohibiting solicitation of employees or clients of the Company or any Affiliate thereof or any confidentiality obligation with respect to the Company or any Affiliate thereof or otherwise in competition with the Company or any Affiliate thereof, to the extent specified in such Award Agreement applicable to the Grantee. Furthermore, the Company may annul an Award if the Grantee is an employee of the Company or an Affiliate thereof and is terminated for Cause as defined in the applicable Award Agreement or the Plan, as applicable. The grant of any Award shall be contingent upon the Grantee executing the appropriate Award Agreement.
Notwithstanding the foregoing, no amendment or modification may be made to an outstanding Option or SAR which reduces the Option Price or SAR Exercise Price, either by lowering the Option Price or SAR Exercise Price or by canceling the outstanding Option or SAR and granting a replacement Option or SAR with a lower exercise price without the approval of the stockholders of the Company, provided, that, appropriate adjustments may be made to outstanding Options and SARs pursuant to Section 17.
3.4. Deferral Arrangement.
The Board may permit or require the deferral of any award payment into a deferred compensation arrangement, subject to such rules and procedures as it may establish, which may include provisions for the payment or crediting of interest or dividend equivalents, including converting such credits into deferred Stock equivalents, restricting deferrals to comply with hardship distribution rules affecting 401(k) plans. Any such deferrals shall be made in a manner that complies with Code Section 409A.
3.5. No Liability.
No member of the Board or of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Award or Award Agreement.
3.6. Share Issuance
Notwithstanding any provision of this Plan to the contrary, the issuance of the Stock under the Plan may be evidenced in such a manner as the Board, in its discretion, deems appropriate, including, without limitation, book-entry registration or issuance of one or more Stock certificates.
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4. STOCK SUBJECT TO THE PLAN
Subject to adjustment as provided in Section 17 hereof, the number of shares of Stock available for issuance under the Plan shall be ten million (10,000,000). Notwithstanding the preceding sentence and also subject to adjustment as provided in Section 17 hereof, the aggregate number of shares of Stock which cumulatively may be available for issuance pursuant to Awards other than Awards of Options or SARs shall not exceed three million five hundred thousand (3,500,000) and the number of shares that may be issued as Incentive Stock Options shall not exceed ten million (10,000,000). Stock issued or to be issued under the Plan shall be authorized but unissued shares; or, to the extent permitted by applicable law, issued shares that have been reacquired by the Company. If any shares covered by an Award are not purchased or are forfeited, or if an Award otherwise terminates without delivery of any Stock subject thereto, then the number of shares of Stock counted against the aggregate number of shares available under the Plan with respect to such Award shall, to the extent of any such forfeiture or termination, again be available for making Awards under the Plan.
The Board shall have the right to substitute or assume Awards in connection with mergers, reorganizations, separations, or other transactions to which Section 424(a) of the Code applies. The number of shares of Stock reserved pursuant to Section 4 may be increased by the corresponding number of Awards assumed and, in the case of a substitution, by the net increase in the number of shares of Stock subject to Awards before and after the substitution.
5. EFFECTIVE DATE, DURATION AND AMENDMENTS
5.1. Effective Date.
The Plan shall be effective as of the Effective Date, subject to approval of the Plan by the Companys stockholders within one year of the Effective Date. Upon approval of the Plan by the stockholders of the Company as set forth above, all Awards made under the Plan on or after the Effective Date shall be fully effective as if the stockholders of the Company had approved the Plan on the Effective Date. If the stockholders fail to approve the Plan within one year of the Effective Date, any Awards made hereunder shall be null and void and of no effect.
5.2. Term.
The Plan shall terminate automatically ten (10) years after its adoption by the Board and may be terminated on any earlier date as provided in Section 5.3.
5.3. Amendment and Termination of the Plan
The Board may, at any time and from time to time, amend, suspend, or terminate the Plan as to any shares of Stock as to which Awards have not been made. An amendment shall be contingent on approval of the Companys stockholders to the extent stated by the Board, required by applicable law or required by applicable stock exchange or market listing requirements. No Awards shall be made after termination of the Plan. No amendment, suspension, or termination of the Plan shall, without the consent of the Grantee, impair rights or obligations under any Award theretofore awarded under the Plan.
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6. AWARD ELIGIBILITY AND LIMITATIONS
6.1. Service Providers and Other Persons
Subject to this Section 6, Awards may be made under the Plan to: (i) any Service Provider to the Company or of any Affiliate, including any Service Provider who is an officer or director of the Company, or of any Affiliate, as the Board shall determine and designate from time to time, (ii) any Outside Director, and (iii) any other individual whose participation in the Plan is determined to be in the best interests of the Company by the Board.
6.2. Successive Awards and Substitute Awards.
An eligible person may receive more than one Award, subject to such restrictions as are provided herein. Notwithstanding Sections 8.1 and 9.1, the Option Price of an Option or the grant price of a SAR that is a Substitute Award may be less than 100% of the Fair Market Value of a share of Common Stock on the original date of grant provided that the Option Price or grant price in determined in accordance with the principles of Code Section 424 and the regulations thereunder.
6.3. Limitation on Shares of Stock Subject to Awards and Cash Awards.
During any time when the Company has a class of equity security registered under Section 12 of the Exchange Act:
(i) the maximum number of shares of Stock subject to Options or SARs that can be awarded under the Plan to any person eligible for an Award under Section 6 hereof is one million (1,000,000) per calendar year;
(ii) the maximum number of shares that can be awarded under the Plan, other than pursuant to an Option or SARs, to any person eligible for an Award under Section 6 hereof is seven hundred thousand (700,000) per calendar year; and
(iii) the maximum amount that may be earned as an Annual Incentive Award or other cash Award in any calendar year by any one Grantee shall be $3,000,000 and the maximum amount that may be earned as a Performance Award or other cash Award in respect of a performance period by any one Grantee shall be $5,000,000.
