e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2006
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission File Number 000-28275
PFSweb, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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75-2837058 |
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(State of Incorporation)
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(I.R.S. Employer I.D. No.) |
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500 North Central Expressway, Plano, Texas
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75074 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (972) 881-2900
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 þ No o
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated Filer o
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Accelerated Filer o
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Non-Accelerated Filer þ |
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
At April 25, 2006 there were 41,415,259 shares of registrants common stock outstanding, excluding
86,300 shares of common stock in treasury.
PFSWEB, INC. AND SUBSIDIARIES
Form 10-Q
March 31, 2006
INDEX
2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
PFSWEB, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
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March 31, |
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December 31, |
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2006 |
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2005 |
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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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$ |
13,955 |
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$ |
13,683 |
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Restricted cash |
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3,238 |
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2,077 |
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Accounts receivable, net of allowance for doubtful accounts of $1,757
and $484 at March 31, 2006 and December 31, 2005, respectively |
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52,160 |
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44,556 |
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Inventories, net |
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53,629 |
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43,654 |
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Other receivables |
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8,609 |
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9,866 |
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Prepaid expenses and other current assets |
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2,912 |
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3,213 |
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Total current assets |
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134,503 |
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117,049 |
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PROPERTY AND EQUIPMENT, net |
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13,304 |
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13,040 |
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RESTRICTED CASH |
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¾ |
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150 |
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IDENTIFIABLE INTANGIBLES |
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7,521 |
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¾ |
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GOODWILL |
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18,265 |
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¾ |
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OTHER ASSETS |
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1,007 |
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1,487 |
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Total assets |
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$ |
174,600 |
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$ |
131,726 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Current portion of long-term debt and capital lease obligations |
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$ |
26,262 |
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$ |
21,626 |
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Trade accounts payable |
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73,319 |
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60,053 |
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Accrued expenses |
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15,565 |
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12,011 |
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Total current liabilities |
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115,146 |
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93,690 |
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LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current
Portion |
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1,595 |
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6,289 |
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OTHER LIABILITIES |
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2,277 |
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1,813 |
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COMMITMENTS AND CONTINGENCIES |
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SHAREHOLDERS EQUITY: |
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Preferred stock, $1.00 par value; 1,000,000 shares authorized;
none issued and outstanding |
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¾ |
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¾ |
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Common stock, $0.001 par value; 75,000,000 shares authorized;
41,501,559 and 22,613,314 shares issued at March 31, 2006
and December 31, 2005, respectively; and 41,415,259 and
22,527,014 outstanding at March 31, 2006 and December 31,
2005, respectively |
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42 |
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23 |
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Additional paid-in capital |
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85,749 |
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58,736 |
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Accumulated deficit |
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(31,411 |
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(29,824 |
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Accumulated other comprehensive income |
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1,287 |
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1,084 |
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Treasury stock at cost, 86,300 shares |
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(85 |
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(85 |
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Total shareholders equity |
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55,582 |
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29,934 |
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Total liabilities and shareholders equity |
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$ |
174,600 |
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$ |
131,726 |
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The accompanying notes are an integral part of these unaudited interim condensed consolidated
financial statements.
3
PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
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Three Months Ended |
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March 31, |
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2006 |
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2005 |
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REVENUES: |
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Product revenue, net |
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$ |
90,204 |
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$ |
63,630 |
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Service fee revenue |
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15,919 |
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14,085 |
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Pass-through revenue |
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4,545 |
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4,150 |
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Total revenues |
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110,668 |
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81,865 |
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COSTS OF REVENUES: |
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Cost of product revenue |
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84,354 |
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59,637 |
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Cost of service fee revenue |
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11,348 |
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10,768 |
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Pass-through cost of revenue |
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4,545 |
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4,150 |
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Total costs of revenues |
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100,247 |
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74,555 |
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Gross profit |
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10,421 |
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7,310 |
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SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES |
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11,361 |
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6,966 |
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Income (loss) from operations |
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(940 |
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344 |
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INTEREST EXPENSE, NET |
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431 |
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319 |
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Income (loss) before income taxes |
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(1,371 |
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25 |
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INCOME TAX EXPENSE |
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216 |
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239 |
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NET LOSS |
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$ |
(1,587 |
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$ |
(214 |
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NET LOSS PER SHARE: |
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Basic and Diluted |
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$ |
(0.05 |
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$ |
(0.01 |
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WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: |
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Basic and Diluted |
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34,904 |
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22,136 |
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The accompanying notes are an integral part of these unaudited interim condensed consolidated
financial statements.
4
PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
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Three Months Ended |
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March 31, |
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2006 |
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2005 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net loss |
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$ |
(1,587 |
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$ |
(214 |
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Adjustments to reconcile net loss to net cash provided by (used in)
operating activities: |
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Depreciation and amortization |
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1,752 |
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1,503 |
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Provision for doubtful accounts |
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137 |
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(81 |
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Provision for excess and obsolete inventory |
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63 |
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Deferred income taxes |
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(15 |
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33 |
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Stock option expense |
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239 |
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Changes in operating assets and liabilities: |
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Restricted cash |
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476 |
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Accounts receivables |
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(1,686 |
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1,275 |
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Inventories, net |
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(2,578 |
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(2,035 |
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Prepaid expenses, other receivables and other assets |
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2,036 |
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(2,065 |
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Accounts payable, accrued expenses and other liabilities |
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4,454 |
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(1,952 |
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Net cash provided by (used in) operating activities |
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3,291 |
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(3,536 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchases of property and equipment |
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(690 |
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(2,073 |
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Payment for purchase of eCOST, net of cash acquired |
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(1,299 |
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Decrease in restricted cash |
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573 |
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1,198 |
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Net cash used in investing activities |
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(1,416 |
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(875 |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Payments on capital lease obligations |
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(384 |
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(277 |
) |
Decrease (increase) in restricted cash |
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(1,026 |
) |
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903 |
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Proceeds from issuance of common stock |
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15 |
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1,698 |
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Proceeds from (payments on) debt, net |
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(209 |
) |
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3,495 |
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Net cash provided by (used in) financing activities |
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(1,604 |
) |
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5,819 |
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EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS |
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1 |
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(52 |
) |
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NET INCREASE IN CASH AND CASH EQUIVALENTS |
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272 |
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1,356 |
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CASH AND CASH EQUIVALENTS, beginning of period |
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13,683 |
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13,592 |
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CASH AND CASH EQUIVALENTS, end of period |
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$ |
13,955 |
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$ |
14,948 |
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SUPPLEMENTAL CASH FLOW INFORMATION |
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Non-cash investing and financing activities: |
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Property and equipment acquired under capital leases |
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$ |
187 |
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$ |
327 |
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The accompanying notes are an integral part of these unaudited interim condensed consolidated
financial statements.
5
PFSweb,
Inc. And Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
1. OVERVIEW AND BASIS OF PRESENTATION
PFSweb, Inc. and its subsidiaries, including Supplies Distributors, Inc., and eCOST.com, Inc.,
are collectively referred to as the Company; Supplies Distributors refers to Supplies
Distributors, Inc. and its subsidiaries; eCOST refers to eCOST.com, Inc.; and PFSweb refers to
PFSweb, Inc. and its subsidiaries excluding Supplies Distributors and eCOST.
PFSweb Overview
PFSweb is an international provider of integrated business process outsourcing services to
major brand name companies seeking to maximize their supply chain efficiencies and to extend their
traditional and e-commerce initiatives in the United States, Canada, and Europe. PFSweb offers such
services as professional consulting, technology collaboration, managed web hosting and internet
application development, order management, web-enabled customer contact centers, customer
relationship management, financial services including billing and collection services and working
capital solutions, information management, facilities and operations management, kitting and
assembly services, and international fulfillment and distribution services.
Supplies Distributors Overview
Supplies Distributors acts as a master distributor of various products, primarily
International Business Machines Corporation (IBM) product, under a master distributor agreement
with IBM. Supplies Distributors has outsourced to PFSweb the transaction management and fulfillment
service functions of its distribution business and has outsourced to a third party the sales and
marketing functions. Supplies Distributors sells its products in the United States, Canada and
Europe.
eCOST Overview
eCOST is a multi-category online discount retailer of new, close-out and refurbished
brand-name merchandise, selling products primarily to customers in the United States. eCOST offers
products in twelve merchandise categories, including computer hardware and software, home
electronics, digital imaging, watches and jewelry, housewares, DVD movies, video games, travel, bed
and bath, apparel and accessories, licensed sports gear and cellular/wireless. eCOST carries
products from leading manufacturers such as Apple, Canon, Citizen, Denon, Hewlett-Packard (HP),
Nikon, Onkyo, Seiko and Toshiba.
Acquisition of eCOST
Effective February 1, 2006, a wholly-owned subsidiary of PFSweb merged with and into eCOST,
with eCOST surviving the merger as a wholly-owned subsidiary of PFSweb. Each of the 18,858,132
issued and outstanding shares of common stock of eCOST were converted into one share of common
stock of the Company. In conjunction with the merger, PFSweb assumed 36,210 warrants previously issued
to a former eCOST warrantholder with an exercise price of $2.00 per share, subject to the terms set
forth. As a result of the merger, effective February 1, 2006, PFSweb began consolidating
100% of eCOSTs financial position and results of operations into PFSwebs consolidated financial
statements. The following table presents selected pro forma information, for comparative purposes,
assuming the acquisition had occurred on January 1 for the periods presented (unaudited) (in
thousands):
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Three Months Ended March 31, |
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2006 |
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2005 |
Net revenues |
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$ |
123,835 |
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$ |
136,921 |
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Net loss |
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(2,768 |
) |
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(3,242 |
) |
Basic and diluted loss per share |
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(.07 |
) |
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|
(.08 |
) |
6
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
The unaudited pro forma information combines the historical unaudited consolidated statements
of the Companys operations and eCOSTs operations for the
three months ended March 31, 2006 and 2005 giving effect to the merger and related events as if they had been consummated
on January 1, for the periods presented. Pro forma adjustments have been made to reflect the amortization expense
relating to the finite lives of certain acquired intangibles, such as trademark name and customer
relationships and the reversal of the income tax benefit recognized by
eCOST in the first quarter of 2005.
The unaudited pro forma information does not reflect significant operational and
administrative cost savings, which are referred to as synergies, that management estimates may be
achieved as a result of the merger transaction, or other incremental costs that may be incurred as a
direct result of the merger transaction. The unaudited pro forma net revenue and pro forma net
loss are not necessarily indicative of the consolidated results of operations for future periods or
the results of operations that would have been realized had the Company consolidated eCOST during
the periods noted.
The transaction was accounted for using the purchase method of accounting for business
combinations and, accordingly, the results of operations of eCOST have been included in the
Companys consolidated financial statements since the date of acquisition. For purposes
of computing the purchase price, the value of the 18.9 million shares of PFSweb common stock issued
was $1.42 per common share, based on the average closing price of PFSwebs common stock on NASDAQ
for the period beginning two days prior to the consummation of the merger and ending on the
consummation of the merger. The following table summarizes the preliminary unaudited,
estimated fair value of the assets acquired and liabilities assumed as of February 1, 2006. The
Company is in the process of finalizing the purchase price allocation and, accordingly, the
allocation of the purchase price is subject to adjustment (in thousands):
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Cash and restricted cash |
|
$ |
1,036 |
|
Accounts receivable, net |
|
|
5,828 |
|
Inventories |
|
|
7,078 |
|
Identifiable intangibles |
|
|
7,657 |
|
Property and equipment |
|
|
700 |
|
Other assets |
|
|
322 |
|
|
|
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|
Total assets acquired |
|
|
22,621 |
|
|
|
|
|
Trade accounts payable |
|
|
8,804 |
|
Accrued expenses |
|
|
3,211 |
|
Other liabilities |
|
|
793 |
|
|
|
|
|
Total liabilities assumed |
|
|
12,808 |
|
|
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|
Net assets acquired |
|
|
9,813 |
|
Estimated purchase price |
|
|
28,078 |
|
|
|
|
|
Goodwill acquired |
|
$ |
18,265 |
|
|
|
|
|
Estimated purchase price for eCOST is as follows (in thousands):
|
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|
|
|
Number of shares of common stock issued |
|
|
18,858 |
|
Multiplied by PFSwebs stock price |
|
$ |
1.42 |
|
|
|
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|
Share consideration |
|
$ |
26,778 |
|
Estimated transaction costs |
|
|
1,300 |
|
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|
Estimated purchase price |
|
$ |
28,078 |
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|
The above purchase price has been preliminarily allocated based on estimates of the fair
values of assets acquired and liabilities assumed. The final valuation of net assets is expected to
be completed as soon as possible, but no later than one year from the acquisition date.
7
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
The excess of the purchase price over the fair value of the net assets acquired and
liabilities assumed was allocated to goodwill. The total goodwill of $18.3 million, none of which
is deductible for tax purposes, is not being amortized but is subject to an
impairment test each year using a fair-value-based approach pursuant to SFAS No. 142. The Company
is amortizing the identifiable intangible assets acquired on a straight-line basis over their estimated
remaining useful lives.
Basis of Presentation
The unaudited interim condensed consolidated financial statements as of March 31, 2006, and
for the three months ended March 31, 2006 and 2005, have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC) and are unaudited. Certain
information and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of America have been
condensed or omitted pursuant to the rules and regulations promulgated by the SEC. In the opinion
of management and subject to the foregoing, the unaudited interim condensed consolidated financial
statements of the Company include all adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation of the Companys financial position as of March 31, 2006, its
results of operations for the three months ended March 31, 2006 and 2005 and its results of cash
flows for the three months ended March 31, 2006 and 2005. Results of the Companys operations for
interim periods may not be indicative of results for the full fiscal year.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets
and liabilities. The recognition and allocation of certain operating expenses in these consolidated
financial statements also require management estimates and assumptions. The Companys estimates and
assumptions are continually evaluated based on available information and experience. Because the use of estimates
is inherent in the financial reporting process, actual results could differ from estimates.
Revenue Recognition
Net sales include product sales, gross outbound shipping charges, and related handling fees,
and to a lesser extent, third-party extended warranties and other services. eCOST recognizes
revenue from product sales, net of estimated returns, promotional discounts, credit card fraud and
chargebacks, and coupon redemptions, when both title and risk of loss to the products has
transferred to the customer, which eCOST has determined to occur upon receipt of products by the
customer. eCOST generally requires payment by
8
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
credit card upon placing an order, and to a lesser extent, grants credit to business customers on
normal credit terms.
eCOST periodically provides incentive offers to customers including percentage discounts off
current purchases. Such
discounts are recorded as a reduction of the related purchase price at the time of sale based on
actual and estimated redemption rates. Future redemption rates are estimated using eCOSTs
historical experience for similar sales inducement offers.
For product sales shipped directly from eCOSTs vendors to end customers, eCOST records
revenue and related costs at the gross amounts charged to the customer and paid to the vendor based
on an evaluation of the criteria outlined in EITF No. 99-19, Reporting Revenue Gross as a Principal
Versus Net as an Agent. eCOSTs evaluation is performed based on a number factors, including
whether eCOST is the primary obligor in the transaction, has latitude in establishing prices and
selecting suppliers, takes title to the products sold upon shipment, bears credit risk, and bears
inventory risk for returned products that are not successfully returned to third-party suppliers.
eCOST recognizes revenue on extended warranties and other services for which it is not the primary
obligor on a net basis.
Investment in Affiliates
PFSweb has loaned its subsidiaries Supplies Distributors and eCOST $6.5 million and $2.0
million, respectively, as of March 31, 2006, which are eliminated in consolidation. Under the terms
of certain of the Companys debt facilities, the outstanding balance of the Supplies Distributors
loan cannot be increased to more than $8.0 million or decreased to less than $6.5 million without
prior approval of the Companys lenders and the outstanding balance of the eCOST loan amount cannot
be less than $2.0 million without prior approval of eCOSTs lender or increased above $3.5 million
without the approval of PFSwebs lender.
Concentration of Business and Credit Risk
For the three months ended March 31, 2005, the Companys product revenue was primarily
generated by sales to customers of product purchased under master distributor agreements with one
supplier. The Companys service fee revenue is generated under contractual service fee
relationships with multiple client relationships. A summary of the customer and client
concentrations is as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
March 31, |
|
|
2006 |
|
2005 |
Product Revenue (as a percentage of
Product Revenue): |
|
|
|
|
|
|
|
|
Customer 1 |
|
|
12 |
% |
|
|
12 |
% |
Customer 2 |
|
|
9 |
% |
|
|
12 |
% |
Customer 3 |
|
|
8 |
% |
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
Service Fee Revenue (as a percentage of
Service Fee Revenue): |
|
|
|
|
|
|
|
|
Client 1 |
|
|
22 |
% |
|
|
33 |
% |
Client 2 |
|
|
21 |
% |
|
|
13 |
% |
Client 3 |
|
|
12 |
% |
|
|
12 |
% |
|
|
|
|
|
|
|
|
|
Consolidated Revenue: |
|
|
|
|
|
|
|
|
Customer/Client 1 |
|
|
7 |
% |
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
Accounts Receivable: |
|
|
|
|
|
|
|
|
2 Customers/Clients |
|
|
22 |
% |
|
|
21 |
% |
PFSweb has provided certain guarantees of its subsidiaries, Supplies Distributors and eCOST,
9
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
financings and credit arrangements. These subsidiaries ability to obtain financing or credit
arrangements on similar terms would be significantly impacted without these guarantees.