The preceding limitations in this Section 6.3 are subject to adjustment as provided in Section 17 hereof.
7. AWARD AGREEMENT
Each Award granted pursuant to the Plan shall be evidenced by an Award Agreement, in such form or forms as the Board shall from time to time determine. Award Agreements granted from time to time or at the same time need not contain similar provisions but shall be consistent with the terms of the Plan. Each Award Agreement evidencing an Award of Options shall specify whether such Options are intended to be Non-qualified Stock Options or Incentive Stock Options, and in the absence of such specification such options shall be deemed Non-qualified Stock Options.
8. TERMS AND CONDITIONS OF OPTIONS
8.1. Option Price
The Option Price of each Option shall be fixed by the Board and stated in the Award Agreement evidencing such Option. The Option Price of each Option shall be at least the Fair Market Value on the Grant Date of a share of Stock; provided, however, that in the event that a Grantee is a Ten Percent Stockholder, the Option Price of an Option granted to such Grantee that is intended to be an Incentive
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Stock Option shall be not less than 110 percent of the Fair Market Value of a share of Stock on the Grant Date. In no case shall the Option Price of any Option be less than the par value of a share of Stock.
8.2. Vesting.
Subject to Sections 8.3 and 17.3 hereof, each Option granted under the Plan shall become exercisable at such times and under such conditions as shall be determined by the Board and stated in the Award Agreement. For purposes of this Section 8.2, fractional numbers of shares of Stock subject to an Option shall be rounded down to the next nearest whole number. No Option shall be exercisable in whole or in part prior to the date the Plan is approved by the Stockholders of the Company as provided in Section 5.1 hereof.
8.3. Term.
Each Option granted under the Plan shall terminate, and all rights to purchase shares of Stock thereunder shall cease, upon the expiration of ten years from the date such Option is granted, or under such circumstances and on such date prior thereto as is set forth in the Plan or as may be fixed by the Board and stated in the Award Agreement relating to such Option (the Termination Date); provided, however, that in the event that the Grantee is a Ten Percent Stockholder, an Option granted to such Grantee that is intended to be an Incentive Stock Option shall not be exercisable after the expiration of five years from its Grant Date.
8.4. Termination of Service.
Each Award Agreement shall set forth the extent to which the Grantee shall have the right to exercise the Option following termination of the Grantees Service. Such provisions shall be determined in the sole discretion of the Board, need not be uniform among all Options issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination of Service.
8.5. Limitations on Exercise of Option.
Notwithstanding any other provision of the Plan, in no event may any Option be exercised, in whole or in part, prior to the date the Plan is approved by the stockholders of the Company as provided herein or after the occurrence of an event referred to in Section 17 hereof which results in termination of the Option.
8.6. Method of Exercise.
An Option that is exercisable may be exercised by the Grantees delivery to the Company of written notice of exercise on any business day, at the Companys principal office, on the form specified by the Company. Such notice shall specify the number of shares of Stock with respect to which the Option is being exercised and shall be accompanied by payment in full of the Option Price of the shares for which the Option is being exercised plus the amount (if any) of federal and/or other taxes which the Company may, in its judgment, be required to withhold with respect to an Award. The minimum number of shares of Stock with respect to which an Option may be exercised, in whole or in part, at any time shall be the lesser of (i) 100 shares or such lesser number set forth in the applicable Award Agreement and (ii) the maximum number of shares available for purchase under the Option at the time of exercise.
8.7. Rights of Holders of Options
Unless otherwise stated in the applicable Award Agreement, an individual holding or exercising an Option shall have none of the rights of a stockholder (for example, the right to receive cash or
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dividend payments or distributions attributable to the subject shares of Stock or to direct the voting of the subject shares of Stock) until the shares of Stock covered thereby are fully paid and issued to him. Except as provided in Section 17 hereof, no adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date of such issuance.
8.8. Delivery of Stock Certificates.
Promptly after the exercise of an Option by a Grantee and the payment in full of the Option Price, such Grantee shall be entitled to the issuance of a stock certificate or certificates evidencing his or her ownership of the shares of Stock subject to the Option.
8.9. Transferability of Options
Except as provided in Section 8.10, during the lifetime of a Grantee, only the Grantee (or, in the event of legal incapacity or incompetency, the Grantees guardian or legal representative) may exercise an Option. Except as provided in Section 8.10, no Option shall be assignable or transferable by the Grantee to whom it is granted, other than by will or the laws of descent and distribution.
8.10. Family Transfers.
If authorized in the applicable Award Agreement, a Grantee may transfer, not for value, all or part of an Option which is not an Incentive Stock Option to any Family Member. For the purpose of this Section 8.10, a not for value transfer is a transfer which is (i) a gift, (ii) a transfer under a domestic relations order in settlement of marital property rights; or (iii) a transfer to an entity in which more than fifty percent of the voting interests are owned by Family Members (or the Grantee) in exchange for an interest in that entity. Following a transfer under this Section 8.10, any such Option shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer. Subsequent transfers of transferred Options are prohibited except to Family Members of the original Grantee in accordance with this Section 8.10 or by will or the laws of descent and distribution. The events of termination of Service of Section 8.4 hereof shall continue to be applied with respect to the original Grantee, following which the Option shall be exercisable by the transferee only to the extent, and for the periods specified, in Section 8.4.
8.11. Limitations on Incentive Stock Options.
An Option shall constitute an Incentive Stock Option only (i) if the Grantee of such Option is an employee of the Company or any Subsidiary of the Company; (ii) to the extent specifically provided in the related Award Agreement; and (iii) to the extent that the aggregate Fair Market Value (determined at the time the Option is granted) of the shares of Stock with respect to which all Incentive Stock Options held by such Grantee become exercisable for the first time during any calendar year (under the Plan and all other plans of the Grantees employer and its Affiliates) does not exceed $100,000. This limitation shall be applied by taking Options into account in the order in which they were granted.
9. TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS
9.1. Right to Payment and Grant Price.
A SAR shall confer on the Grantee to whom it is granted a right to receive, upon exercise thereof, the excess of (A) the Fair Market Value of one share of Stock on the date of exercise over (B) the grant price of the SAR as determined by the Board. The Award Agreement for a SAR shall specify the grant price of the SAR, which shall be at least the Fair Market Value of a share of Stock on the date of grant. SARs may be granted in conjunction with all or part of an Option granted under the Plan or at any subsequent time during the term of such Option, in conjunction with all or part of any other Award or without regard to any Option or other Award; provided that a SAR that is granted
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subsequent to the Grant Date of a related Option must have a SAR Price that is no less than the Fair Market Value of one share of Stock on the SAR Grant Date.
9.2. Other Terms.
The Board shall determine at the date of grant or thereafter, the time or times at which and the circumstances under which a SAR may be exercised in whole or in part (including based on achievement of performance goals and/or future service requirements), the time or times at which SARs shall cease to be or become exercisable following termination of Service or upon other conditions, the method of exercise, method of settlement, form of consideration payable in settlement, method by or forms in which Stock will be delivered or deemed to be delivered to Grantees, whether or not a SAR shall be in tandem or in combination with any other Award, and any other terms and conditions of any SAR.
10. TERMS AND CONDITIONS OF RESTRICTED STOCK AND STOCK UNITS
10.1. Grant of Restricted Stock or Stock Units.
Awards of Restricted Stock or Stock Units may be made for no consideration (other than par value of the shares which is deemed paid by Services already rendered).
10.2. Restrictions.
At the time a grant of Restricted Stock or Stock Units is made, the Board may, in its sole discretion, establish a period of time (a restricted period) applicable to such Restricted Stock or Stock Units. Each Award of Restricted Stock or Stock Units may be subject to a different restricted period. The Board may, in its sole discretion, at the time a grant of Restricted Stock or Stock Units is made, prescribe restrictions in addition to or other than the expiration of the restricted period, including the satisfaction of corporate or individual performance objectives, which may be applicable to all or any portion of the Restricted Stock or Stock Units in accordance with Section 14.1 and 14.2. Neither Restricted Stock nor Stock Units may be sold, transferred, assigned, pledged or otherwise encumbered or disposed of during the restricted period or prior to the satisfaction of any other restrictions prescribed by the Board with respect to such Restricted Stock or Stock Units.
10.3. Restricted Stock Certificates.
The Company shall issue, in the name of each Grantee to whom Restricted Stock has been granted, stock certificates representing the total number of shares of Restricted Stock granted to the Grantee, as soon as reasonably practicable after the Grant Date. The Board may provide in an Award Agreement that either (i) the Secretary of the Company shall hold such certificates for the Grantees benefit until such time as the Restricted Stock is forfeited to the Company or the restrictions lapse, or (ii) such certificates shall be delivered to the Grantee, provided, however, that such certificates shall bear a legend or legends that comply with the applicable securities laws and regulations and makes appropriate reference to the restrictions imposed under the Plan and the Award Agreement.
10.4. Rights of Holders of Restricted Stock.
Unless the Board otherwise provides in an Award Agreement, holders of Restricted Stock shall have the right to vote such Stock and the right to receive any dividends declared or paid with respect to such Stock. The Board may provide that any dividends paid on Restricted Stock must be reinvested in shares of Stock, which may or may not be subject to the same vesting conditions and restrictions applicable to such Restricted Stock. All distributions, if any, received by a Grantee with respect to Restricted Stock as a result of any stock split, stock dividend, combination of shares, or other similar transaction shall be subject to the restrictions applicable to the original Grant.
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10.5. Rights of Holders of Stock Units.
10.5.1. Voting and Dividend Rights.
Holders of Stock Units shall have no rights as stockholders of the Company. The Board may provide in an Award Agreement evidencing a grant of Stock Units that the holder of such Stock Units shall be entitled to receive, upon the Companys payment of a cash dividend on its outstanding Stock, a cash payment for each Stock Unit held equal to the per-share dividend paid on the Stock. Such Award Agreement may also provide that such cash payment will be deemed reinvested in additional Stock Units at a price per unit equal to the Fair Market Value of a share of Stock on the date that such dividend is paid.
10.5.2. Creditors Rights.
A holder of Stock Units shall have no rights other than those of a general creditor of the Company. Stock Units represent an unfunded and unsecured obligation of the Company, subject to the terms and conditions of the applicable Award Agreement.
10.6. Termination of Service.
Unless the Board otherwise provides in an Award Agreement or in writing after the Award Agreement is issued, upon the termination of a Grantees Service, any Restricted Stock or Stock Units held by such Grantee that have not vested, or with respect to which all applicable restrictions and conditions have not lapsed, shall immediately be deemed forfeited. Upon forfeiture of Restricted Stock or Stock Units, the Grantee shall have no further rights with respect to such Award, including but not limited to any right to vote Restricted Stock or any right to receive dividends with respect to shares of Restricted Stock or Stock Units.