Additionally, since Supplies Distributors has limited personnel and physical resources, its ability
to conduct business could be materially impacted by any termination of its contract with the party
performing product demand generation for the IBM products sold by Supplies Distributors.
The Company has multiple arrangements with IBM and is dependent upon the continuation of such
arrangements. These arrangements, which are critical to the Companys ongoing operations, include
Supplies Distributors master distributor agreements, certain of Supplies Distributors working
capital financing agreements, product sales to IBM business units and a term master lease
agreement.
eCOSTs arrangements with its vendors are terminable by either
party at will. Loss of any vendors
could have a material adverse effect on its financial position, results of operations and cash
flows. Sales of HP and HP-related products represented 31% of eCOSTs net sales, or 6% of
consolidated net sales, in the three months ended March 31, 2006.
Cash and Cash Equivalents
Cash equivalents are defined as short-term highly liquid investments with original maturities
of three months or less.
Accounts Receivable
Accounts receivable consist primarily of amounts due from customers/clients to whom the
Company has extended credit as well as amounts due from vendors related to co-op advertising costs.
The Company records vendor receivables at such time as all conditions have been met that would
entitle the Company to receive such vendor funding and is thereby considered fully earned.
The Company maintains an allowance for doubtful accounts receivable based upon estimates of
future collection. The Company regularly evaluates customers financial condition and credit
history in determining the adequacy of the allowance for doubtful accounts. The Company also maintains an
allowance for uncollectible vendor receivables, which arise from vendor rebate programs, price
protections and other promotions. The Company determines the sufficiency of the vendor receivable
allowance based upon various factors, including payment history. If estimated allowances for
uncollectible accounts or vendor receivables subsequently prove insufficient, additional allowances
may be required.
Inventories
Inventories (all of which are finished goods) are stated at the lower of weighted average cost
or market. Supplies Distributors assumes responsibility for slow-moving inventory under certain
master distributor agreements, subject to certain termination rights, but has the right to return
product rendered obsolete by engineering changes, as defined. The Company reviews inventory for
impairment on a periodic basis, but at a minimum, annually. Recoverability of the inventory on hand
is measured by comparison of the carrying value of the inventory to the fair value of the
inventory.
In the event PFSweb, Supplies Distributors and IBM terminate the master distributor
agreements, the agreements provide for the parties to mutually agree on a plan of disposition of
Supplies Distributors then existing inventory.
Supplies Distributors inventories include merchandise in-transit that has not been received by
the Company but that has been shipped and invoiced by Supplies Distributors vendors. The
corresponding payable for inventories in-transit is included in accounts payable in the
accompanying consolidated financial statements.
eCOST inventories include goods in-transit to customers. eCOST establishes inventory reserves
based
10
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
upon estimates of potential declines in values due to inventories that are potentially slow
moving or obsolete, potential excess levels of inventory or values assessed at potentially lower
than cost.
The allowance for slow moving inventory was $1.6 million and $1.5 million at March 31, 2006
and December 31, 2005, respectively.
Property and Equipment
The Companys property held under capital leases amounted to approximately $3.4 million and
$3.3 million, net of accumulated amortization of approximately $8.7 million and $8.3 million, at
March 31, 2006 and December 31, 2005, respectively.
Advertising Costs
eCOST produces and circulates catalogs at various dates throughout the year and receives
market development funds and co-op advertising funds from vendors included in each catalog.
Pursuant to Statement of Position (SOP) 93-7, Reporting on Advertising Costs, the costs of
developing, producing and circulating each catalog are deferred and charged to advertising expense
ratably over the life of the catalog based on the revenue generated from each catalog,
approximately eight weeks. Advertising expenses for eCOST, including those for catalog, internet
and other methods, were $888,000 for the period from the eCOST acquisition date through March 31,
2006 and are included in selling, general and administrative
expenses. There were no such expenses to the Company prior to the
acquisition of eCOST.
Market development and co-op advertising funds pursuant to Emerging Issues Task Force (EITF)
02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received form a
Vendor, are recognized as an offset to cost of goods sold. Direct market development and co-op
funds for eCOST were $479,000 for the period from the acquisition
date through March 31, 2006. There were no such funds recognized
by the Company prior to the acquisition of eCOST.
Intangible Assets
Intangible assets acquired consisted of the following as of March 31, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
|
Amortization |
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
|
Period |
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Customer relationships |
|
8 years |
|
$ |
2,072 |
|
|
$ |
(43 |
) |
|
$ |
2,029 |
|
Trademark/Domain name |
|
10 years |
|
|
5,585 |
|
|
|
(93 |
) |
|
|
5,492 |
|
Total intangible assets |
|
|
|
|
|
$ |
7,657 |
|
|
$ |
(136 |
) |
|
$ |
7,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3. COMPREHENSIVE LOSS (in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31 |
|
|
|
2006 |
|
|
2005 |
|
Net loss |
|
$ |
(1,587 |
) |
|
$ |
(214 |
) |
Other comprehensive loss: |
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment |
|
|
203 |
|
|
|
(542 |
) |
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(1,384 |
) |
|
$ |
(756 |
) |
|
|
|
|
|
|
|
4. NET LOSS PER COMMON SHARE
Basic and diluted net loss per share is computed by dividing net loss available to common
shareholders by the weighted-average number of common shares outstanding for the reporting period.
For the three months ended March 31, 2006 and 2005, outstanding options of 6.1 million and 4.8
million, respectively, to purchase common shares were anti-dilutive and have been excluded from the
weighted diluted average share computation. Warrants not included in the calculation of diluted
net loss per share for the three months ended March 31, 2006 and 2005, were 0.6 million for each
period, as the effect would be anti-dilutive.
5. STOCK AND STOCK OPTIONS
On January 1, 2006, the Company adopted the fair value recognition provisions of Financial
Accounting Standards Board (FASB) Statement No. 123(R), Share-Based Payment, (FAS 123R). Prior
to January 1, 2006, the Company accounted for share-based employee compensation plans using the
recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25), and related Interpretations. In accordance with APB 25 no compensation was
11
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
required to be recognized for options granted that had an exercise price equal to or greater
than the market value of the underlying common stock on the date of grant.
The Company adopted FAS 123R using the modified prospective transition method. Under that
transition method, compensation cost recognized in the quarter ended March 31, 2006 includes: a)
compensation cost for all share-based payments granted prior to, but not yet vested as of January
1, 2006, based on the grant date fair value estimated in accordance with the original provisions of
FAS 123, and b) compensation cost for all share-based payments granted subsequent to January 1,
2006, based on the grant date fair value estimated in accordance with the provisions of FAS 123R.
Compensation cost is recognized on a straight-line basis, net of estimated forfeitures, over the
requisite service period of each award. Results for prior periods have not been restated.
As a result of adoption FAS 123R, stock compensation expense charged against income was $0.2
million for the three months ended March 31, 2006, or approximately $0.01 per share, which is
included in selling, general and administrative expenses. As of March 31, 2006, there was $1.8
million of total unrecognized compensation costs related to unvested stock options, which is expected to be
recognized over a weighted average period of approximately 1.4 years.
The following table illustrates the effect on net loss and net loss per share for the three
months ended March 31, 2005 as if our stock-based compensation had been determined based on the
fair value at the grant date (in thousands, except per share amounts):
|
|
|
|
|
Net loss as reported |
|
$ |
(214 |
) |
Add: Stock-based non-employee compensation expense
included in reported net loss |
|
|
|
|
Deduct: Total stock-based employee and non-employee
compensation expense determined under fair value based
method |
|
|
(201 |
) |
|
|
|
|
Pro forma net loss, applicable to common stock for basic
and diluted computations |
|
$ |
(415 |
) |
|
|
|
|
Loss per common share as reported |
|
|
|
|
Basic and diluted |
|
$ |
(0.01 |
) |
|
|
|
|
Loss per common share pro forma |
|
|
|
|
Basic and diluted |
|
$ |
(0.02 |
) |
|
|
|
|
As of March 31, 2006, the Company has the following share-based compensation plans:
PFSweb Plan Options
The Company has an Employee Stock and Incentive Plan and an Outside Director Stock Option and
Retainer Plan under which an aggregate of 8,500,000 shares of common stock are authorized for
issuance (the Stock Options Plans) and an outstanding stock option agreement under which 35,000
shares are authorized for issuance. The Stock Option Plans provide for the granting of incentive
awards in the form of stock options to directors, executive management, key employees, and outside
consultants of the Company. The rights to purchase shares under the employee stock option
agreements typically vest over a three-year period, one-twelfth each quarter. Stock options must be
exercised within 10 years from the date of grant. Stock options are generally issued such that the
exercise price is equal to the fair market value of the Companys common stock at the date of
grant.
As of March 31, 2006, there were 2,206,447 shares available for future options under the Stock
Option Plans.
The following table summarizes stock option activity under the Stock Option Plans:
12
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Contractual Life |
|
|
Intrinsic Value |
|
Outstanding, December 31, 2005 |
|
|
4,947,950 |
|
|
$ |
1.30 |
|
|
|
6.8 |
|
|
|
|
|
Granted |
|
|
750,000 |
|
|
$ |
1.46 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled |
|
|
(14,250 |
) |
|
$ |
2.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2006 |
|
|
5,683,700 |
|
|
$ |
1.32 |
|
|
|
7.0 |
|
|
$ |
1,321,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, March 31, 2006 |
|
|
4,254,056 |
|
|
$ |
1.15 |
|
|
|
6.2 |
|
|
$ |
1,321,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average fair value per share of options granted during the three months ended
March 31, 2006 and 2005 was $1.88 and $1.97, respectively. The total intrinsic value of options
exercised under the Stock Option Plans during the quarter ended March 31, 2005 was $0.1 million.
The 750,000 options were granted to officers and key employees of eCOST in conjunction with the
acquisition.
The following table summarizes information concerning currently outstanding and exercisable
stock options issued under the Stock Option Plans as of March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
Range of |
|
|
Outstanding as of |
|
|
Remaining |
|
|
Average |
|
|
Exercisable as of |
|
|
Average |
|
Exercise Prices |
|
|
March 31, 2006 |
|
|
Contractual Life |
|
|
Exercise Price |
|
|
March 31, 2006 |
|
|
Exercise Price |
|
$ |
0.39-$0.91 |
|
|
|
2,912,845 |
|
|
|
6.0 |
|
|
$ |
0.78 |
|
|
|
2,911,427 |
|
|
$ |
0.78 |
|
$ |
1.16-$1.92 |
|
|
|
2,086,105 |
|
|
|
7.7 |
|
|
$ |
1.64 |
|
|
|
1,080,234 |
|
|
$ |
1.76 |
|
$ |
2.05-$2.96 |
|
|
|
677,000 |
|
|
|
8.7 |
|
|
$ |
2.58 |
|
|
|
254,645 |
|
|
$ |
2.59 |
|
$ |
10.45-$16.00 |
|
|
|
7,750 |
|
|
|
3.4 |
|
|
$ |
11.17 |
|
|
|
7,750 |
|
|
$ |
11.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,683,700 |
|
|
|
7.0 |
|
|
$ |
1.32 |
|
|
|
4,254,056 |
|
|
$ |
1.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PFSweb Non-plan Options
Prior to the Companys initial public offering, certain of the Companys employees were
holders of stock options of the Companys former parent company, Daisytek International Corporation
(Daisytek), issued under Daisyteks stock option plans.
In connection with the completion of the Companys spin-off from Daisytek on July 6, 2000 (the
Spin-off), all outstanding Daisytek stock options were replaced with substitute stock options.
Daisytek options held by PFSweb employees were replaced (at the option holders election made prior
to the Spin-off) with either options to acquire shares of PFSweb common stock or options to acquire
shares of both Daisytek common stock and PFSweb common stock (which may be exercised separately)
(the Unstapled Options). Options held by Daisytek employees were replaced (at the option holders
election made prior to the Spin-off) with either options to acquire shares of Daisytek common stock
or Unstapled Options.
As a result of the stock option replacement process described above, in conjunction with the
Spin-off, PFSweb stock options (the Non-plan Options) were issued to PFSweb and Daisytek
officers, directors and employees. These options were issued as one-time grants and were not issued
under the Stock Option Plans. The terms and provisions of the Non-plan Options are substantially
the same as options issued under the Stock Option Plans.
As of March 31, 2006, 439,235 Non-plan Options were outstanding, all of which were held by
PFSweb officers, directors and employees.
The following table summarizes stock option activity under the Non-plan Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Contractual Life |
|
|
Intrinsic Value |
|
Outstanding, December 31, 2005 |
|
|
|
|
|
|
439,235 |
|
|
$ |
0.95 |
|
|
5.9 |
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Contractual Life |
|
|
Intrinsic Value |
|
Canceled |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2006 |
|
|
439,235 |
|
|
$ |
0.95 |
|
|
|
5.7 |
|
|
$ |
139,842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, March 31, 2006 |
|
|
439,235 |
|
|
$ |
0.95 |
|
|
|
5.7 |
|
|
$ |
139,842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information concerning Non-plan Options outstanding and
exercisable as of March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Exercisable |
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Outstanding as of |
|
Average |
|
Weighted |
|
Exercisable as of |
|
Weighted |
Range of |
|
March 31, |
|
Remaining |
|
Average |
|
March 31, |
|
Average |
Exercise Prices |
|
2006 |
|
Contractual Life |
|
Exercise Price |
|
2006 |
|
Exercise Price |
$ |
0.91 |
|
|
|
437,005 |
|
|
|
5.7 |
|
|
$ |
0.91 |
|
|
|
437,005 |
|
|
$ |
0.91 |
|
$ |
5.78-$10.58 |
|
|
|
2,230 |
|
|
|
1.8 |
|
|
$ |
8.83 |
|
|
|
2,230 |
|
|
$ |
8.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
439,235 |
|
|
|
5.7 |
|
|
$ |
0.95 |
|
|
|
439,235 |
|
|
$ |
0.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions used for grants of options under the Stock
Option Plans for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Three Months Ended |
|
|
March 31, 2006 |
|
March 31, 2005 |
Expected dividend yield |
|
|
|
|
Expected stock price volatility. |
|
102% |
|
105% |
Risk-free interest rate |
|
4.5% - 4.6% |
|
4.6% |
Expected life of options (years) |
|
0.5-6 |
|
5 |
The Black-Scholes option valuation model requires the input of highly subjective assumptions,
including the expected life of the stock-based award and stock-price volatility. The assumptions
listed above represent managements best estimates, but these estimates involve inherent
uncertainties and the application of management judgment. As a result, if other assumptions had
been used, our recorded and pro forma stock-based compensation expense could have been different.
In addition, we are required to estimate the expected forfeiture rate and only recognize expense
for those shares expected to vest. If our actual forfeiture rate is materially different from our
estimate, the share-based compensation expense could be materially different.
6. VENDOR FINANCING:
|
|
Outstanding obligations under vendor financing arrangements consist of the following (in
thousands): |
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Inventory and working capital financing agreements: |
|
|
|
|
|
|
|
|
United States |
|
$ |
22,671 |
|
|
$ |
30,092 |
|
Europe |
|
|
14,672 |
|
|
|
12,071 |
|
|
|
|
|
|
|
|
Total |
|
$ |
37,343 |
|
|
$ |
42,163 |
|
|
|
|
|
|
|
|
Inventory and Working Capital Financing Agreement, United States
Supplies Distributors has a short-term credit facility with IBM Credit LLC to finance its
distribution of IBM products in the United States, providing financing for eligible IBM inventory
and for certain receivables up to $30.5 million through its expiration in March 2007. As of March
31, 2006, Supplies Distributors had $6.8 million of available credit under this facility. The
credit facility contains cross default provisions, various restrictions upon the ability of
Supplies Distributors to, among others, merge, consolidate, sell assets, incur indebtedness, make
loans and payments to related parties (including entities directly or
indirectly owned by PFSweb, Inc.), provide
guarantees, make investments and loans, pledge assets, make changes to capital stock ownership
structure and pay dividends, as well as financial covenants, such as annualized revenue to working
capital, net profit after tax to revenue, and total liabilities to tangible net
14
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed
Consolidated Financial Statements
worth, as defined, and are secured by
certain of the assets of Supplies Distributors, as well
as a collateralized guaranty of PFSweb. Additionally, PFSweb is required to maintain a minimum
Subordinated Note receivable balance from Supplies Distributors of $6.5 million and a minimum
shareholders equity of $18.0 million. Borrowings under the credit facility accrue interest, after
a defined free financing period, at prime rate plus 0.5% (8.25% as of March 31, 2006). The facility
also includes a monthly service fee. The Company has classified the outstanding amounts under this
credit facility as accounts payable in the consolidated balance sheets.