10.7. Purchase of Restricted Stock.
The Grantee shall be required, to the extent required by applicable law, to purchase the Restricted Stock from the Company at a Purchase Price equal to the greater of (i) the aggregate par value of the shares of Stock represented by such Restricted Stock or (ii) the Purchase Price, if any, specified in the Award Agreement relating to such Restricted Stock. The Purchase Price shall be payable in a form described in Section 12 or, in the discretion of the Board, in consideration for past Services rendered to the Company or an Affiliate.
10.8. Delivery of Stock.
Upon the expiration or termination of any restricted period and the satisfaction of any other conditions prescribed by the Board, the restrictions applicable to shares of Restricted Stock or Stock Units settled in Stock shall lapse, and, unless otherwise provided in the Award Agreement, a stock certificate for such shares shall be delivered, free of all such restrictions, to the Grantee or the Grantees beneficiary or estate, as the case may be. Neither the Grantee, nor the Grantees beneficiary or estate, shall have any further rights with regard to a Stock Unit once the share of Stock represented by the Stock Unit has been delivered.
11. TERMS AND CONDITIONS OF UNRESTRICTED STOCK AWARDS
The Board may, in its sole discretion, grant (or sell at par value or such other higher purchase price determined by the Board) an Unrestricted Stock Award to any Grantee pursuant to which such Grantee may receive shares of Stock free of any restrictions (Unrestricted Stock) under the Plan. Unrestricted Stock Awards may be granted or sold as described in the preceding sentence in respect of
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past Services and other valid consideration, or in lieu of, or in addition to, any cash compensation due to such Grantee.
12. FORM OF PAYMENT FOR OPTIONS AND RESTRICTED STOCK
12.1. General Rule.
Payment of the Option Price for the shares purchased pursuant to the exercise of an Option or the Purchase Price for Restricted Stock shall be made in cash or in cash equivalents acceptable to the Company.
12.2. Surrender of Stock.
To the extent the Award Agreement so provides, payment of the Option Price for shares purchased pursuant to the exercise of an Option or the Purchase Price for Restricted Stock may be made all or in part through the tender to the Company of shares of Stock, which shares, if acquired from the Company and if so required by the Company, shall have been held for at least six months at the time of tender and which shall be valued, for purposes of determining the extent to which the Option Price or Purchase Price has been paid thereby, at their Fair Market Value on the date of exercise or surrender.
12.3. Cashless Exercise.
With respect to an Option only (and not with respect to Restricted Stock), to the extent permitted by law and to the extent the Award Agreement so provides, payment of the Option Price for shares purchased pursuant to the exercise of an Option may be made all or in part by delivery (on a form acceptable to the Board) of an irrevocable direction to a licensed securities broker acceptable to the Company to sell shares of Stock and to deliver all or part of the sales proceeds to the Company in payment of the Option Price and any withholding taxes described in Section 18.3.
12.4. Other Forms of Payment.
To the extent the Award Agreement so provides, payment of the Option Price for shares purchased pursuant to exercise of an Option or the Purchase Price for Restricted Stock may be made in any other form that is consistent with applicable laws, regulations and rules.
13. TERMS AND CONDITIONS OF DIVIDEND EQUIVALENT RIGHTS
13.1. Dividend Equivalent Rights.
A Dividend Equivalent Right is an Award entitling the recipient to receive credits based on cash distributions that would have been paid on the shares of Stock specified in the Dividend Equivalent Right (or other award to which it relates) if such shares had been issued to and held by the recipient. A Dividend Equivalent Right may be granted hereunder to any Grantee. The terms and conditions of Dividend Equivalent Rights shall be specified in the grant. Dividend equivalents credited to the holder of a Dividend Equivalent Right may be paid currently or may be deemed to be reinvested in additional shares of Stock, which may thereafter accrue additional equivalents. Any such reinvestment shall be at Fair Market Value on the date of reinvestment. Dividend Equivalent Rights may be settled in cash or Stock or a combination thereof, in a single installment or installments, all determined in the sole discretion of the Board. A Dividend Equivalent Right granted as a component of another Award may provide that such Dividend Equivalent Right shall be settled upon exercise, settlement, or payment of, or lapse of restrictions on, such other award, and that such Dividend Equivalent Right shall expire or be forfeited or annulled under the same conditions as such other award. A Dividend Equivalent Right
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granted as a component of another Award may also contain terms and conditions different from such other award.
13.2. Termination of Service.
Except as may otherwise be provided by the Board either in the Award Agreement or in writing after the Award Agreement is issued, a Grantees rights in all Dividend Equivalent Rights or interest equivalents shall automatically terminate upon the Grantees termination of Service for any reason.
14. TERMS AND CONDITIONS OF PERFORMANCE AND ANNUAL INCENTIVE AWARDS
14.1. Performance Conditions
The right of a Grantee to exercise or receive a grant or settlement of any Award, and the timing thereof, may be subject to such performance conditions as may be specified by the Board. The Board may use such business criteria and other measures of performance as it may deem appropriate in establishing any performance conditions, and may exercise its discretion to reduce the amounts payable under any Award subject to performance conditions, except as limited under Sections 14.2 hereof in the case of a Performance Award or Annual Incentive Award intended to qualify under Code Section 162(m). If and to the extent required under Code Section 162(m), any power or authority relating to a Performance Award or Annual Incentive Award intended to qualify under Code Section 162(m), shall be exercised by the Committee and not the Board.
14.2. Performance or Annual Incentive Awards Granted to Designated Covered Employees
If and to the extent that the Committee determines that a Performance or Annual Incentive Award to be granted to a Grantee who is designated by the Committee as likely to be a Covered Employee should qualify as performance-based compensation for purposes of Code Section 162(m), the grant, exercise and/or settlement of such Performance or Annual Incentive Award shall be contingent upon achievement of pre-established performance goals and other terms set forth in this Section 14.2.
14.2.1. Performance Goals Generally.
The performance goals for such Performance or Annual Incentive Awards shall consist of one or more business criteria and a targeted level or levels of performance with respect to each of such criteria, as specified by the Committee consistent with this Section 14.2. Performance goals shall be objective and shall otherwise meet the requirements of Code Section 162(m) and regulations thereunder including the requirement that the level or levels of performance targeted by the Committee result in the achievement of performance goals being substantially uncertain. The Committee may determine that such Performance or Annual Incentive Awards shall be granted, exercised and/or settled upon achievement of any one performance goal or that two or more of the performance goals must be achieved as a condition to grant, exercise and/or settlement of such Performance or Annual Incentive Awards. Performance goals may differ for Performance or Annual Incentive Awards granted to any one Grantee or to different Grantees.
14.2.2. Business Criteria.
One or more of the following business criteria for the Company, on a consolidated basis, and/or specified subsidiaries or business units of the Company (except with respect to the total stockholder return and earnings per share criteria), shall be used exclusively by the Committee in establishing performance goals for such Performance or Annual Incentive Awards: (1) total stockholder return; (2) such total stockholder return as compared to total return (on a comparable basis) of a publicly available index such as, but not limited to, the Standard & Poors 500 Stock Index; (3) net income;
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(4) pretax earnings; (5) earnings before interest expense, taxes, depreciation and amortization; (6) pretax operating earnings after interest expense and before bonuses, service fees, and extraordinary or special items; (7) operating margin; (8) earnings per share; (9) return on equity; (10) return on capital; (11) return on investment; (12) operating earnings; (13) working capital; (14) ratio of debt to stockholders equity; (15) revenue; and (16) gross merchandise value. Business criteria may be measured on an absolute basis or on a relative basis (i.e., performance relative to peer companies) and on a GAAP or non-GAAP basis.
14.2.3. Timing For Establishing Performance Goals.
Performance goals shall be established not later than 90 days after the beginning of any performance period applicable to such Performance or Annual Incentive Awards, or at such other date as may be required or permitted for performance-based compensation under Code Section 162(m).
14.2.4. Settlement of Performance or Annual Incentive Awards; Other Terms.
Settlement of such Performance or Annual Incentive Awards shall be in cash, Stock, other Awards or other property, in the discretion of the Committee. The Committee may, in its discretion, reduce the amount of a settlement otherwise to be made in connection with such Performance or Annual Incentive Awards. The Committee shall specify the circumstances in which such Performance or Annual Incentive Awards shall be paid or forfeited in the event of termination of Service by the Grantee prior to the end of a performance period or settlement of Performance Awards.
14.3. Written Determinations.
All determinations by the Committee as to the establishment of performance goals, the amount of any potential Performance Awards and as to the achievement of performance goals relating to Performance Awards, and the amount of any potential individual Annual Incentive Awards and the amount of final Annual Incentive Awards, shall be made in writing in the case of any Award intended to qualify under Code Section 162(m). To the extent permitted by Section 162(m), the Committee may delegate any responsibility relating to such Performance Awards or Annual Incentive Awards.
14.4. Status of Section 14.2 Awards Under Code Section 162(m)
It is the intent of the Company that Performance Awards and Annual Incentive Awards under Section 14.2 hereof granted to persons who are designated by the Committee as likely to be Covered Employees within the meaning of Code Section 162(m) and regulations thereunder shall, if so designated by the Committee, constitute qualified performance-based compensation within the meaning of Code Section 162(m) and regulations thereunder. Accordingly, the terms of Section 14.2, including the definitions of Covered Employee and other terms used therein, shall be interpreted in a manner consistent with Code Section 162(m) and regulations thereunder. The foregoing notwithstanding, because the Committee cannot determine with certainty whether a given Grantee will be a Covered Employee with respect to a fiscal year that has not yet been completed, the term Covered Employee as used herein shall mean only a person designated by the Committee, at the time of grant of Performance Awards or an Annual Incentive Award, as likely to be a Covered Employee with respect to that fiscal year. If any provision of the Plan or any agreement relating to such Performance Awards or Annual Incentive Awards does not comply or is inconsistent with the requirements of Code Section 162(m) or regulations thereunder, such provision shall be construed or deemed amended to the extent necessary to conform to such requirements.
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15. PARACHUTE LIMITATIONS
Notwithstanding any other provision of this Plan or of any other agreement, contract, or understanding heretofore or hereafter entered into by a Grantee with the Company or any Affiliate, except an agreement, contract, or understanding hereafter entered into that expressly modifies or excludes application of this paragraph (an Other Agreement), and notwithstanding any formal or informal plan or other arrangement for the direct or indirect provision of compensation to the Grantee (including groups or classes of Grantees or beneficiaries of which the Grantee is a member), whether or not such compensation is deferred, is in cash, or is in the form of a benefit to or for the Grantee (a Benefit Arrangement), if the Grantee is a disqualified individual, as defined in Section 280G(c) of the Code, any Option, Restricted Stock or Stock Unit held by that Grantee and any right to receive any payment or other benefit under this Plan shall not become exercisable or vested (i) to the extent that such right to exercise, vesting, payment, or benefit, taking into account all other rights, payments, or benefits to or for the Grantee under this Plan, all Other Agreements, and all Benefit Arrangements, would cause any payment or benefit to the Grantee under this Plan to be considered a parachute payment within the meaning of Section 280G(b)(2) of the Code as then in effect (a Parachute Payment) and (ii) if, as a result of receiving a Parachute Payment, the aggregate after-tax amounts received by the Grantee from the Company under this Plan, all Other Agreements, and all Benefit Arrangements would be less than the maximum after-tax amount that could be received by the Grantee without causing any such payment or benefit to be considered a Parachute Payment. In the event that the receipt of any such right to exercise, vesting, payment, or benefit under this Plan, in conjunction with all other rights, payments, or benefits to or for the Grantee under any Other Agreement or any Benefit Arrangement would cause the Grantee to be considered to have received a Parachute Payment under this Plan that would have the effect of decreasing the after-tax amount received by the Grantee as described in clause (ii) of the preceding sentence, then the Grantee shall have the right, in the Grantees sole discretion, to designate those rights, payments, or benefits under this Plan, any Other Agreements, and any Benefit Arrangements that should be reduced or eliminated so as to avoid having the payment or benefit to the Grantee under this Plan be deemed to be a Parachute Payment.