Inventory and Working Capital Financing
Agreement, Europe
Supplies Distributors
European subsidiaries have a short-term credit facility with IBM
Belgium Financial Services S.A. (IBM Belgium) to finance their distribution of IBM products in
Europe. The asset based credit facility with IBM Belgium provides up to 12.5 million Euros
(approximately $15.1 million) in financing for purchasing IBM inventory and for certain receivables
through its expiration in March 2007. As of March 31, 2006, Supplies Distributors European
subsidiaries had 0.3 million euros ($0.4 million) of available credit under this facility. The
credit facility contains cross default provisions, various restrictions upon the ability of
Supplies Distributors and its European subsidiaries to, among others, merge, consolidate, sell
assets, incur indebtedness, make loans and payments to related
parties (including entities directly or indirectly owned by PFSweb,
Inc.), provide guarantees, make
investments and loans, pledge assets, make changes to capital stock ownership structure and pay
dividends, as well as financial covenants, such as annualized revenue to working capital, net
profit after tax to revenue, and total liabilities to tangible net worth, as defined, and are
secured by certain of the assets of Supplies Distributors European subsidiaries, as well as
collateralized guaranties of Supplies Distributors and PFSweb. Additionally, PFSweb is required to
maintain a minimum Subordinated Note receivable balance from Supplies Distributors of $6.5 million
and a minimum shareholders equity of $18.0 million. Borrowings under the credit facility accrue
interest, after a defined free financing period, at Euribor plus 1.5% (4.1% as of March 31, 2006).
Supplies Distributors European subsidiaries pay a monthly service fee on the commitment. The
Company has classified the outstanding amounts under this facility as accounts payable in the
consolidated balance sheets.
7. DEBT AND CAPITAL LEASE
OBLIGATIONS;
Outstanding obligations
under debt and capital lease obligations consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Loan and security agreements, United States |
|
|
|
|
|
|
|
|
Supplies Distributors |
|
$ |
11,299 |
|
|
$ |
11,673 |
|
eCOST |
|
|
734 |
|
|
|
|
|
PFSweb |
|
|
6,312 |
|
|
|
6,640 |
|
Factoring agreement, Europe |
|
|
743 |
|
|
|
576 |
|
Taxable revenue bonds |
|
|
4,500 |
|
|
|
5,000 |
|
Master lease agreements |
|
|
3,889 |
|
|
|
3,713 |
|
Other |
|
|
380 |
|
|
|
313 |
|
|
|
|
|
|
|
|
Total |
|
|
27,857 |
|
|
|
27,915 |
|
Less current portion of long-term debt |
|
|
26,262 |
|
|
|
21,626 |
|
|
|
|
|
|
|
|
Long-term debt, less current portion |
|
$ |
1,595 |
|
|
$ |
6,289 |
|
|
|
|
|
|
|
|
Loan and Security Agreement
Supplies Distributors
Supplies Distributors
has a loan and security agreement with Congress Financial Corporation
(Southwest) (Congress) to provide financing for up to $25 million of eligible accounts receivable
in the United States and Canada. As of March 31, 2006, Supplies Distributors had $6.3 million of
available credit under this agreement. The Congress
15
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
facility expires on the earlier of March 29,
2007 or the date on which the parties to the IBM master distributor agreement no longer operate
under the terms of such agreement and/or IBM no longer supplies products pursuant to such
agreement. Borrowings under the Congress facility accrue interest at prime rate to prime rate plus
0.25% or Eurodollar rate plus 2.25% to 2.75%, dependent on excess availability, as defined. The
interest rate as of March 31, 2006 was 7.75% for $6.3 million of outstanding borrowings and 6.95%
for $5.0 million of outstanding borrowings. This agreement contains cross default provisions,
various restrictions upon the ability of and Supplies Distributors to, among other things, merge,
consolidate, sell assets, incur indebtedness, make loans and payments to related parties (including
entities directly or indirectly owned by PFSweb, Inc.), provide guarantees, make investments and loans, pledge
assets, make changes to capital stock ownership structure and pay dividends, as well as financial
covenants, such as minimum net worth, as defined, and is secured by all of the assets of Supplies
Distributors, as well as a collateralized guaranty of PFSweb. Additionally, PFSweb is required to
maintain a Subordinated Note receivable balance from Supplies Distributors of no less than $6.5
million and restricted cash of less than $5.0 million, and is restricted with regard to
transactions with related parties, indebtedness and changes to capital stock ownership structure.
Supplies Distributors has entered into blocked account agreements with its banks and Congress
pursuant to which a security interest was granted to Congress for all U.S. and Canadian customer
remittances received in specified bank accounts. At March 31, 2006 and December 31, 2005, these
bank accounts held $1.7 million and $1.0 million, respectively, which was restricted for payment to
Congress.
Loan and Security Agreement PFSweb
Priority Fulfillment Services, Inc. (PFS), a wholly-owned subsidiary of PFSweb, has a Loan
and Security Agreement (Comerica Agreement) with Comerica Bank (Comerica). The Comerica
Agreement provides for up to $7.5 million of eligible accounts receivable financing (Working
Capital Advances) through March 2007 and $2.5 million of equipment financing (Equipment
Advances) through June 15, 2008. Outstanding Working Capital Advances, $5.4 million as of March
31, 2006, accrue interest at prime rate plus 1% (7.75% as of March 31, 2006). Outstanding Equipment
Advances, $0.9 million as of March 31, 2006, accrue interest at prime rate plus 1.5% (9.25% as of
March 31, 2006). As of March 31, 2006, PFS had $1.7 million of available credit under the Working
Capital Advance portion of this facility and no available credit under the Equipment Advance
portion of this facility. In April 2006, the Company repaid the $5.4 million of Working Capital
Advances outstanding as of March 31, 2006. The Comerica Agreement contains cross default
provisions, various restrictions upon PFS ability to, among other things, merge, consolidate, sell
assets, incur indebtedness, make loans and payments to related
parties (including entities directly or indirectly owned by PSFweb,
Inc.), make investments and loans, pledge assets, make changes to capital
stock ownership structure, as well as financial covenants of a minimum tangible net worth of $20
million, as defined, a minimum earnings before interest and taxes, plus depreciation, amortization
and non-cash compensation accruals, if any, as defined, and a minimum liquidity ratio, as defined.
The Comerica Agreement restricts the amount of the note receivable from Supplies Distributors to a
maximum of $8 million. Comerica has provided approval for PFS to use up to $3.5 million in cash to
fund the cash flow requirements of eCOST, a portion of which is subject to certain restrictions. As
of March 31, 2006 PFS had advanced $2.0 million to eCOST. The Comerica Agreement is secured by all
of the assets of PFS, as well as a guarantee of PFSweb, Inc. The Comerica Agreement requires PFS
to maintain a minimum cash balance of $1.3 million at Comerica.
Credit Facility eCOST
eCOST currently has an asset-based line of credit facility of up to $15.0 million with
Wachovia Capital Finance Corporation (Western), which is collateralized by substantially all of
eCOSTs assets. Borrowings under the facility are limited to a percentage of eligible accounts
receivable and inventory. Outstanding amounts under the facility bear interest at rates ranging
from the prime rate to the prime rate plus 0.5%
(8.25% as of March 31, 2006), depending on eCOSTs financial results. As of March 31, 2006,
eCOST had $1.5 million of letters of credit outstanding, $0.7 of outstanding advances and $1.5
million of available credit under this facility. In connection with the line of credit, eCOST
entered into a cash management arrangement whereby eCOSTs operating amounts are swept and used to
repay outstanding amounts under the line of credit. The credit facility restricts eCOSTs ability
to, among other things, merge, consolidate, sell assets, incur indebtedness, make loans,
investments and payments to subsidiaries, affiliates and related parties (including
entities directly or indirectly owned by PFSweb, Inc.), make investments and loans, pledge assets, make
16
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
changes to capital
stock ownership structure, and requires a minimum tangible net worth of $1 million, as defined.
PFSweb has guaranteed all current and future obligations of eCOST under this line of credit.
Factoring Agreement
Supplies Distributors European subsidiary has a factoring agreement with Fortis Commercial
Finance N.V. (Fortis) to provide factoring for up to 7.5 million euros (approximately $9.1
million) of eligible accounts receivables through March 2007. As of March 31, 2006, Supplies
Distributors European subsidiary had approximately 3.0 million euros ($3.6 million) of available
credit under this agreement. Borrowings accrue interest at Euribor plus 0.6 (3.2% at March 31,
2006). This agreement contains various restrictions upon the ability of Supplies Distributors
European subsidiary to, among other things, merge, consolidate and incur indebtedness, as well as
financial covenants, such as minimum net worth. This agreement is secured by a guarantee of
Supplies Distributors, up to a maximum of 200,000 euros.
Taxable Revenue Bonds
PFSweb has a Loan Agreement with the Mississippi Business Finance Corporation (the MBFC) in
connection with the issuance by the MBFC of $5 million MBFC Taxable Variable Rate Demand Limited
Obligation Revenue Bonds, Series 2004 (Priority Fulfillment Services, Inc. Project) (the Bonds).
The MBFC loaned the proceeds of the Bonds to PFSweb for the purpose of financing the acquisition
and installation of equipment, machinery and related assets located in the Companys Southaven,
Mississippi distribution facility. The Bonds bear interest at a variable rate (4.8% as of March
31, 2006), as determined by Comerica Securities, as Remarketing Agent. PFSweb, at its option, may
convert the Bonds to a fixed rate, to be determined by the Remarketing Agent at the time of
conversion.
The primary source of repayment of the Bonds is a letter of credit (the Letter of Credit) in
the initial face amount of $5.1 million issued by Comerica pursuant to a Reimbursement Agreement
between PFSweb and Comerica under which PFSweb is obligated to pay to Comerica all amounts drawn
under the Letter of Credit. The Letter of Credit has a maturity date of January 2007 at which
time, if not renewed or replaced, will result in a draw on the undrawn face amount thereof. If
the Letter of Credit is renewed or replaced, the Bonds require future principal repayments of
$500,000 in January 2007 and $800,000 in each of January 2008 through 2012. PFSweb has established
a sinking fund account with Comerica, which at March 31, 2006 includes $40,000 restricted for
payments on the Bonds.
Debt Covenants
To the extent the Company or any of its subsidiaries fail to comply with its covenants
applicable to its debt or vendor financing obligations, including the monthly financial covenant
requirements and required level of stockholders equity or net worth, and one or all of the lenders
accelerate the repayment of the credit facility obligations, the Company would be required to repay
all amounts outstanding thereunder. In particular, in the event eCOST is unable to increase its
revenue and/or gross profit from its present levels and does not achieve the operating efficiencies
targeted to occur upon completion of its integration into the Companys infrastructure, it may fail
to comply with one or more of the financial covenants required under its working capital line of
credit. In such event, absent a waiver, the working capital lender would be entitled to accelerate
all amounts outstanding thereunder and exercise all other rights and remedies, including sale of
collateral and payment under the Company parent guaranty. Any acceleration of the repayment of the
credit facilities would have a material adverse impact on the Companys financial
condition and results of operations and no assurance can be given that the Company would have
the financial ability to repay all or any portion of such obligations.
Master Lease Agreements
The Company has a Term Lease Master Agreement with IBM Credit Corporation (Master Lease
Agreement) that provides for leasing or financing transactions of equipment and other assets,
which generally have terms of 3 to 5 years. The outstanding leasing transactions ($0.8 million and
$0.7 million as
17
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
of March 31, 2006 and December 31, 2005, respectively) are secured by the related
equipment and letters of credit. The outstanding financing transactions ($0.2 million and $0.2
million as of March 31, 2006 and December 31, 2005, respectively) are secured by a letter of
credit.
The Company has a master agreement with a leasing company that provided for leasing
transactions of certain equipment. The amounts outstanding under this agreement as of March 31,
2006 and December 31, 2005 were $1.7 million and $1.9 million, respectively, and are secured by the
related equipment.
The Company has other leasing and financing agreements and will continue to enter into those
arrangements as needed to finance the purchasing or leasing of certain equipment or other assets.
Borrowings under these agreements are generally secured by the related equipment.
8. SEGMENT INFORMATION
The Company is organized into three operating segments: PFSweb is an international provider of
integrated business process outsourcing solutions and operates as a service fee business; Supplies
Distributors is a master distributor of primarily IBM products; and eCOST is a multi-category
online discount retailer of new, close-out and refurbished brand-name merchandise.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Revenues (in thousands): |
|
|
|
|
|
|
|
|
PFSweb |
|
$ |
22,988 |
|
|
$ |
20,365 |
|
Supplies Distributors |
|
|
68,415 |
|
|
|
63,630 |
|
eCOST |
|
|
21,789 |
|
|
|
|
|
Eliminations |
|
|
(2,621 |
) |
|
|
(2,130 |
) |
|
|
|
|
|
|
|
|
|
$ |
110,571 |
|
|
$ |
81,865 |
|
|
|
|
|
|
|
|
Income (loss) from operations (in
thousands): |
|
|
|
|
|
|
|
|
PFSweb |
|
$ |
(529 |
) |
|
$ |
(1,334 |
) |
Supplies Distributors |
|
|
1,755 |
|
|
|
1,678 |
|
eCOST |
|
|
(2,166 |
) |
|
|
|
|
Eliminations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(940 |
) |
|
$ |
344 |
|
|
|
|
|
|
|
|
Depreciation and amortization
(in thousands): |
|
|
|
|
|
|
|
|
PFSweb |
|
$ |
1,561 |
|
|
$ |
1,503 |
|
Supplies Distributors |
|
|
|
|
|
|
|
|
eCOST |
|
|
191 |
|
|
|
|
|
Eliminations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,752 |
|
|
$ |
1,503 |
|
|
|
|
|
|
|
|
Capital expenditures (in thousands): |
|
|
|
|
|
|
|
|
PFSweb |
|
$ |
650 |
|
|
$ |
2,073 |
|
Supplies Distributors |
|
|
34 |
|
|
|
|
|
eCOST |
|
|
6 |
|
|
|
|
|
Eliminations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
690 |
|
|
$ |
2,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Assets (in thousands): |
|
|
|
|
|
|
|
|
PFSweb |
|
$ |
87,484 |
|
|
$ |
60,337 |
|
Supplies Distributors |
|
|
88,299 |
|
|
|
87,542 |
|
eCOST |
|
|
44,145 |
|
|
|
|
|
Eliminations |
|
|
(45,328 |
) |
|
|
(16,153 |
) |
|
|
|
|
|
|
|
|
|
$ |
174,600 |
|
|
$ |
131,726 |
|
|
|
|
|
|
|
|
18
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
9. COMMITMENTS AND CONTENGENCIES
The Company receives municipal tax abatements in certain locations. During 2004 the Company
received notice from a municipality that it did not satisfy certain criteria necessary to maintain
the abatements. The Company plans to dispute the notice. If the dispute is not resolved favorably,
the Company could be assessed additional taxes from January 1, 2004. The Company has not accrued
for the additional taxes, which through March 31, 2006 could be approximately $1.0 million, as it
does not believe that it is probable that an additional assessment will be incurred.
On May 9, 2005, a lawsuit was filed in the District Court of Collin County, Texas, by J. Gregg
Pritchard, as Trustee of the D.I.C. Creditors Trust, naming the former directors of Daisytek
International Corporation and the Company as defendants. Daisytek filed for bankruptcy in May 2003
and the Trust was created pursuant to Daisyteks Plan of Liquidation. The complaint alleges, among
other things, that the spin-off of the Company from Daisytek in December 1999 was a fraudulent
conveyance and that Daisytek was damaged thereby in the amount of at least $38 million. The Company
believes the claim has no merit and is vigorously defending the action.
In the ordinary course of business, one or more of the Companys clients may dispute Company
invoices for services rendered or other charges. As of March 31, 2006, an aggregate of
approximately $1.1 million of client invoices were in dispute. The Company believes it will
resolve these disputes in its favor and has not recorded any reserve for such disputes.
On July 12, 2004, eCOST received correspondence from MercExchange LLC alleging infringement of
MercExchanges U.S. patents relating to e-commerce and offering to license its patent portfolio to
us. On July 15, 2004, eCOST received a follow-up letter from MercExchange specifying which of our
technologies MercExchange believes infringe certain of its patents, alone or in combination with
technologies provided by third parties. Some of those patents are currently being litigated by
third parties, and eCOST is not involved in those proceedings. In addition, three of the four
patents identified by MercExchange are under reexamination at the U.S. Patent and Trademark Office,
which may or may not result in the modification of those claims. In the July 15 letter,
MercExchange also advised eCOST that it has a number of applications pending for additional
patents. MercExchange has filed lawsuits alleging infringement of some or all of its patents
against third parties, resulting in settlements or verdicts in favor of MercExchange. At least one
such verdict was appealed to the United States Court of Appeals for the Federal Circuit and was
affirmed in part. Based on eCOSTs investigation of this matter to date, eCOST believes that its
current operations do not infringe any valid claims of the patents identified by MercExchange in
these letters. There can be no assurance, however, that such claims will not be material or
adversely affect eCOSTs business, financial position, results of operations or cash flows.