16. REQUIREMENTS OF LAW
16.1. General.
The Company shall not be required to sell or issue any shares of Stock under any Award if the sale or issuance of such shares would constitute a violation by the Grantee, any other individual exercising an Option, or the Company of any provision of any law or regulation of any governmental authority, including without limitation any federal or state securities laws or regulations. If at any time the Company shall determine, in its discretion, that the listing, registration or qualification of any shares subject to an Award upon any securities exchange or under any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the issuance or purchase of shares hereunder, no shares of Stock may be issued or sold to the Grantee or any other individual exercising an Option pursuant to such Award unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company, and any delay caused thereby shall in no way affect the date of termination of the Award. Specifically, in connection with the Securities Act, upon the exercise of any Option or the delivery of any shares of Stock underlying an Award, unless a registration statement under such Act is in effect with respect to the shares of Stock covered by such Award, the Company shall not be required to sell or issue such shares unless the Board has received evidence satisfactory to it that the Grantee or any other individual exercising an Option may acquire such shares pursuant to an exemption from registration under the Securities Act. Any determination in this connection by the Board shall be final, binding, and conclusive. The Company may, but shall in no event be obligated to, register any securities covered hereby pursuant to the Securities Act. The Company shall not be obligated to take any affirmative action in order to cause the exercise of an Option or the issuance of shares of Stock pursuant to the
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Plan to comply with any law or regulation of any governmental authority. As to any jurisdiction that expressly imposes the requirement that an Option shall not be exercisable until the shares of Stock covered by such Option are registered or are exempt from registration, the exercise of such Option (under circumstances in which the laws of such jurisdiction apply) shall be deemed conditioned upon the effectiveness of such registration or the availability of such an exemption.
16.2. Rule 16b-3.
During any time when the Company has a class of equity security registered under Section 12 of the Exchange Act, it is the intent of the Company that Awards pursuant to the Plan and the exercise of Options granted hereunder will qualify for the exemption provided by Rule 16b-3 under the Exchange Act. To the extent that any provision of the Plan or action by the Board does not comply with the requirements of Rule 16b-3, it shall be deemed inoperative to the extent permitted by law and deemed advisable by the Board, and shall not affect the validity of the Plan. In the event that Rule 16b-3 is revised or replaced, the Board may exercise its discretion to modify this Plan in any respect necessary to satisfy the requirements of, or to take advantage of any features of, the revised exemption or its replacement.
17. EFFECT OF CHANGES IN CAPITALIZATION
17.1. Changes in Stock.
If the number of outstanding shares of Stock is increased or decreased or the shares of Stock are changed into or exchanged for a different number or kind of shares or other securities of the Company on account of any recapitalization, reclassification, stock split, reverse split, combination of shares, exchange of shares, stock dividend or other distribution payable in capital stock, or other increase or decrease in such shares effected without receipt of consideration by the Company occurring after the Effective Date, the number and kinds of shares for which grants of Options and other Awards may be made under the Plan shall be adjusted proportionately and accordingly by the Company. In addition, the number and kind of shares for which Awards are outstanding shall be adjusted proportionately and accordingly so that the proportionate interest of the Grantee immediately following such event shall, to the extent practicable, be the same as immediately before such event. Any such adjustment in outstanding Options or SARs shall not change the aggregate Option Price or SAR Exercise Price payable with respect to shares that are subject to the unexercised portion of an outstanding Option or SAR, as applicable, but shall include a corresponding proportionate adjustment in the Option Price or SAR Exercise Price per share. The conversion of any convertible securities of the Company shall not be treated as an increase in shares effected without receipt of consideration. Notwithstanding the foregoing, in the event of any distribution to the Companys stockholders of securities of any other entity or other assets (including an extraordinary dividend but excluding a non-extraordinary dividend of the Company) without receipt of consideration by the Company, the Company may, in such manner as the Company deems appropriate, adjust (i) the number and kind of shares subject to outstanding Awards and/or (ii) the exercise price of outstanding Options and Stock Appreciation Rights to reflect such distribution.
17.2. Reorganization in Which the Company Is the Surviving Entity Which does not Constitute a Corporate Transaction.
Subject to Section 17.3 hereof, if the Company shall be the surviving entity in any reorganization, merger, or consolidation of the Company with one or more other entities which does not constitute a Corporate Transaction, any Option or SAR theretofore granted pursuant to the Plan shall pertain to and apply to the securities to which a holder of the number of shares of Stock subject to such Option or SAR would have been entitled immediately following such reorganization, merger, or consolidation, with a corresponding proportionate adjustment of the Option Price or SAR Exercise Price per share so that the aggregate Option Price or SAR Exercise Price thereafter shall be the same as the aggregate
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Option Price or SAR Exercise Price of the shares remaining subject to the Option or SAR immediately prior to such reorganization, merger, or consolidation. Subject to any contrary language in an Award Agreement evidencing an Award, any restrictions applicable to such Award shall apply as well to any replacement shares received by the Grantee as a result of the reorganization, merger or consolidation. In the event of a transaction described in this Section 17.2, Stock Units shall be adjusted so as to apply to the securities that a holder of the number of shares of Stock subject to the Stock Units would have been entitled to receive immediately following such transaction.
17.3. Corporate Transaction.
Subject to the exceptions set forth in the last sentence of this Section 17.3 and the last sentence of Section 17.4, upon the occurrence of a Corporate Transaction:
(i) all outstanding shares of Restricted Stock shall be deemed to have vested, and all Stock Units shall be deemed to have vested and the shares of Stock subject thereto shall be delivered, immediately prior to the occurrence of such Corporate Transaction, and
(ii) either of the following two actions shall be taken:
(A) fifteen days prior to the scheduled consummation of a Corporate Transaction, all Options and SARs outstanding hereunder shall become immediately exercisable and shall remain exercisable for a period of fifteen days, or
(B) the Board may elect, in its sole discretion, to cancel any outstanding Awards of Options, Restricted Stock, Stock Units, and/or SARs and pay or deliver, or cause to be paid or delivered, to the holder thereof an amount in cash or securities having a value (as determined by the Board acting in good faith), in the case of Restricted Stock or Stock Units, equal to the formula or fixed price per share paid to holders of shares of Stock and, in the case of Options or SARs, equal to the product of the number of shares of Stock subject to the Option or SAR (the Award Shares) multiplied by the amount, if any, by which (I) the formula or fixed price per share paid to holders of shares of Stock pursuant to such transaction exceeds (II) the Option Price or SAR Exercise Price applicable to such Award Shares.
With respect to the Companys establishment of an exercise window, (i) any exercise of an Option or SAR during such fifteen-day period shall be conditioned upon the consummation of the event and shall be effective only immediately before the consummation of the event, and (ii) upon consummation of any Corporate Transaction the Plan, and all outstanding but unexercised Options and SARs shall terminate. The Board shall send written notice of an event that will result in such a termination to all individuals who hold Options and SARs not later than the time at which the Company gives notice thereof to its stockholders. This Section 17.3 shall not apply to any Corporate Transaction to the extent that provision is made in writing in connection with such Corporate Transaction for the assumption or continuation of the Options, SARs, Stock Units and Restricted Stock theretofore granted, or for the substitution for such Options, SARs, Stock Units and Restricted Stock for new common stock options and stock appreciation rights and new common stock stock units and restricted stock relating to the stock of a successor entity, or a parent or subsidiary thereof, with appropriate adjustments as to the number of shares (disregarding any consideration that is not common stock) and option and stock appreciation right exercise prices, in which event the Plan, Options, SARs, Stock Units and Restricted Stock theretofore granted shall continue in the manner and under the terms so provided.
17.4. Adjustments.
Adjustments under this Section 17 related to shares of Stock or securities of the Company shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. No fractional shares or other securities shall be issued pursuant to any such adjustment, and any fractions resulting from any such adjustment shall be eliminated in each case by rounding downward to the
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nearest whole share. The Board shall determine the effect of a Corporate Transaction upon Awards other than Options, SARs, Stock Units and Restricted Stock, and such effect shall be set forth in the appropriate Award Agreement. The Board may provide in the Award Agreements at the time of grant, or any time thereafter with the consent of the Grantee, for different provisions to apply to an Award in place of those described in Sections 17.1, 17.2 and 17.3.
17.5. No Limitations on Company.
The making of Awards pursuant to the Plan shall not affect or limit in any way the right or power of the Company to make adjustments, reclassifications, reorganizations, or changes of its capital or business structure or to merge, consolidate, dissolve, or liquidate, or to sell or transfer all or any part of its business or assets.
18. GENERAL PROVISIONS
18.1. Disclaimer of Rights
No provision in the Plan or in any Award or Award Agreement shall be construed to confer upon any individual the right to remain in the employ or service of the Company or any Affiliate, or to interfere in any way with any contractual or other right or authority of the Company either to increase or decrease the compensation or other payments to any individual at any time, or to terminate any employment or other relationship between any individual and the Company. In addition, notwithstanding anything contained in the Plan to the contrary, unless otherwise stated in the applicable Award Agreement, no Award granted under the Plan shall be affected by any change of duties or position of the Grantee, so long as such Grantee continues to be a director, officer, consultant or employee of the Company or an Affiliate. The obligation of the Company to pay any benefits pursuant to this Plan shall be interpreted as a contractual obligation to pay only those amounts described herein, in the manner and under the conditions prescribed herein. The Plan shall in no way be interpreted to require the Company to transfer any amounts to a third party trustee or otherwise hold any amounts in trust or escrow for payment to any Grantee or beneficiary under the terms of the Plan.
18.2. Nonexclusivity of the Plan
Neither the adoption of the Plan nor the submission of the Plan to the stockholders of the Company for approval shall be construed as creating any limitations upon the right and authority of the Board to adopt such other incentive compensation arrangements (which arrangements may be applicable either generally to a class or classes of individuals or specifically to a particular individual or particular individuals) as the Board in its discretion determines desirable, including, without limitation, the granting of stock options otherwise than under the Plan.