19
ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our results of operations and financial condition
should be read in conjunction with the unaudited interim condensed consolidated financial
statements and related notes appearing elsewhere in this Form 10-Q.
Forward-Looking Information
We have made forward-looking statements in this Report on Form 10-Q. These statements are
subject to risks and uncertainties, and there can be no guarantee that these statements will prove
to be correct. Forward-looking statements include assumptions as to how we may perform in the
future. When we use words like seek, strive, believe, expect, anticipate, predict,
potential, continue, will, may, could, intend, plan, target and estimate or
similar expressions, we are making forward-looking statements. You should understand that the
following important factors, in addition to those set forth above or elsewhere in this Report on
Form 10-Q and our Form 10-K and Form 10-K/A for the year ended December 31, 2005, could cause our
results to differ materially from those expressed in our forward-looking statements. These factors
include:
|
|
|
our ability to retain and expand relationships with existing clients and attract and
implement new clients; |
|
|
|
|
our reliance on the fees generated by the transaction volume or product sales of our clients; |
|
|
|
|
our reliance on our clients projections or transaction volume or product sales; |
|
|
|
|
our dependence upon our agreements with IBM; |
|
|
|
|
our dependence upon our agreements with our major clients; |
|
|
|
|
our client mix, their business volumes and the seasonality of their business; |
|
|
|
|
our ability to finalize pending contracts; |
|
|
|
|
the impact of strategic alliances and acquisitions; |
|
|
|
|
trends in the market for our services; |
|
|
|
|
trends in e-commerce; |
|
|
|
|
whether we can continue and manage growth; |
|
|
|
|
changes in the trend toward outsourcing; |
|
|
|
|
increased competition; |
|
|
|
|
our ability to generate more revenue and achieve sustainable profitability; |
|
|
|
|
effects of changes in profit margins; |
|
|
|
|
the customer and supplier concentration of our business; |
|
|
|
|
the unknown effects of possible system failures and rapid changes in technology; |
|
|
|
|
trends in government regulation both foreign and domestic; |
|
|
|
|
foreign currency risks and other risks of operating in foreign countries; |
|
|
|
|
potential litigation; |
|
|
|
|
our dependency on key personnel; |
|
|
|
|
the impact of new accounting standards and rules regarding revenue recognition, stock
options and other matters; |
|
|
|
|
changes in accounting rules or the interpretations of those rules; |
|
|
|
|
our ability to raise additional capital or obtain additional financing; |
|
|
|
|
our ability and the ability of our subsidiaries to borrow under current financing
arrangements and maintain compliance with debt covenants; |
|
|
|
|
relationship with and our guarantees of certain of the liabilities and indebtedness of
our subsidiaries; |
|
|
|
|
whether outstanding warrants issued in a prior private placement will be exercised in the future; |
|
|
|
|
the transition costs resulting from our merger with eCOST; |
|
|
|
|
our ability to successfully integrate eCOST into our business to achieve the
anticipated benefits of the merger: |
|
|
|
|
eCOSTs potential indemnification obligations to its former parent; |
|
|
|
|
eCOSTs ability to maintain existing and build new relationships with manufacturers and
vendors and the success of its advertising and marketing efforts; and |
|
|
|
|
eCOSTs ability to increase its sales revenue and sales margin and improve operating
efficiencies. |
20
We have based these statements on our current expectations about future events. Although we
believe that the expectations reflected in our forward-looking statements are reasonable, we cannot
guarantee you that these expectations actually will be achieved. In addition, some forward-looking
statements are based upon assumptions as to future events that may not prove to be accurate.
Therefore, actual outcomes and results may differ materially from what is expected or forecasted in
such forward-looking statements. We undertake no obligation to update publicly any forward-looking
statement for any reason, even if new information becomes available or other events occur in the
future. In addition to the risks set forth in our Annual Report on From 10-K and Form 10-K/A for
the year ended December 31, 2005 under the caption Risk Factors, there may be additional risks
that we do not currently view as material or that are not presently known.
Overview
We are an international provider of integrated business process outsourcing solutions to major
brand name companies seeking to maximize their supply chain efficiencies and to extend their
traditional business and e-commerce initiatives as well as a leading multi-category online discount
retailer of new, close-out and refurbished brand-name merchandise. We derive our revenues from
three business segments.
For our first business segment, a service fee revenue model, we derive our revenues from a
broad range of services, including professional consulting, technology collaboration, order
management, managed web hosting and web development, customer relationship management, financial
services including billing and collection services and working capital solutions, kitting and
assembly services, information management and international fulfillment and distribution services
and on-line retail sales. We offer our services as an integrated solution, which enables our
clients to outsource their complete infrastructure needs to a single source and to focus on their
core competencies. Our distribution services are conducted at warehouses that we lease or manage
and include real-time inventory management and customized picking, packing and shipping of our
clients customer orders. We currently offer the ability to provide infrastructure and distribution
solutions to clients that operate in a range of vertical markets, including technology
manufacturing, computer products, printers, cosmetics, fragile goods, high security collectibles,
pharmaceuticals, contemporary home furnishings, apparel, aviation, telecommunications and consumer
electronics, among others.
In our service fee revenue segment, we do not own the underlying inventory or the resulting
accounts receivable, but provide management services for these client-owned assets. We typically
charge our service fee revenue on a cost-plus basis, a percent of shipped revenue basis or a
per-transaction basis, such as a per-minute basis for web-enabled customer contact center services
and a per-item basis for fulfillment services. Additional fees are billed for other services. We
price our services based on a variety of factors, including the depth and complexity of the
services provided, the amount of capital expenditures or systems customization required, the length
of contract and other factors.
Many of our service fee contracts involve third-party vendors who provide additional services
such as package delivery. The costs we are charged by these third-party vendors for these services
are often passed on to our clients. Our billings for reimbursements of these and other
out-of-pocket expenses include travel, shipping and handling costs and telecommunication charges
are included in pass-through revenue.
Our second business segment is a product revenue model. In this segment, we are a master
distributor of product for IBM and certain other clients. In this capacity, we purchase, and thus
own, inventory and recognize the corresponding product revenue. As a result, upon the sale of
inventory, we own the accounts receivable. Freight costs billed to customers are reflected as
components of product revenue. This business segment requires significant working capital
requirements, for which we have senior credit facilities to provide for more than $86 million of
available financing.
The third business segment is a web-commerce product revenue model focused on the sale of
products to a broad range of consumer and small business customers. In this segment we operate as
a multi-category online discount retailer of new, close-out and refurbished brand-name
merchandise. Our web-
commerce product line currently offers more than 100,000 products in twelve primary
merchandise categories, including computer hardware and software, home electronics, digital
imaging, watches and jewelry, housewares, DVD movies, video games, travel, bed and bath, apparel
and accessories, licensed sports gear
21
and cellular/wireless.
Growth is a key element to achieving our future goals, including maintaining sustainable
profitability. Growth in our service fee business is driven by two main elements: new client
relationships and organic growth from existing clients. We have refocused our sales efforts on
larger contracts with brand-name companies; however, we have seen the sales cycle lengthen and the
number of new contract signings slow down as compared to prior periods. Our results for the
quarter ended March 31, 2006 include approximately $1.0 million of new revenue including certain
incremental projects. Growth within our non-service fee business segments is expected to occur as
a result of our merger with eCOST.
We continue to monitor and control our costs to focus on profitability. While we are
targeting our new service fee contracts to yield increase gross profit, we also expect to incur
incremental investments to implement new contracts, investments in infrastructure and sales and
marketing to support our targeted growth and increased public company professional fees.
Our expenses comprise primarily four categories: 1) cost of product revenue, 2) cost of
service fee revenue, 3) cost of pass-through revenue and 4) selling, general and administrative
(SG&A) expenses.
Cost of product revenues cost of product revenue consists of the purchase price of product
sold and freight costs, which are reduced by certain reimbursable expenses. These reimbursable
expenses include pass-through customer marketing programs, direct costs incurred in passing on any
price decreases offered by IBM to Supplies Distributors or its customers to cover price protection
and certain special bids, the cost of products provided to replace defective product returned by
customers and certain other expenses as defined under the master distributor agreements. Certain
cost of product revenues related to eCOST are reduced by certain vendor consideration such as co-op
advertising funds.
Cost of service fee revenue - consists primarily of compensation and related expenses for our
web-enabled customer contact center services, international fulfillment and distribution services
and professional consulting services, and other fixed and variable expenses directly related to
providing services under the terms of fee based contracts, including certain occupancy and
information technology costs and depreciation and amortization expenses.
Cost of pass-through revenue - the related reimbursable costs for pass-through expenditures
are reflected as cost of pass-through revenue.
SG&A expenses consist primarily of compensation and related expenses for sales and marketing
staff, advertising, on-line marketing and catalog production, distribution costs (excluding
freight) applicable to the Supplies Distributors and eCOST businesses, executive, management and
administrative personnel and other overhead costs, including certain occupancy and information
technology costs and depreciation and amortization expenses.
Monitoring and controlling our available cash balances continues to be a primary focus. Our
cash and liquidity positions are important components of our financing of both current operations
and our targeted growth. In recent years we have added to our available cash and liquidity
positions through various transactions. First, each of our primary operating subsidiaries has one
or more asset based working capital financing agreements with various lenders. Secondly, in 2003
we completed a private placement of approximately 1.6 million shares of our common stock to certain
investors that provided net proceeds of approximately $3.2 million. In January 2005, we issued an
additional 0.4 million shares of common stock
to certain of these investors who exercised warrants issued in the private placement. The
warrants exercised provided $1.3 million of additional proceeds. Thirdly, in 2004 we received
proceeds of $5.0 million of taxable revenue bonds to finance capital additions to our new facility
in Southaven, MS.
Results of Operations
The following table sets forth certain historical financial information from our unaudited
interim condensed consolidated statements of operations expressed as a percent of net revenues.
22
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
|
2006 |
|
2005 |
|
|
(Unaudited) |
|
(Unaudited) |
Product revenue, net |
|
|
81.8 |
% |
|
|
77.7 |
% |
Service fee revenue |
|
|
14.2 |
|
|
|
17.2 |
|
Pass-through revenue |
|
|
4.0 |
|
|
|
5.1 |
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
Cost of product revenue (as % of product
revenue) |
|
|
93.5 |
|
|
|
93.7 |
|
Cost of service fee revenue (as % of net
service fee revenue) |
|
|
71.5 |
|
|
|
76.5 |
|
Cost of pass-through revenue (as % of
pass- through revenue) |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
Total costs of revenues |
|
|
90.6 |
|
|
|
91.1 |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
9.4 |
|
|
|
8.9 |
|
Selling, general and administrative
expenses |
|
|
10.3 |
|
|
|
8.5 |
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(0.9 |
) |
|
|
0.4 |
|
Interest expense, net |
|
|
0.4 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(1.3 |
) |
|
|
0.0 |
|
Income tax expense |
|
|
0.2 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(1.5 |
)% |
|
|
(0.3 |
)% |
|
|
|
|
|
|
|
|
|
Results of Operations for the Interim Periods
Ended March 31, 2006 and 2005
Product Revenue. Product
revenue was $90.2 million for the three months ended March 31, 2006,
as compared to $63.6 million for the three months ended March 31, 2005, an increase of $26.6
million, or 41.8%. Excluding the $21.8 million of product revenue of eCOST for the two months
following its acquisition on February 1, 2006, product revenue increased $4.8 million, or 7.5%
primarily due to the timing of a vendor promotion in the first quarter.
Service Fee Revenue.
Service fee revenue was $15.9 million for the three months ended March
31, 2006 as compared to $14.1 million for the three months ended March 31, 2005, an increase of
$1.8 million or 13.0%. Service fee revenue for both the three months ended March 31, 2006 and 2005
included increased service fees generated from incremental projects with certain client
relationships. The change in service fee revenue is shown below ($ millions):
|
|
|
|
|
|
|
Three |
|
|
|
Months |
|
Period ended March 31, 2005 |
|
$ |
14.1 |
|
New service contract relationships, including certain
incremental projects under new contracts |
|
|
1.0 |
|
Increase in existing client service fees from organic
growth and certain incremental projects with existing
clients |
|
|
1.5 |
|
Terminated clients not included in 2006 revenue |
|
|
(0.7 |
) |
|
|
|
|
Period ended March 31, 2006 |
|
$ |
15.9 |
|
|
|
|
|
Cost of Product
Revenue. Cost of product revenue was $84.3 million for the three months ended
March 31, 2006, as compared to $59.6 million for the three months ended March 31, 2005, an increase
of $24.7 million or 41.4%. Excluding the $20.4 million of cost of product revenue of eCOST for the
two months following the acquisition, cost of product revenue increased $4.3 million or 7.2%. Cost
of product revenue, excluding eCOST, increased primarily as the result of increased sales volumes
of certain
products related to the sales promotion in the first quarter of 2006. Cost of product
revenue, as a percent of product revenue, excluding the impact of eCOST, was 93.5% during the three
months ended March 31, 2006 and 93.7% during the three months ended March 31, 2005. The resulting
gross profit margin was 6.5% for the three months ended March 31, 2006 and 6.3% for the three
months ended March 31, 2005. eCOSTs cost of product revenue, as a percentage of product revenue
was 93.6% during the period ended March 31, 2006. The resulting gross margin for eCOST was 6.4%
during the same period. The gross margin for eCOST
23
reflects approximately
$0.4 million of a loss applicable to a sales transaction to a
former eCOST customer.
Cost of Service Fee Revenue. Cost of service fee revenue was $11.4 million for the three
months ended March 31, 2006, as compared to $10.8 million during the three months ended March 31,
2005, an increase of $0.6 million or 5.7%. The resulting service fee gross profit was $4.5 million
or 28.5% of service fee revenue, during the three months ended March 31, 2006 as compared to $3.3
million, or 23.5% of service fee revenue for the three months ended March 31, 2005. Our gross
profit as a percent of service fees increased in the current period primarily due to higher gross
margins on certain client project revenue as well as the prior year having lower gross margins on
certain new contracts, including certain start up costs. As we add new service fee revenue in the
future, we currently intend to target the underlying contracts to earn an average gross profit
percentage of 25-35%, but we have and may continue to accept lower gross margin percentages on
certain contracts depending on contract scope and other factors.
Selling, General and Administrative Expenses. SG&A expenses were $11.4 million for the three
months ended March 31, 2006, or 10.3% of total net revenues, as compared to $7.0 million, or 8.5%
of total net revenues, for the three months ended March 31, 2005. Excluding the $3.6 million of
SG&A expenses of eCOST for the two months following its acquisition, SG&A expenses were $7.8
million or 8.9% of total net revenues. SG&A rose primarily due to increased personnel related
costs and stock option expense. Upon the conclusion of the integration process of eCOST into our
current infrastructure, currently targeted for the third quarter, we expect to realize certain SG&A
savings through the reduction of certain eCOST overhead expenses and changes in corporate
infrastructure.
Interest Expense, net. Net interest expense was $0.4 million for the three months ended March
31, 2006 as compared to $0.3 million for the three months ended March 31, 2005.
Income Taxes. For the three months ended March 31, 2006 and 2005, we recorded a tax provision
of $0.2 million primarily associated with our subsidiary Supplies Distributors Canadian and
European operations. We did not record an income tax benefit associated with our consolidated net
loss in our U.S. operations. A valuation allowance has been provided for our net U.S. deferred tax
assets as of March 31, 2006, which are primarily related to our net operating loss carryforwards.
We did not record an income tax benefit for our PFSweb Canadian pre-tax losses in the current or
prior periods. Due to the consolidation of Supplies Distributors, in the future we anticipate that
we will continue to record an income tax provision associated with Supplies Distributors Canadian
and European results of operations.
Liquidity and Capital Resources
Net cash provided by operating activities was $3.3 million for the three months ended March
31, 2006, and primarily resulted from a $4.5 million increase in accounts payable, accrued expenses
and other liabilities, a $2.0 million decrease in prepaid expenses, other receivables and other
current assets, and a
$0.6 million increase in income, as adjusted for non-cash items partially offset by increases
in inventories of $2.6 million and accounts receivable of $1.7 million.
Net cash used in operating activities was $3.5 million for the three months ended March 31,
2005, and primarily resulted from a $2.0 million increase in inventories, a $2.1 million increase
in prepaid expenses, other receivables and other current assets and a $2.0 million decrease in
accounts payable, accrued expenses and other liabilities partially offset by a decrease in accounts
receivable of $1.3 million and an increase in income as adjusted for non-cash items of $1.2
million. The decrease in accounts payable was due to the timing of invoice processing by one of
our master distribution vendors and a decrease in certain liabilities due to clients for unremitted
funds collected on their behalf and reimbursable expense deposits.
The decrease in accounts receivable was primarily due to reduced revenue from our Supplies
Distributors business segment partially offset by increased service fee billings for certain client
relationships.
Net cash used in investing activities for the three months ended March 31, 2006 totaled $1.4
million, representing capital expenditures of $0.7 million and cash paid to acquire eCOST, net of
cash acquired, of $1.3 million, partially offset by a decrease in restricted cash of $0.6 million.
Net cash used in investing activities for the three months ended March 31, 2005 totaled $0.9
million,
24
representing capital expenditures of $2.1 million, offset by a decrease in restricted cash
of $1.2 million.
Capital expenditures have historically consisted primarily of additions to upgrade our
management information systems, and general expansion of our facilities, both domestic and foreign.
We expect to incur capital expenditures to support new contracts and anticipated future growth
opportunities. Based on our current client business activity and our targeted growth plans, we
anticipate that our total investment in upgrades and additions to facilities and information
technology services for the upcoming twelve months will be approximately $4 to $7 million, although
additional capital expenditures may be necessary to support the infrastructure requirements of new
clients as well as the eCOST infrastructure. To maintain our current operating cash position, a
portion of these expenditures may be financed through debt, operating or capital leases or
additional equity. We may elect to modify or defer a portion of such anticipated investments in
the event that we do not obtain the financing or achieve the revenue necessary to support such
investments.
Net cash used in financing activities was approximately $1.6 million for the three months
ended March 31, 2006, primarily representing a $1.0 million increase in restricted cash, $0.2
million of payments on debt and $0.4 million of payments on capital leases.
Net cash provided by financing activities was approximately $5.8 million for the three months
ended March 31, 2005, primarily representing $3.5 million of proceeds from debt, $1.7 million from
the issuance of common stock pursuant to our employee stock purchase and stock option programs and
warrant exercises and a $0.9 million decrease in restricted cash.
Our liquidity could be impacted significantly as a result of the merger with eCOST. During
2005 and the three month period ended March 31, 2006, eCOST experienced a significant net usage of
cash primarily due to certain operational difficulties related to its transition as a separate
company following its spin-off from its parent company in April 2005 as well as declining sales and
increasing inventory and accounts receivable balances. As a result, we are anticipating, during
the process of transitioning and integrating the eCOST operations, of having to support eCOSTs
cash needs in order to help them achieve a stabilized operational position. The amount of cash
needed to support eCOST operations depends upon the financing available as well as the length of
time it takes to successfully transition and incorporate eCOST into
our current infrastructure and eCOST's ability to improve its financial results.
We currently expect that eCOST, as part of a combined Company, should achieve annual recurring
cost savings of approximately $4 to $5 million in the first full year of operation following the
integration. These savings are expected to result from, among other things, the reduction of
certain overhead expenses, changes in corporate infrastructure and reduced freight costs, although
there can be no assurance that
these cost savings will be achieved. We currently are targeting eCOST to be nearly fully
incorporated into our infrastructure by the end of the third quarter of 2006 at which time we
expect to begin realizing the full potential of the expected cost savings.
During the three months ended March 31, 2006, our working capital decreased to $19.4 million
from $23.4 million at December 31, 2005, primarily as a result of the reclassification of the $4.5
million in taxable revenue bonds to short-term debt due as the related letters of credit securing
the taxable revenue bonds matures in January 2007. We are targeting to renew this letter of credit
facility with the bank during 2006 to present this as a long-term liability again in the future.
To obtain additional financing in the future, in addition to our current cash position, we
plan to evaluate various financing alternatives including the sale of equity, utilizing capital or
operating leases, borrowing under our credit facilities,
expanding our current credit facilities, entering into new debt agreements or transferring to
third parties a portion of our subordinated loan balance due from Supplies Distributors. In
conjunction with certain of these alternatives, we may be required to provide certain letters of
credit to secure these arrangements. No assurances can be given that we will be successful in
obtaining any additional financing or the terms thereof. We currently believe that our cash
position, financing available under our credit facilities and funds generated from operations
(including our anticipated revenue growth and/or cost reductions to offset lower than anticipated
revenue growth) will satisfy our presently known operating cash needs, our working capital and
capital expenditure requirements, our lease obligations, and additional loans to our subsidiaries
Supplies Distributors and eCOST, if necessary, for at least the next twelve months.
25
The following is a schedule of our total contractual cash obligations which is comprised of
operating leases, debt, vendor financing and capital leases (including interest) as of March 31,
2006, (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
Due By Period |
|
|
|
|
|
|
|
Less than |
|
|
1 - 3 |
|
|
3 - 5 |
|
|
More than |
|
Contractual Obligations |
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
Debt and vendor financing |
|
$ |
61,591 |
|
|
$ |
61,189 |
|
|
$ |
381 |
|
|
$ |
21 |
|
|
$ |
|
|
Capital lease obligations |
|
|
4,123 |
|
|
|
2,826 |
|
|
|
1,143 |
|
|
|
154 |
|
|
|
|
|
Operating leases |
|
|
23,135 |
|
|
|
8,230 |
|
|
|
10,179 |
|
|
|
3,522 |
|
|
|
664 |
|
Service agreements |
|
|
120 |
|
|
|
120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
88,969 |
|
|
$ |
72,365 |
|
|
$ |
12,243 |
|
|
$ |
3,697 |
|
|
$ |
664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In support of certain debt instruments and leases, as of March 31, 2006, we had $0.5
million of cash restricted as collateral for letters of credit. The letters of credit expire at
various dates through March 2007, the related debt and lease obligations termination dates. As of
March 31, 2006, we had $2.7 million of cash restricted for payment of capital expenditures or
repayments to lenders. In addition, as described above, we have provided collateralized guarantees
to secure the repayment of certain of our subsidiaries credit facilities. Many of our debt
facilities include both financial and non-financial covenants, and also include cross default
provisions applicable to other agreements. To the extent we fail to comply with our debt covenants,
including the monthly financial covenant requirements and our required level of shareholders
equity, and the lenders accelerate the repayment of the credit facility obligations, we would be
required to repay all amounts outstanding thereunder. In particular, in the event eCOST is unable
to increase its revenue and/or gross profit from its present levels and does not achieve the
operating efficiencies targeted to occur upon completion of its integration into the Companys
infrastructure, it may fail to comply with one or more of the financial covenants required under
its working capital line of credit. In such event, absent a waiver, the working capital lender
would be entitled to accelerate all amounts outstanding thereunder and exercise all other rights
and remedies, including sale of collateral and payment under the Company parent guaranty. A
requirement to accelerate the repayment of the credit facility obligations would have a material
adverse impact on our financial condition and results of operations. We can provide no assurance
that we will have the financial ability to repay all of such obligations. As of March 31, 2006, we
were in compliance with all debt covenants. We do not have any other material financial
commitments, although future client contracts may require capital expenditures and lease
commitments to support the services provided to such clients.
In the future, we may attempt to acquire other businesses or seek an equity or strategic
partner to generate capital or expand our services or capabilities in connection with our efforts
to grow our business. Acquisitions involve certain risks and uncertainties and may require
additional financing. Therefore, we can give no assurance with respect to whether we will be
successful in identifying businesses to acquire or an equity or strategic partner, whether we or
they will be able to obtain financing to complete a transaction, or whether we or they will be
successful in operating the acquired business.
To finance their distribution of IBM products, Supplies Distributors and its subsidiaries have
short-term credit facilities with IBM Credit LLC (IBM Credit) and IBM Belgium Financial Services
S.A. (IBM Belgium). We have provided a collateralized guaranty to secure the repayment of these
credit facilities. These asset-based credit facilities provided financing for up to $30.5 million
and up to 12.5 million Euros (approximately $15.1 million) with IBM Credit and IBM Belgium,
respectively. These agreements expire in March 2007.
Supplies Distributors also has a loan and security agreement with Congress Financial
Corporation (Southwest) (Congress) to provide financing for up to $25 million of eligible
accounts receivables in the United States and Canada. The Congress facility expires on the earlier
of March 29, 2007 or the date on which the parties to the IBM master distributor agreement no
longer operate under the terms of such agreement and/or IBM no longer supplies products pursuant to
such agreement.
Supplies Distributors European subsidiary has a factoring agreement with Fortis Commercial
Finance N.V. (Fortis) to provide factoring for up to 7.5 million Euros (approximately $9.1
million) of eligible accounts receivables through March 2007.
26
These credit facilities contain cross default provisions, various restrictions upon the
ability of Supplies Distributors and its subsidiaries to, among other things, merge, consolidate,
sell assets, incur indebtedness, make loans and payments to related
parties (including entities directly or indirectly owned by PFSweb,
Inc.), provide guarantees, make investments and loans, pledge assets, make
changes to capital stock ownership structure and pay dividends, as well as financial covenants,
such as cash flow from operations, annualized revenue to working capital, net profit after tax to
revenue, minimum net worth and total liabilities to tangible net worth, as defined, and are secured
by all of the assets of Supplies Distributors, as well as a collateralized guaranty of PFSweb.
Additionally, we are required to maintain a subordinated loan to Supplies Distributors of no less
than $6.5 million, maintain restricted cash of less than $5.0 million, are restricted with regard
to transactions with related parties, (including entities directly or indirectly owned by PFSweb,
Inc.) indebtedness and changes to capital stock ownership structure
and a minimum shareholders equity of at least $18.0 million. Furthermore, we are obligated to
repay any over-advance made to Supplies Distributors or its subsidiaries under these facilities if
they are unable to do so. We have also provided a guarantee of the obligations of Supplies
Distributors and its subsidiaries to IBM, excluding the trade payables that are financed by IBM
credit.
Our subsidiary, Priority Fulfillment Services, Inc. (PFS), has entered into a Loan and
Security Agreement with Comerica Bank (Comerica), which provides for up to $7.5 million of
eligible accounts receivable financing through March 2007, and up to $2.5 million of eligible
equipment purchases through June 2008. We entered this Agreement to supplement our existing cash
position, and provide funding for our current and future operations, including our targeted growth.
The Agreement contains cross default provisions, various restrictions upon our ability to, among
other things, merge, consolidate, sell assets, incur indebtedness, make loans and payments to
subsidiaries, affiliates and related parties (including entities directly or indirectly owned by PFSweb,
Inc.),
make investments and loans, pledge assets, make changes to capital stock ownership structure, as
well as financial covenants of a minimum tangible net worth of $20 million, as defined, and a
minimum liquidity ratio, as defined. The agreement also limits our ability to increase the
subordinated loan to Supplies Distributors to more than $8.0 million or advance more than $3.5
million to eCOST without the lenders approval. The agreement is secured by all of the assets of
PFS, as well as a guarantee of PFSweb.
In 2003, we entered into a Securities Purchase Agreement with certain institutional investors
in a
private placement transaction pursuant to which we issued and sold an aggregate of 1.6 million
shares of our common stock, par value $.001 per share (the Common Stock), at $2.16 per share,
resulting in gross proceeds of $3.4 million. After deducting expenses, the net proceeds were
approximately $3.2 million. In addition to the Common Stock, the investors received one-year
warrants to purchase an aggregate 525,692 shares of Common Stock at an exercise price of $3.25 per
share and four-year warrants to purchase an aggregate of 395,486 shares of Common Stock at an
exercise price of $3.30 per share. In January 2005, 394,865 of the one-year warrants were exercised
prior to their expiration, generating net proceeds to us of $1.3 million, and 131,277 of the
one-year warrants expired unexercised. As a result of the merger with eCOST, the exercise price of
the four-year warrants has been adjusted to $2.47 per share and the number of warrants has been
adjusted to 528,832. In addition, in connection with the merger with eCOST, we assumed outstanding
warrants to issue an aggregate of 36,210 shares of common stock at an exercise price of $2.00 per
share, subject to the terms set forth therein.
In 2004, to fulfill our obligations under certain new client relationships, we entered into a
three-year operating lease arrangement for a new distribution facility in Southaven, MS, near our
existing
distribution complex in Memphis, TN. We have incurred more than $5 million in capital
expenditures to support the incremental business in this new distribution center. We financed a
significant portion of these expenditures through a Loan Agreement with the Mississippi Business
Finance Corporation (the MBFC) pursuant to which the MBFC issued $5 million MBFC Taxable Variable
Rate Demand Limited Obligation Revenue Bonds, Series 2004 (Priority Fulfillment Services, Inc.
Project) (the Bonds). The MBFC loaned us the proceeds of the Bonds for the purpose of financing
the acquisition and installation of equipment, machinery and related assets located in our new
Southaven, Mississippi distribution facility. The primary source of repayment of the Bonds is a
letter of credit (the Letter of Credit) in the initial face amount of $5.1 million issued by
Comerica pursuant to a Reimbursement Agreement between us and Comerica under which we are obligated
to pay to Comerica all amounts drawn under the Letter of Credit. The Letter of Credit has a
maturity date of January 2007 at which time, if not renewed or replaced, will result in a draw on
the undrawn face amount thereof.
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To the extent we fail to comply with the various debt covenants described above, and the
lenders accelerate the repayment of the credit facility obligations, we would be required to repay
all amounts outstanding thereunder. Any requirement to accelerate the repayment of the credit
facility obligations would have a material adverse impact on our financial condition and results of
operations. We can provide no assurance that we will have the financial ability to repay all of
such obligations. As of March 31, 2006, we were in compliance with all debt covenants.
Through our merger with eCOST, we plan to align the core strengths of each company, to
leverage our operational infrastructure and technology expertise with eCOSTs customer base and
supplier relationships. Specifically, we are targeting for eCOST to achieve $4 to $5 million in
annual cost savings in the first full year of operation following the integration. These savings
are expected to result from, among other things, reductions in the following costs:
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Certain redundant administrative and public company activities; |
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Technology, telecommunications and operational costs; and |
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Overall outbound freight costs due to additional freight options. |
We currently are targeting eCOST to be nearly fully incorporated into our infrastructure by
the end of the third quarter of 2006 at which time we expect to begin realizing the full potential
of the expected cost savings.
Additionally, we believe the combined companies can pursue a variety of incremental revenue
and gross profit-related opportunities, such as:
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Increase the number of virtual warehouse partnerships for both electronics and
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Develop higher margin non-product and service categories; |
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Expand international sales, particularly in Europe and Canada, where we maintain a
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Utilize our stronger financial platform to enhance eCOSTs working capital resources to
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We can provide no assurance that such plans or the underlying financial benefits will be
achieved. Additionally, even with such plans, we expect that eCOST will operate at a loss during
2006 and will require funding to support its operations.
eCOST currently has an asset-based line of credit facility of up to $15.0 million with
Wachovia Capital Finance Corporation (Western), which is collateralized by substantially all of
eCOSTs assets. Borrowings under the facility are limited to a percentage of eligible accounts
receivable and letter of credit availability is limited to a percentage of accounts receivable and
inventory. Outstanding amounts under the facility bear interest at rates ranging from the prime
rate to the prime rate plus 0.5% (8.25% as of March 31, 2006), depending on eCOSTs financial
results. As of March 31, 2006, eCOST had $1.5
million of letters of credit outstanding, $0.7 of outstanding advances and $1.5 million of
available credit under this facility. The credit facility restricts eCOSTs ability to, among other
things, merge, consolidate, sell assets, incur indebtedness, make loans, investments and payments
to subsidiaries, affiliates and related parties, make investments and loans, pledge assets, make
changes to capital stock ownership structure, and requires a minimum tangible net worth of $1
million, as defined. PFSweb has guaranteed all current and future obligations of eCOST under this
line of credit.
eCOST has historically incurred significant operating losses and used cash to fund its
operations. As a result, we expect that we will be required to invest cash to fund eCOSTs
operations, which we cannot do without approval from our lenders. The amount of cash needed to
support eCOST operations depends upon the financing available under its credit line as well as the
length of time it takes to successfully transition and incorporate eCOST into our current
infrastructure. We have received lender approval to use a maximum of $3.5 million in cash to fund
eCOSTs cash flow requirements, and have advanced $2.0 million to eCOST as of March 31, 2006. We
can provide no assurance that we will receive further approval from our lenders if additional
financing needs are required by eCOST. In addition, PFSweb has provided a guaranty of eCOSTs bank
line of credit and certain eCOST vendor trade payables.
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If eCOST is unable to meet its requirements under its debt obligations and bank facility, the
guarantees referred to above could be called upon.
We receive municipal tax abatements in certain locations. During 2004 we received notice from
a municipality that we did not satisfy certain criteria necessary to maintain the abatements. We
plan to dispute the notice. If the dispute is not resolved favorably, we could be assessed
additional taxes for calendar years 2004 and 2005. We have not accrued for the additional taxes,
which through March 31, 2006 could be approximately $1.0 million in the aggregate, as we do not
believe that it is probable that an additional assessment will be incurred.
On May 9, 2005, a lawsuit was filed in the District Court of Collin County, Texas, by J. Gregg
Pritchard, as Trustee of the D.I.C. Creditors Trust, naming the former directors of Daisytek
International Corporation and the Company as defendants. Daisytek filed for bankruptcy in May 2003
and the Trust was created pursuant to Daisyteks Plan of Liquidation. The complaint alleges, among
other things, that the spin-off of the Company from Daisytek in December 1999 was a fraudulent
conveyance and that Daisytek was damaged thereby in the amount of at least $38 million. We believe
the claim has no merit and are vigorously defending the action.
In the ordinary course of business, one or more of the Companys clients may dispute Company
invoices for services rendered or other charges. As of March 31, 2006, an aggregate of
approximately $1.1 million of client invoices were in dispute. The Company believes it will
resolve these disputes in its favor and has not recorded any reserve for such disputes.
On July 12, 2004, eCOST received correspondence from MercExchange LLC alleging infringement of
MercExchanges U.S. patents relating to e-commerce and offering to license its patent portfolio to
us. On July 15, 2004, eCOST received a follow-up letter from MercExchange specifying which of our
technologies MercExchange believes infringe certain of its patents, alone or in combination with
technologies provided by third parties. Some of those patents are currently being litigated by
third parties, and eCOST is not involved in those proceedings. In addition, three of the four
patents identified by MercExchange are under reexamination at the U.S. Patent and Trademark Office,
which may or may not result in the modification of those claims. In the July 15 letter,
MercExchange also advised eCOST that it has a number of applications pending for additional
patents. MercExchange has filed lawsuits alleging infringement of some or all of its patents
against third parties, resulting in settlements or verdicts in favor of MercExchange. At least one
such verdict was appealed to the United States Court of Appeals for the Federal Circuit and was
affirmed in part. Based on eCOSTs investigation of this matter to date, eCOST believes that its
current operations do not infringe any valid claims of the patents identified by MercExchange in
these letters. There can be no assurance, however, that such claims will not be material or
adversely affect eCOSTs business, financial position, results of operations or cash flows.
Seasonality
The seasonality of our service fee business is dependent upon the seasonality of our clients
business and sales of their products. Accordingly, our management must rely upon the projections of
our clients in assessing quarterly variability. We believe that with our current client mix and
their current business volumes, our service fee business activity will be at it lowest in the
quarter ended March 31. We anticipate that our product revenue will be highest during the quarter
ended December 31.
We believe that results of operations for a quarterly period may not be indicative of the
results for any other quarter or for the full year.
Inflation
Management believes that inflation has not had a material effect on our operations.
Critical Accounting Policies
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A description of critical accounting policies is included in Note 2 to the accompanying
unaudited interim condensed consolidated financial statements. For other significant accounting
policies, see Note 2 to the consolidated financial statements in our December 31, 2005 Annual
Report on Form 10-K and Form 10-K/A.
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ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
We are exposed to various market risks including interest rates on its financial instruments
and foreign exchange rates.
Interest Rate Risk
Our interest rate risk is limited to our outstanding balances on our inventory and working
capital financing agreements, taxable revenue bonds, loan and security agreements and factoring
agreement for the financing of inventory, accounts receivable and certain other receivables and
certain equipment, which amounted to $61.3 million at March 31, 2006. A 100 basis point movement in
interest rates would result in approximately $0.2 million annualized increase or decrease in
interest expense based on the outstanding balance of these agreements at March 31, 2006.
Foreign Exchange Risk
Currently, our foreign currency exchange rate risk is primarily limited to the Canadian Dollar
and the Euro. In the future, our foreign currency exchange risk may also include other currencies
applicable to certain of our international operations. We have and may continue, from time to
time, to employ derivative financial instruments to manage our exposure to fluctuations in foreign
currency rates. To hedge our net investment and intercompany payable or receivable balances in
foreign operations, we may enter into forward currency exchange contracts.
ITEM 4. Controls and Procedures
We maintain a system of controls and procedures designed to provide reasonable assurance as to
the reliability of the financial statements and other disclosures included in this report, as well
as to safeguard assets from unauthorized use or disposition. We evaluated the effectiveness of the
design and operation of our disclosure controls and procedures under the supervision and with the
participation of management, including our Chief Executive Officer and Principal Financial and
Accounting Officer, within 90 days prior to the filing date of this report. Based upon the
evaluation, our Chief Executive Officer and Principal Financial and Accounting Officer concluded
that our disclosure controls and procedures are effective in timely alerting them to material
information required to be included in our periodic Securities and Exchange Commission filings. No
significant changes were made to our internal controls or other factors that could significantly
affect these controls subsequent to the date of their evaluation.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
None
ITEM 1A. Risk Factors
Our business, financial condition and operating results could be adversely affected by any of
the following factors, in which event the trading price of our common stock could decline, and you
could lose part or all of your investment. The risks and uncertainties described below are not the
only ones that we face. Additional risks and uncertainties not presently known to us, or that we
currently think are immaterial, may also impair our business operations.
Risks Related to PFSweb
We anticipate incurring significant expenses in the foreseeable future, which may reduce our
ability to achieve or maintain profitability.
To reach our business growth objectives, we may increase our operating and marketing expenses,
as well as capital expenditures. To offset these expenses, we will need to generate additional
profitable business. If our revenue grows slower than either we anticipate or our clients
projections indicate, or if our operating and marketing expenses exceed our expectations, we may
not generate sufficient revenue to be profitable or be able to sustain or increase profitability on
a quarterly or an annual basis in the future. Additionally, if our revenue grows slower than either
we anticipate or our clients projections indicate, we may incur unnecessary or redundant costs and
our operating results could be adversely affected. We also expect to incur additional expenses upon
the adoption of Statement on Financial Accounting Standards No. 123R, Accounting for Stock-based
Compensation.
Our service fee revenue and gross margin is dependent upon our clients business and transaction
volumes and our costs; many of our client service agreements are terminable by the client at will;
We may incur financial penalties if we fail to meet contractual service levels under certain client
service agreements.
Our service fee revenue is primarily transaction based and fluctuates with the volume of
transactions or level of sales of the products by our clients for whom we provide transaction
management services. If
we are unable to retain existing clients or attract new clients or if we dedicate significant
resources to clients whose business does not generate sufficient revenue or whose products do not
generate substantial
customer sales, our business may be materially adversely affected. Moreover, our ability to
estimate service fee
32
revenue for future periods is substantially dependent upon our clients and
our own projections, the accuracy of which has been, and will continue to be, unpredictable.
Therefore, our planning for client activity and targeted goals for service fee revenue and gross
margin may be materially adversely affected by incomplete, delayed or inaccurate projections. In
addition, many of our service agreements with our clients are terminable by the client at will.
Therefore, we cannot assure you that any of our clients will continue to use our services for any
period of time. The loss of a significant amount of service fee revenue due to client terminations
could have a material adverse effect on our ability to cover our costs and thus on our
profitability. Certain of our client service agreements contain minimum service level requirements
and impose financial penalties if we fail to meet such requirements. The imposition of a
substantial amount of such penalties could have a material adverse effect on our business and
operations.
Our operating results are materially impacted by our client mix and the seasonality of their
business.
Our business is materially impacted by our client mix and the seasonality of their business.
Based upon our current client mix and their current projected business volumes, we anticipate our
service fee revenue business activity will be at its lowest in the first quarter of our fiscal year
and that our product revenue business activity will be at its highest in the fourth quarter of our
fiscal year. We believe results of operations for a quarterly period may not be indicative of the
results for any other quarter or for the full year. We are unable to predict how the seasonality of
future clients business may affect our quarterly revenue and whether the seasonality may change
due to modifications to a clients business. As such, we believe that results of operations for a
quarterly period may not be indicative of the results for any other quarter or for the full year.
Our systems may not accommodate significant growth in our number of clients.
Our success depends on our ability to handle a large number of transactions for many different
clients in various product categories. We expect that the volume of transactions will increase
significantly as we expand our operations. If this occurs, additional stress will be placed upon
the network hardware and software that manages our operations. We cannot assure you of our ability
to efficiently manage a large number of transactions. If we are not able to maintain an appropriate
level of operating performance, we may develop a negative reputation, and impair existing and
prospective client relationships and our business would be materially adversely affected.
We may not be able to recover all or a portion of our start-up costs associated with one or more of
our clients.
We generally incur start-up costs in connection with the planning and implementation of
business process solutions for our clients. Although we generally attempt to recover these costs
from the client in the early stages of the client relationship, or upon contract termination if the
client terminates without cause prior to full amortization of these costs, there is a risk that the
client contract may not fully cover the start-up costs. To the extent start-up costs exceed the
start-up fees received, excess costs will be expensed as incurred. Additionally, in connection with
new client contracts we generally incur capital expenditures associated with assets whose primary
use is related to the client solution. There is a risk that the contract may end before expected
and we may not recover the full amount of our capital costs.
Our revenue and margins may be materially impacted by client transaction volumes that differ from
client projections and business assumptions.
Our pricing for client transaction services, such as call center and fulfillment, is often
based upon volume projections and business assumptions provided by the client and our anticipated
costs to perform such work. In the event the actual level of activity or cost is substantially
different from the projections or assumptions, we may have insufficient or excess staffing,
incremental costs or other assets dedicated for
such client that may negatively impact our margins and business relationship with such client.
In the event we are unable to meet the service levels expected by the client, our relationship with
the client will suffer and may result in financial penalties and/or the termination of the client
contract.
Our business is subject to the risk of customer and supplier concentration.
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For
the three months ended March 31, 2006, the prime contractor to a U.S. government agency (for whom we are a subcontractor),
a consumer products company and Xerox Corporation represented
approximately 22%, 21% and 12%,
respectively, of our total service fee revenue, net of pass-through
revenue. The loss of, or non-payment of invoices by, any or all of
such prime contractor to the U.S. agency,
consumer products company or Xerox as clients would have a material adverse effect upon our
business. In particular, the agreement under which we provide services to such clients are
terminable at will upon notice by such clients.
Substantially
all of our Supplies Distributors product revenue was generated by sales of product purchased under
master distributor agreements with IBM and is dependent on IBMs
business. Our Supplies Distributor product revenue
business is dependent upon our master distributor relationship with IBM and the continuing market
for IBM products. A termination of the relationship with IBM or a decline in customer demand for
such products could have a material adverse effect on our business.
Sales to one customer accounted for approximately 12% of our total
product revenues for the three months ended
March 31, 2006. The loss of any one or more of such
customers, or non-payment of any material amount by these or any other customer, would have a
material adverse effect upon our business.
Changes to financial accounting standards may affect our reported results of operations.
We prepare our financial statements to conform to generally accepted accounting principles, or
GAAP. GAAP are subject to interpretation by the American Institute of Certified Public Accountants,
the SEC and various bodies formed to interpret and create appropriate accounting policies. A change
in those policies can have a significant effect on our reported results and may even affect our
reporting of transactions which were completed before a change is announced. Accounting rules
affecting many aspects of our business, including rules relating to accounting for asset
impairments, revenue recognition, arrangements involving multiple deliverables, employee stock
purchase plans and stock option grants, have recently been revised or are currently under review.
Changes to those rules or current interpretation of those rules may have a material adverse effect
on our reported financial results or on the way we conduct our business.
We operate with significant levels of indebtedness and are required to comply with certain
financial and non-financial covenants; We are required to maintain a minimum level of subordinated
loans to our subsidiary Supplies Distributors; and we have guaranteed certain indebtedness and
obligations of our subsidiaries Supplies Distributors and eCOST.
As
of March 31, 2006, our total credit facilities outstanding, including debt, capital
lease obligations and our vendor accounts payable related to financing of IBM product inventory,
was approximately $86.0 million. Certain of the credit facilities have maturity dates in calendar
year 2007 or after, but are classified as current liabilities in our consolidated financial
statements. We cannot provide assurance that our credit facilities will be renewed by the lending
parties. Additionally, these credit facilities include both financial and non-financial covenants,
many of which also include cross default provisions applicable to other agreements. These covenants
also restrict our ability to transfer funds among our various subsidiaries, which may adversely
affect the ability of our subsidiaries to operate their businesses or comply with their respective
loan covenants. We cannot provide assurance that we will be able to maintain compliance with these
covenants. Any non-renewal or any default under any of our credit facilities would have a material
adverse impact upon our business and financial condition. In addition
we have provided $6.5 million
of subordinated indebtedness to Supplies Distributors, the minimum level
required under certain credit facilities as of March 31, 2006. The maximum level of this
subordinated indebtedness to Supplies Distributors that may be provided without approval from our
lenders is $8.0 million. The restrictions on increasing this amount without lender approval may
limit our ability to comply with certain loan covenants or further grow and develop Supplies
Distributors business. We have guaranteed most of the indebtedness of Supplies Distributors.
Furthermore, we are obligated to repay any over-advance made to Supplies Distributors by its
lenders to the extent Supplies Distributors is unable to
do so. We have also guaranteed eCOSTs $15 million credit line with Wachovia, as well as
certain of its vendor trade payables. We currently expect that it may be necessary to provide
additional guarantees of certain eCOST vendor trade payables in the future.
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We face competition from many sources that could adversely affect our business.
Many companies offer, on an individual basis, one or more of the same services we do, and we
face competition from many different sources depending upon the type and range of services
requested by a potential client. Our competitors include vertical outsourcers, which are companies
that offer a single function, such as call centers, public warehouses or credit card processors. We
compete against transportation logistics providers who offer product management functions as an
ancillary service to their primary transportation services. We also compete against other business
process outsourcing providers, who perform many similar services as us. Many of these companies
have greater capabilities than we do for the single or multiple functions they provide. In many
instances, our competition is the in-house operations of its potential clients themselves. The
in-house operations of potential clients often believe that they can perform the same services we
do, while others are reluctant to outsource business functions that involve direct customer
contact. We cannot be certain that we will be able to compete successfully against these or other
competitors in the future.
Our sales and implementation cycles are highly variable and our ability to finalize pending
contracts may cause our operating results to vary widely.
The sales cycle for our services is variable, typically ranging between several months to up
to a year from initial contact with the potential client to the signing of a contract. Occasionally
the sales cycle requires substantially more time. Delays in signing and executing client contracts
may affect our revenue and cause our operating results to vary widely. We believe that a potential
clients decision to purchase our services is discretionary, involves a significant commitment of
the clients resources and is influenced by intense internal and external pricing and operating
comparisons. To successfully sell our services, we generally must educate our potential clients
regarding the use and benefit of our services, which can require significant time and resources.
Consequently, the period between initial contact and the purchase of our services is often long and
subject to delays associated with the lengthy approval and competitive evaluation processes that
typically accompany significant operational decisions. Additionally, the time required to finalize
pending contracts and to implement our systems and integrate a new client can range from several
weeks to many months. Delays in signing and integrating new clients may affect our revenue and
cause our operating results to vary widely.
We are dependent on our key personnel, and we need to hire and retain skilled personnel to sustain
our business.
Our performance is highly dependent on the continued services of our executive officers and
other key personnel, the loss of any of whom could materially adversely affect our business. In
addition, we need to attract and retain other highly-skilled, technical and managerial personnel
for whom there is intense competition. We cannot assure you that we will be able to attract and
retain the personnel necessary for the continuing growth of our business. Our inability to attract
and retain qualified technical and managerial personnel would materially adversely affect our
ability to maintain and grow our business.
We are subject to risks associated with our international operations.
We currently operate a 150,000 square foot distribution center in Liege, Belgium and a 13,000
square foot distribution center in Richmond Hill, Canada, near Toronto, both of which currently
have excess capacity. We cannot assure you that we will be successful in expanding in these or any
additional international markets. In addition to the uncertainty regarding our ability to generate
revenue from foreign operations and expand our international presence, there are risks inherent in
doing business internationally, including:
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changing regulatory requirements; |
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legal uncertainty regarding foreign laws, tariffs and other trade barriers; |
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political instability; |
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potentially adverse tax consequences; |
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foreign currency fluctuations; and |
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cultural differences. |
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Any one or more of these factors could materially adversely affect our business in a number of
ways, such as increased costs, operational difficulties and reductions in revenue.
We are uncertain about our need for and the availability of additional funds.
Our future capital needs are difficult to predict. We may require additional capital to take
advantage of unanticipated opportunities, including strategic alliances and acquisitions and to
fund capital expenditures, or to respond to changing business conditions and unanticipated
competitive pressures. In addition, eCOST is now a wholly-owned subsidiary and is expected to need
additional financing as well. We may also require additional funds to finance operating losses,
including continuing operating losses currently anticipated to be incurred by eCOST. Should these
circumstances arise, our existing cash balance and credit facilities may be insufficient and we may
need to raise additional funds either by borrowing money or issuing additional equity. We cannot
assure you that such resources will be adequate or available for all of our future financing needs.
Our inability to finance our growth, either internally or externally, may limit our growth
potential and our ability to execute our business strategy. If we are successful in completing an
additional equity financing, this could result in further dilution to our stockholders or reduce
the market value of our common stock.
We are subject to disputes with clients, customers and other authorities which, if not resolved in
our favor, may materially adversely affect our results of operations.
In the ordinary course of our business, one or more of our clients or customers may dispute
our invoices for services rendered or other charges. As of
March 31, 2006, an aggregate of
approximately $1.1 million of our invoices were in dispute. Although we believe it will resolve
these disputes in our favor, the failure to do so may have a material adverse effect on our results
of operations. We also receive municipal tax abatements in certain locations. During 2004 we
received notice from a municipality that we did not satisfy certain criteria necessary to maintain
the abatements. We plan to dispute the notice, but if the dispute is not resolved favorably,
additional taxes of approximately $0.4 million to $0.5 million could be assessed against us for
each of the calendar years 2005 and 2004.
We may engage in future strategic alliances or acquisitions that could dilute our existing
stockholders, cause us to incur significant expenses or harm our business.
We may review strategic alliance or acquisition opportunities that would complement our
current business or enhance our technological capabilities. Integrating any newly acquired
businesses, technologies or services may be expensive and time-consuming. To finance any
acquisitions, it may be necessary for us to raise additional funds through borrowing money or
completing public or private financings. Additional funds may not be available on terms that are
favorable to us and, in the case of equity financings, may result in dilution to our stockholders.
We may not be able to operate any acquired businesses profitably or otherwise implement our growth
strategy successfully. If we are unable to integrate any newly acquired entities or technologies
effectively, our operating results could suffer. Future acquisitions could also result in
incremental expenses and the incurrence of debt and contingent liabilities, any of which could harm
our operating results.
Our business could be adversely affected by a systems or equipment failure, whether that of us or
our clients.
Our operations are dependent upon our ability to protect our distribution facilities, customer
service centers, computer and telecommunications equipment and software systems against damage and
failures. Damage or failures could result from fire, power loss, equipment malfunctions, system
failures, natural disasters and other causes. If our business is interrupted either from accidents
or the intentional acts of others, our business could be materially adversely affected. In
addition, in the event of widespread damage or failures at our facilities, our short-term disaster
recovery and contingency plans and insurance coverage may not be sufficient.
Our clients businesses may also be harmed from any system or equipment failures we
experiences. In that event, our relationship with these clients may be adversely affected, we may
lose these clients, our ability to attract new clients may be adversely affected and we could be
exposed to liability.
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Interruptions could also result from the intentional acts of others, like hackers. If our
systems are penetrated by computer hackers, or if computer viruses infect our systems, our
computers could fail or proprietary information could be misappropriated.
If our clients suffer similar interruptions in their operations, for any of the reasons
discussed above or for others, our business could also be adversely affected. Many of our clients
computer systems interface with our systems. If our clients suffer interruptions in their systems,
the link to our systems could be severed and sales of the clients products could be slowed or
stopped.
A breach of our e-commerce security measures could reduce demand for its services. Credit card
fraud and other fraud could adversely affect our business.
A requirement of the continued growth of e-commerce is the secure transmission of confidential
information over public networks. A party who is able to circumvent our security measures could
misappropriate proprietary information or interrupt our operations. Any compromise or elimination
of our security could reduce demand for our services.
We may be required to expend significant capital and other resources to protect against
security breaches or to address any problem they may cause. Because our activities involve the
storage and transmission of proprietary information, such as credit card numbers, security breaches
could damage its reputation, cause us to lose clients, impact our ability to attract new clients
and we could be exposed to litigation and possible liability. Our security measures may not prevent
security breaches, and failure to prevent security breaches may disrupt our operations. In certain
circumstances, we do not carry insurance against the risk of credit card fraud and other fraud, so
the failure to adequately control fraudulent transactions on our clients behalf could increase our
expenses. To date we have not suffered material losses due to fraud.
We may be a party to litigation involving our e-commerce intellectual property rights.
In recent years, there has been significant litigation in the United States involving patent
and other intellectual property rights. We may be a party to intellectual property litigation in
the future to protect our trade secrets or know-how. United States patent applications are
confidential until a patent is issued and most technologies are developed in secret. Accordingly,
we are not, and cannot be, aware of all patents or other intellectual property rights of which our
services may pose a risk of infringement. Others asserting rights against us could force us to
defend ourself or our customers against alleged infringement of intellectual property rights. We
could incur substantial costs to prosecute or defend any such litigation.
If we fail to maintain an effective system of internal controls, we may not be able to accurately
report our financial results or prevent fraud. As a result, current and potential stockholders
could lose confidence in our financial reporting, which could harm our business, and the trading
price of our common stock.
We have begun a process to document and evaluate our internal controls over financial
reporting to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires
annual management assessments of the effectiveness of our internal controls over financial
reporting and a report by our independent auditors addressing these assessments. Based on the
current requirements, and our current public float, we are not required to comply with Section 404.
However, in this regard, our management has been dedicating internal resources, has engaged outside
consultants and has begun to develop a detailed work plan to (i) assess and document the adequacy
of internal controls over financial reporting, (ii) take steps to improve control processes, where
appropriate, and (iii) validate through testing that controls are functioning as documented. If we
fail to correct any issues in the design or operating effectiveness of internal controls over
financial reporting or fail to prevent fraud, current and potential stockholders could lose
confidence in our financial reporting, which could harm our business and the trading price of our
common stock.
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Risks Related to the Business Process Outsourcing Industry
If the trend toward outsourcing does not continue, our business will be adversely affected.
Our business could be materially adversely affected if the trend toward outsourcing declines
or reverses, or if corporations bring previously outsourced functions back in-house. Particularly
during general economic downturns, businesses may bring in-house previously outsourced functions to
avoid or delay layoffs. The continued threat of terrorism within the United States and abroad and
the potential for sustained military action may cause disruption to commerce and economic
conditions, both domestic and foreign, which could have a material adverse effect upon our business
and new client prospects.
Our market is subject to rapid technological change and to compete we must continually enhance our
systems to comply with evolving standards.
To remain competitive, we must continue to enhance and improve the responsiveness,
functionality and features of our services and the underlying network infrastructure. If we are
unable to adapt to changing market conditions, client requirements or emerging industry standards,
our business could be adversely affected. The internet and e-commerce environments are
characterized by rapid technological change, changes in user requirements and preferences, frequent
new product and service introductions embodying new technologies and the emergence of new industry
standards and practices that could render our technology and systems obsolete. Our success will
depend, in part, on our ability to both internally develop and license leading technologies to
enhance PFSwebs existing services and develop new services. We must continue to address the
increasingly sophisticated and varied needs of our clients and respond to technological advances
and emerging industry standards and practices on a cost-effective and timely basis. The development
of proprietary technology involves significant technical and business risks. We may fail to develop
new technologies effectively or to adapt our proprietary technology and systems to client
requirements or emerging industry standards.
Risks Related to Our Stock
Our stock price could decline if a significant number of shares become available for sale.
As of March 31, 2006, we had issued and outstanding 528,832 warrants to purchase common stock
(having an exercise price of $2.47 per share). In addition, as of
March 31, 2006, we have an
aggregate of 6,122,935 stock options outstanding to employees, directors and others with a weighted
average exercise price of $1.30 per share. The shares of common stock that may be issued upon
exercise of these warrants and options may be resold into the public market. Sales of substantial
amounts of common stock in the public market as a result of the exercise of these warrants or
options, or the perception that future sales of these shares could occur, could reduce the market
price of our common stock and make it more difficult to sell equity securities in the future.
The market price of our common stock may be volatile. You may not be able to sell your shares at or
above the price at which you purchased such shares.
The trading price of our common stock may be subject to wide fluctuations in response to
quarter-to-quarter fluctuations in operating results, announcements of material adverse events,
general conditions in our industry or the public marketplace and other events or factors. In
addition, stock markets have experienced extreme price and trading volume volatility in recent
years. This volatility has had a substantial effect on the market prices of securities of many
technology related companies for reasons frequently unrelated to the operating performance of the
specific companies. These broad market fluctuations may adversely affect the market price of our
common stock. In addition, if our operating results differ from our announced guidance or the
expectations of equity research analysts or investors, the price of our common stock could decrease
significantly.
Our certificate of incorporation, our bylaws, our shareholder rights plan and Delaware law make it
difficult for a third party to acquire us, despite the possible benefit to our stockholders.
Provisions of our certificate of incorporation, our bylaws, our shareholder rights plan and
Delaware law could make it more difficult for a third party to acquire us, even if doing so would
be beneficial to our stockholders. For example, our certificate of incorporation provides for a
classified board of directors,
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meaning that only approximately one-third of our directors may be
subject to re-election at each annual stockholder meeting. Our certificate of incorporation also
permits our Board of Directors to issue one or more series of preferred stock which may have rights
and preferences superior to those of the common stock. The ability to issue preferred stock could
have the effect of delaying or preventing a third party from acquiring us. We have also adopted a
shareholder rights plan. These provisions could discourage takeover attempts and could materially
adversely affect the price of our stock. In addition, because we are incorporated in Delaware, we
are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may
prohibit large stockholders from consummating a merger with, or acquisition of us. These provisions
may prevent a merger or acquisition that would be attractive to stockholders and could limit the
price that investors would be willing to pay in the future for our common stock.
There are limitations on the liabilities of our directors and executive officers.
Pursuant to our bylaws and under Delaware law, our directors are not liable to us or our
stockholders for monetary damages for breach of fiduciary duty, except for liability for breach of
a directors duty of loyalty, acts or omissions by a director not in good faith or which involve
intentional misconduct or a knowing violation of law, or any transaction in which a director has
derived an improper personal benefit.
Risks Related to our Merger with eCOST
We may fail to realize the anticipated synergies, cost savings, growth opportunities and other
benefits expected from the merger, which could adversely affect the value of our common stock.
We entered into a merger with eCOST with the expectation that the merger will result in
synergies, cost savings, growth opportunities and other benefits to the combined company.
However, the ability to realize these anticipated benefits of the merger will depend, in part,
on our ability to integrate the business of eCOST with our business. The integration of two
independent companies is a complex, costly and time-consuming process. It is possible that
these integration efforts will not be completed as smoothly as planned or that these efforts
will divert management attention for an extended period of time. Delays encountered in the
integration process could have a material adverse effect on the revenues, expenses, operating
results and financial condition for us. Although we expect significant benefits, such as
increased cost savings, to result from the merger, there can be no assurance that we will
realize any of these anticipated benefits.
Stockholders may receive a lower return on their investment after the merger.
Although we believe that the merger will create financial, operational and strategic benefits
for the combined company and its stockholders, these benefits may not be achieved. The combination
of our businesses, even if conducted in an efficient, effective and timely manner, may not result
in combined financial performance that is better than what our company would have achieved
independently if the merger had not occurred.
Uncertainty regarding the merger may cause clients, customers, suppliers and others to delay or
defer decisions concerning us and eCOST, which may harm the results of operations of either or both
companies.
In response to our completion of the merger, clients, customers and suppliers may delay or
defer outsourcing, purchasing or supply decisions or otherwise alter existing relationships with us
and eCOST. Prospective clients and customers could be reluctant to contract for the combined
companys services or purchase the combined companys products due to uncertainty about the
combined companys ability to efficiently provide products and services. In addition, clients,
customers, suppliers and others may also seek to terminate or change existing agreements with us or
eCOST as a result of the merger. These and other actions by clients, customers, suppliers and
others could negatively affect the business of the combined company.
Uncertainties associated with the merger may cause us and eCOST to lose key personnel.
Our current and prospective employees and eCOST employees may experience uncertainty about
their future roles with the combined company until or after strategies with regard to the combined
company are
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announced or executed. In addition, eCOST does not have employment agreements with any
of its key employees other than with its Chief Executive Officer, Adam Shaffer. These uncertainties
may adversely affect PFSwebs and eCOSTs ability to attract and retain key management, sales,
marketing and technical personnel. If a substantial number of key employees leave as a result of
the merger, or the combined company fails to attract key personnel, the combined companys business
could be adversely affected.
eCOST may be required to indemnify PC Mall for taxes arising as a result of the merger.
In connection with the consummation of the merger, eCOST received a written opinion from its
legal counsel to the effect that the merger should not cause Section 355(e) of the Internal Revenue
Code to apply to the April 2005 spin-off of eCOST from its former parent, PC Mall. Such opinion was
based on certain factual representations made by PC Mall and eCOST and certain factual and legal
assumptions made by eCOSTs legal counsel. Such opinion represented such legal counsels best
judgment regarding the application of the U.S. federal income tax laws, but is not binding on the
IRS or the courts. No assurance can be given that the IRS will not assert a contrary position or
that any such contrary position would not be sustained by a court. If the Merger does cause Section
355(e) to apply to the April 2005 spin-off of eCOST from PC Mall, eCOST must indemnify PC Mall for
any resulting tax-related liabilities.
Risks Related to eCOST
eCOST may not be able to achieve or maintain profitability.
eCOST has incurred continuing operating losses and may not be able to achieve or maintain
profitability on a quarterly or annual basis. eCOSTs ability to achieve or maintain profitability
depends on a number of factors, including its ability to:
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increase sales; |
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maintain and expand vendor relationships; |
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obtain additional and increase existing trade credit with key suppliers; |
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generate sufficient gross profit; and |
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control costs and generate the expected synergies applicable to the merger. |
eCOST needs additional financing and may not be able to obtain additional financing on favorable
terms or at all, which could increase its costs and limit its ability to grow.
eCOST needs to obtain additional financing and there can be no assurance that it will be able
to obtain additional financing on commercially reasonable terms or at all. eCOSTs failure to
obtain additional financing or its inability to obtain financing on acceptable terms could
materially adversely affect its ability to achieve profitability and grow its business.
eCOSTs operating results are difficult to predict.
eCOSTs operating results have fluctuated in the past and are likely to vary significantly in
the future based upon a number of factors, many of which it cannot control. eCOST operates in a
highly dynamic industry and future results could be subject to significant fluctuations. Revenue
and expenses in future periods may be greater or less than revenue and expenses in the immediately
preceding period or in the comparable period of the prior year. Therefore, period-to-period
comparisons of eCOST operating results are not necessarily a good indication of its future
performance. Some of the factors that could cause eCOSTs operating results to fluctuate include:
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price competition that results in lower sales volumes, lower profit margins, or net
losses; |
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fluctuations in coupon redemption rates; |
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the amount, timing and impact of advertising and marketing costs; |
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eCOSTs ability to successfully implement new technologies or software systems; |
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eCOSTs ability to obtain sufficient financing; |
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changes in the number of visitors to the eCOST website or eCOSTs inability to convert
those visitors into customers; |
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technical difficulties, including system or Internet failures; |
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fluctuations in the demand for eCOST products or overstocking or understocking of
products; |
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fluctuations in revenues and shipping costs, particularly during the holiday season; |
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economic conditions generally or economic conditions specific to the Internet, online
commerce, the retail industry or the mail order industry; |
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changes in the mix of products that eCOST sells; and |
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fluctuations in levels of inventory theft, damage or obsolescence. |
The failure of eCOST to improve its financial and operating performance may result in a failure of
eCOST to comply with its financial covenants
In the event eCOST is unable to increase its revenue and/or gross profit from its present
levels and does not achieve the operating efficiencies targeted to occur upon completion of its
integration into the Companys infrastructure, it may fail to comply with one or more of the
financial covenants required under its working capital line of credit. In such event, absent a
waiver, the working capital lender would be entitled to accelerate all amounts outstanding
thereunder and exercise all other rights and remedies, including sale of collateral and payment
under the Company parent guaranty
If eCOST fails to accurately predict its inventory risk, its margins may decline as a result of
write-downs of its inventory due to lower prices obtained from older or obsolete products.
Some of the products eCOST sells on its website are characterized by rapid technological
change, obsolescence and price erosion (for example, computer hardware, software and consumer
electronics), and because eCOST may sometimes stock large quantities of particular types of
inventory, inventory reserves may be required or may subsequently prove insufficient, and
additional inventory write-downs may be required.
Increased product returns or a failure to accurately predict product returns could decrease eCOSTs
revenues and impact profitability.
eCOST makes allowances for product returns in its financial statements based on historical
return rates. eCOST is responsible for returns of certain products ordered through its website from
its distribution center as well as products that are shipped to its customers directly from its
vendors. If eCOSTs actual product returns significantly exceed its allowances for returns,
especially as eCOST expands into new product categories, its revenues and profitability could
decrease. In addition, because eCOSTs allowances are based on historical return rates, the
introduction of new merchandise categories, new products, changes in its product mix, or other
factors may cause actual returns to exceed return allowances, perhaps significantly. In addition,
any policies intended to reduce the number of product returns may result in customer
dissatisfaction and fewer repeat customers.
eCOSTs ability to offer a broad selection of products at competitive prices is dependent on its
ability to maintain existing and build new relationships with manufacturers and vendors. eCOST does
not have long-term agreements with its manufacturers or vendors and some of its manufacturers and
vendors compete directly with eCOST.
eCOST purchases products for resale both directly from manufacturers and indirectly through
distributors and other sources, all of whom eCOST considers its vendors. During 2005 and 2004,
eCOST offered products on its website from over 1,000 third-party manufacturers. eCOST does not
have any long-term agreements with any of these vendors. Any agreements with vendors governing
eCOSTs purchase of products are generally terminable by either party upon 30 days notice or less.
In general, eCOST agrees to offer products on its website and the vendors agree to provide eCOST
with information about their products and honor eCOST customer service policies. If eCOST does not
maintain relationships with vendors on acceptable terms, including favorable product pricing and
vendor consideration, it may not be able to offer a broad selection of products or continue to
offer products at competitive prices, and customers may choose not to shop at the eCOST website. In
addition, some vendors may decide not to offer particular products for sale on the Internet, and
others may avoid offering their new products to retailers such as eCOST who offer a mix of
close-out and refurbished products in addition to new products. From time to time, vendors may
terminate eCOSTs right to sell some or all of their products, change the applicable terms and
conditions of sale or reduce or discontinue the incentives or vendor consideration that they offer.
Any such termination or the implementation of such changes could have a
negative impact on eCOSTs operating results. Additionally, some products are subject to
manufacturer or distributor allocation, which limits the number of units of those products that are
available to eCOST and other resellers.
eCOSTs revenue is dependent in part on sales of HP and HP-related products, which represented
31% of eCOSTs net sales for the three months ended
March 31, 2006.
eCOST is dependent on the success of its advertising and marketing efforts, which are costly and
may not achieve desired results, and on its ability to attract customers on cost-effective terms.
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eCOSTs revenues depend on its ability to advertise and market its products effectively.
Increases in the costs of advertising and marketing, including costs of online advertising, paper
and postage costs, costs and fees of third-party service providers and the costs of complying with
applicable regulations, may limit eCOSTs ability to advertise and market its business without
impacting its profitability. If eCOSTs advertising and marketing efforts prove ineffective or do
not produce a sufficient level of sales to cover their costs, or if eCOST decreases its advertising
or marketing activities due to increased costs, restrictions enacted by regulatory agencies or for
any other reason, eCOSTs revenues and profit margins may decrease. eCOSTs success depends on its
ability to attract customers on cost-effective terms. eCOST has relationships with online services,
search engines, shopping engines, directories and other websites and e-commerce businesses through
which it provide advertising banners and other links that direct customers to the eCOST website.
eCOST expects to rely on these relationships as significant sources of traffic to the eCOST website
and to generate new customers. If eCOST is unable to develop or maintain these relationships on
acceptable terms, its ability to attract new customers on a cost-effective basis could be harmed.
In addition, certain of eCOSTs existing online marketing agreements require it to pay fixed
placement fees or fees for directing visits to the eCOST website, neither of which may convert into
sales.
Because eCOST experiences seasonal fluctuations in its revenues, its quarterly results may
fluctuate.
eCOSTs business is moderately seasonal, reflecting the general pattern of peak sales for the
retail industry during the holiday shopping season. Typically, a larger portion of its revenues
occur during the first and fourth fiscal quarters. eCOST believes that its historical revenue
growth makes it difficult to predict the effect of seasonality on its future revenues and results
of operations. In anticipation of increased sales activity during the first and fourth quarter,
eCOST incurs additional expenses, including higher inventory and staffing costs. If sales for the
first and fourth quarter do not meet anticipated levels, then increased expenses may not be offset
which could decrease eCOSTs profitability. If eCOST were to experience lower than expected sales
during its first or fourth quarter, for any reason, it would decrease eCOSTs profitability.
eCOSTs business may be harmed by fraudulent activities on its website.
eCOST has received in the past, and anticipates that it will receive in the future,
communications from customers due to purported fraudulent activities on the eCOST website. Negative
publicity generated as a result of fraudulent conduct by third parties could damage eCOSTs
reputation and diminish the value of its brand name. Fraudulent activities on eCOSTs website could
also subject it to losses. eCOST expects to continue to receive requests from customers for
reimbursement due to purportedly fraudulent activities or threats of legal action if no
reimbursement is made.
eCOSTs business could be subject to political, economic and other risks associated with the
Philippines.
To reduce costs, eCOST is evaluating shifting certain of its operations to the Philippines,
which would subject eCOST to political, economic and other uncertainties, including expropriation,
nationalization, renegotiation, or nullification of existing contracts, currency exchange
restrictions and international monetary fluctuations. Furthermore, the Philippines has experienced
violence related to guerrilla activity.
Delivery of eCOSTs products could be delayed or disrupted by factors beyond its control, and it
could lose customers as a result.
eCOST relies upon third party carriers for timely delivery of its product shipments. As a
result, eCOST is subject to carrier disruptions and increased costs due to factors that are beyond
its control, including employee strikes, inclement weather and increased fuel costs. Any failure to
deliver products to customers in a timely and accurate manner may damage eCOSTs reputation and
brand and could cause it to lose customers. eCOST does not have a written long-term agreement with
any of these third party carriers, and it cannot be sure that these relationships will continue on
terms favorable to eCOST, if at all. If eCOSTs relationship with any of these third party carriers
is terminated or impaired or if any of these third parties is unable to deliver products, eCOST
would be required to use alternative carriers for the shipment of products to customers. eCOST may
be unable to engage alternative carriers on a timely basis or on favorable terms, if at all.
Potential adverse consequences include:
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reduced visibility of order status and package tracking; |
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delays in order processing and product delivery; |
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increased cost of delivery, resulting in reduced margins; and |
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reduced shipment quality, which may result in damaged products and customer
dissatisfaction. |
If eCOST does not successfully expand its website and processing systems to accommodate higher
levels of traffic and changing customer demands, it could lose customers and its revenues could
decline.
To remain competitive, eCOST must continue to enhance and improve the functionality and
features of its website. If eCOST fails to upgrade its website in a timely manner to accommodate
higher volumes of traffic, its website performance could suffer and eCOST may lose customers. The
Internet and the e-commerce industry are subject to rapid technological change. If competitors
introduce new features and website enhancements embodying new technologies, or if new industry
standards and practices emerge, eCOSTs existing website and systems may become obsolete or
unattractive. Developing the eCOST website and other systems entails significant technical and
business risks. eCOST may face material delays in introducing new services, products and
enhancements. If this happens, customers may forgo the use of eCOSTs website and use those of its
competitors. eCOST may use new technologies ineffectively, or it may fail to adapt its website,
transaction processing systems and computer network to meet customer requirements or emerging
industry standards.
If eCOST fails to successfully expand its merchandise categories and product offerings in a
cost-effective and timely manner, its reputation and the value of its new and existing brands could
be harmed, customer demand for its products could decline and its profit margins could decrease.
eCOST has generated the substantial majority of its revenues during the past five years from
the sale of computer hardware, software and accessories and consumer electronics products. In the
past 18 months eCOST launched several new product categories, including digital imaging, watches
and jewelry, housewares, DVD movies, video games, travel, bed and bath, apparel and accessories,
licensed sports gear and cellular/wireless. While its merchandising platform has been incorporated
into and tested in the online computer and consumer electronics retail markets, eCOST cannot
predict with certainty whether it can be successfully applied to other product categories. In
addition, expansion of its business strategy into new product categories may require eCOST to incur
significant marketing expenses, develop relationships with new vendors and comply with new
regulations. eCOST may lack the necessary expertise in a new product category to realize the
expected benefits of that new category. These requirements could strain managerial, financial and
operational resources. Additional challenges that may affect eCOSTs ability to expand into new
product categories include its ability to:
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establish or increase awareness of new brands and product categories; |
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acquire, attract and retain customers at a reasonable cost; |
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achieve and maintain a critical mass of customers and orders across all product
categories; |
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attract a sufficient number of new customers to whom new product categories are
targeted; |
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successfully market new product offerings to existing customers; |
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maintain or improve gross margins and fulfillment costs; |
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attract and retain vendors to provide an expanded line of products to customers on
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manage inventory in new product categories. |
eCOST cannot be certain that it will be able to successfully address any or all of these
challenges in a manner that will enable it to expand its business into new product categories in a
cost-effective or timely manner. If eCOSTs new categories of products or services are not received
favorably, or if its suppliers fail to meet eCOSTs customers expectations, eCOSTs results of
operations would suffer and its reputation and the value of the applicable new brand and other
brands could be damaged. The lack of market acceptance of eCOST new product categories or inability
to generate satisfactory revenues from any expanded product categories to offset their cost could
harm eCOSTs business.
If eCOST is unable to provide satisfactory customer service, it could lose customers.
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eCOSTs ability to provide satisfactory levels of customer service depends, to a large degree,
on the efficient and uninterrupted operation of its customer service operations. Any material
disruption or slowdown in its order processing systems resulting from labor disputes, telephone or
Internet failures, power or service outages, natural disasters or other events could make it
difficult or impossible to provide adequate customer service and support.. If eCOST is unable to
continually provide adequate staffing and training for its customer service operations, its
reputation could be seriously harmed and eCOST could lose customers. Because eCOSTs success
depends in large part on keeping its customers satisfied, any failure to provide high levels of
customer service would likely impair its reputation and decrease its revenues.
eCOST may not be able to compete successfully against existing or future competitors.
The market for online sales of the products eCOST offers is intensely competitive and rapidly
evolving. eCOST principally competes with a variety of online retailers, specialty retailers and
other businesses that offer products similar to or the same as eCOSTs products. Increased
competition is likely to result in price reductions, reduced revenue and gross margins and loss of
market share. eCOST expects competition to intensify in the future because current and new
competitors can enter the market with little difficulty and can launch new websites at a relatively
low cost. In addition, some of eCOSTs product vendors have sold, and continue to intensify their
efforts to sell, their products directly to customers. eCOST currently or potentially competes with
a variety of businesses, including:
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other multi-category online retailers such as Amazon.com and Buy.com; |
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online discount retailers of computer and consumer electronics merchandise such as
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liquidation e-tailers such as Overstock.com and SmartBargains.com; |
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consumer electronics and office supply superstores such as Best Buy, Circuit City,
CompUSA, Office Depot, OfficeMax and Staples; and |
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manufacturers such as Apple, Dell, Gateway, Hewlett-Packard and IBM, that sell directly
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Many of the current and potential competitors described above have longer operating histories,
larger customer bases, greater brand recognition and significantly greater financial, marketing and
other resources than eCOST. In addition, online retailers may be acquired by, receive investments
from or enter into other commercial relationships with larger, well-established and well-financed
companies. Some of eCOSTs competitors may be able to secure products from manufacturers or vendors
on more favorable terms, devote greater resources to marketing and promotional campaigns, adopt
more aggressive pricing or inventory availability policies and devote substantially more resources
to website and systems development than eCOST is able to.
If the protection of eCOSTs trademarks and proprietary rights is inadequate, its brand and
reputation could be impaired and it could lose customers.
eCOST has six trademarks that it considers to be material to the successful operation of
business: eCOST(R), eCOST.com(R), eCOST.com Bargain Countdown, eCOST.com Your Online Discount
Superstore!, Bargain Countdown and Bargain Countdown Platinum Club. eCOST
currently uses all of these marks in connection with telephone, mail order, catalog and online
retail services. eCOST also has several additional pending trademark applications. eCOST relies on
trademark and copyright law, trade secret protection and confidentiality agreements with its
employees, consultants, suppliers and others to protect its proprietary rights. eCOSTs
applications may not be granted, and eCOST may not be able to secure significant protection for its
service marks or trademarks. eCOSTs competitors or others could adopt trademarks or service marks
similar to its marks, or try to prevent eCOST from using its marks, thereby impeding its ability to
build brand identity and possibly leading to customer confusion. Any claim by another party against
eCOST for customer confusion caused by use of eCOSTs trademarks or service marks, or eCOSTs
failure to obtain registrations for its marks, could negatively affect its competitive position and
could cause it to lose customers.
eCOST has also filed an application with the U.S. Patent and Trademark Office for patent
protection for its proprietary Bargain Countdown technology. eCOST may not be granted a patent
for this technology and may not be able to enforce its patent rights if its competitors or others
use infringing
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technology. If this occurs, eCOSTs competitive position, revenues and profitability
could be negatively affected.
Effective trademark, service mark, patent, copyright and trade secret protection may not be
available in every country in which eCOST will sell its products and offer its services. In
addition, the relationship between regulations governing domain names and laws protecting
trademarks and similar proprietary rights is unclear. Therefore, eCOST may be unable to prevent
third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease
the value of its trademarks and other proprietary rights. If eCOST is unable to protect or preserve
the value of its trademarks, copyrights, trade secrets or other proprietary rights for any reason,
eCOSTs competitive position could be negatively affected and it could lose customers.
eCOST also relies on technologies that it licenses from related and third parties. These
licenses may not continue to be available to eCOST on commercially reasonable terms, or at all, in
the future. As a result, eCOST may be required to develop or obtain substitute technology of lower
quality or at greater cost, which could negatively affect its competitive position, cause it to
lose customers and decrease its profitability.
If third parties claim eCOST is infringing their intellectual property rights, eCOST could incur
significant litigation costs, be required to pay damages, or change its business or incur licensing
expenses.
Third parties have asserted, and may in the future assert, that eCOSTs business or the
technologies it uses infringe on their intellectual property rights. As a result, eCOST may be
subject to intellectual property legal proceedings and claims in the ordinary course of business.
eCOST cannot predict whether third parties will assert additional claims of infringement in the
future or whether any future claims will prevent it from offering popular products or services.
On July 12, 2004, eCOST received correspondence from MercExchange LLC alleging infringement of
its U.S. patents relating to e-commerce and offering to license its patent portfolio to eCOST. On
July 15, 2004, eCOST received a follow-up letter from MercExchange specifying which of eCOSTs
technologies it believes infringe certain of its patents, alone or in combination with technologies
provided by third parties. Some of those patents are currently being litigated by third parties,
and eCOST is not involved in those proceedings. In addition, three of the four patents identified
by MercExchange are under reexamination at the U.S. Patent and Trademark Office, which may or may
not result in the modification of the claims. In the July 15(th) letter, MercExchange also advised
that it has a number of applications pending for additional patents. MercExchange has filed
lawsuits alleging infringement of some or all of its patents against third parties, resulting in
settlements or verdicts in favor of MercExchange. At least one such verdict was appealed to the
United States Court of Appeals for the Federal Circuit and was affirmed in part. The defendant in
that case filed a petition for certiorari before the United States Supreme Court, which was granted
in November 2005. A decision is expected before June 2006.
If eCOST is forced to defend against these or any other third-party infringement claims,
whether they are with or without merit or are determined in its favor, eCOST could face expensive
and time-consuming litigation, which could result in the imposition of a preliminary injunction
preventing it from continuing to operate its business as currently conducted throughout the
duration of the litigation or distract eCOSTs technical and management personnel. If eCOST is
found to infringe, it may be required to pay monetary damages, which could include treble damages
and attorneys fees for any infringement that is found to be willful, and either be enjoined or
required to pay ongoing royalties with respect to any technologies found to infringe. Further, as a
result of infringement claims either against eCOST or against those who license technology to
eCOST, eCOST may be required, or deem it advisable, to develop non-infringing technology, which
could be costly and time consuming, or enter into costly royalty or licensing agreements. Such
royalty or licensing agreements, if required, may be unavailable on terms that are acceptable, or
at all. eCOST expects that participants in its market will be increasingly subject to infringement
claims as the number of competitors in the industry grows. If a third party successfully asserts an
infringement claim against eCOST and it is enjoined or required to pay monetary damages or
royalties or eCOST is unable to develop suitable non-infringing alternatives or license the
infringed or similar technology on reasonable terms on a timely basis, eCOSTs business, results of
operations and financial condition could be materially harmed.
45
eCOST may be liable for misappropriation of its customers personal information.
Data security laws are becoming more stringent in the United States and abroad. Third parties
are engaging in increased cyber attacks against companies doing business on the Internet and
individuals are increasingly subjected to identity and credit card theft on the Internet. If third
parties or unauthorized employees are able to penetrate eCOSTs network security or otherwise
misappropriate its customers personal information or credit card information, or if eCOST gives
third parties or its employees improper access to customers personal information or credit card
information, eCOST could be subject to liability. This liability could include claims for
unauthorized purchases with credit card information, impersonation or other similar fraud claims.
This liability could also include claims for other misuses of personal information, including
unauthorized marketing purposes. Liability for misappropriation of this information could decrease
eCOSTs profitability. In such circumstances, eCOST also could be liable for failing to provide
timely notice of a data security breach affecting certain types of personal information. In
addition, the Federal Trade Commission and state agencies have brought numerous enforcement actions
against Internet companies for alleged deficiencies in those companies privacy and data security
practices, and they may continue to bring such actions. eCOST could incur additional expenses if
new regulations regarding the collection, use or storage of personal information are introduced or
if government agencies investigate our privacy or security practices.
eCOST relies on encryption and authentication technology licensed from third parties to
provide the