18.3. Withholding Taxes
The Company or an Affiliate, as the case may be, shall have the right to deduct from payments of any kind otherwise due to a Grantee any federal, state, or local taxes of any kind required by law to be withheld with respect to the vesting of or other lapse of restrictions applicable to an Award or upon the issuance of any shares of Stock upon the exercise of an Option or pursuant to an Award. At the time of such vesting, lapse, or exercise, the Grantee shall pay to the Company or the Affiliate, as the case may be, any amount that the Company or the Affiliate may reasonably determine to be necessary to satisfy such withholding obligation. Subject to the prior approval of the Company or the Affiliate, which may be withheld by the Company or the Affiliate, as the case may be, in its sole discretion, the Grantee may elect to satisfy such obligations, in whole or in part, (i) by causing the Company or the Affiliate to withhold shares of Stock otherwise issuable to the Grantee or (ii) by delivering to the Company or the Affiliate shares of Stock already owned by the Grantee. The shares of Stock so
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delivered or withheld shall have an aggregate Fair Market Value equal to such withholding obligations. The Fair Market Value of the shares of Stock used to satisfy such withholding obligation shall be determined by the Company or the Affiliate as of the date that the amount of tax to be withheld is to be determined. A Grantee who has made an election pursuant to this Section 18.3 may satisfy his or her withholding obligation only with shares of Stock that are not subject to any repurchase, forfeiture, unfulfilled vesting, or other similar requirements.
18.4. Captions
The use of captions in this Plan or any Award Agreement is for the convenience of reference only and shall not affect the meaning of any provision of the Plan or such Award Agreement.
18.5. Other Provisions
Each Award granted under the Plan may contain such other terms and conditions not inconsistent with the Plan as may be determined by the Board, in its sole discretion.
18.6. Number and Gender
With respect to words used in this Plan, the singular form shall include the plural form, the masculine gender shall include the feminine gender, etc., as the context requires.
18.7. Severability
If any provision of the Plan or any Award Agreement shall be determined to be illegal or unenforceable by any court of law in any jurisdiction, the remaining provisions hereof and thereof shall be severable and enforceable in accordance with their terms, and all provisions shall remain enforceable in any other jurisdiction.
18.8. Governing Law
The validity and construction of this Plan and the instruments evidencing the Awards hereunder shall be governed by the laws of the State of Delaware, other than any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Plan and the instruments evidencing the Awards granted hereunder to the substantive laws of any other jurisdiction.
Section 409A of the Code (Section 409A), or an exemption to Section 409A, with regard to Awards hereunder that constitute nonqualified deferred compensation within the meaning of Section 409A. To the extent that the Board determines that a Grantee would be subject to the additional 20% tax imposed on certain nonqualified deferred compensation plans pursuant to Section 409A as a result of any provision of any Award granted under this Plan, such provision shall be deemed amended to the minimum extent necessary to avoid application of such additional tax. The nature of any such amendment shall be determined by the Board.
18.9. Section 409A of the Code
The Board intends to comply with Section 409A of the Code (Section 409A), or an exemption to Section 409A, with regard to Awards hereunder that constitute nonqualified deferred compensation within the meaning of Section 409A. To the extent that the Board determines that a Grantee would be subject to the additional 20% tax imposed on certain nonqualified deferred compensation plans pursuant to Section 409A as a result of any provision of any Award granted under this Plan, such provision shall be deemed amended to the minimum extent necessary to avoid application of such additional tax. The nature of any such amendment shall be determined by the Board.
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EXHIBIT 31.1
CERTIFICATION PURSUANT TO RULE 13a-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
I, William P. Angrick, III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Liquidity Services, Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: May 6, 2009 |
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/s/ William P. Angrick, III |
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By: |
William P. Angrick, III |
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Title: |
Chairman of the Board of Directors and |
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Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION PURSUANT TO RULE 13a-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
I, James M. Rallo, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Liquidity Services, Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: May 6, 2009 |
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/s/ James M. Rallo |
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By: |
James M. Rallo |
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Title: |
Chief Financial Officer and Treasurer |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Liquidity Services, Inc. (the Company) on Form 10-Q for the period ended March 31, 2009 as filed with the Securities and Exchange Commission (the Report), I, William P. Angrick, III, Chief Executive Officer of the Company, certify, to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
May 6, 2009 |
/s/ William P. Angrick, III |
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William P. Angrick, III |
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Chairman of the Board of Directors and Chief Executive Officer |
THE FOREGOING CERTIFICATION IS BEING FURNISHED SOLELY PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 AND IS NOT BEING FILED AS PART OF THE FORM 10-Q OR AS A SEPARATE DISCLOSURE DOCUMENT.
A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, OR OTHER DOCUMENT AUTHENTICATING, ACKNOWLEDGING, OR OTHERWISE ADOPTING THE SIGNATURE THAT APPEARS IN TYPED FORM WITHIN THE ELECTRONIC VERSION OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, HAS BEEN PROVIDED TO LIQUIDITY SERVICES, INC. AND WILL BE RETAINED BY LIQUIDITY SERVICES, INC. AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Liquidity Services, Inc. (the Company) on Form 10-Q for the period ended March 31, 2009 as filed with the Securities and Exchange Commission(the Report), I, James M. Rallo, Chief Financial Officer of the Company, certify, to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
May 6, 2009 |
/s/ James M. Rallo |
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James M. Rallo |
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Chief Financial Officer and Treasurer |
THE FOREGOING CERTIFICATION IS BEING FURNISHED SOLELY PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 AND IS NOT BEING FILED AS PART OF THE FORM 10-Q OR AS A SEPARATE DISCLOSURE DOCUMENT.
A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, OR OTHER DOCUMENT AUTHENTICATING, ACKNOWLEDGING, OR OTHERWISE ADOPTING THE SIGNATURE THAT APPEARS IN TYPED FORM WITHIN THE ELECTRONIC VERSION OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, HAS BEEN PROVIDED TO LIQUIDITY SERVICES, INC. AND WILL BE RETAINED BY LIQUIDITY SERVICES, INC. AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST.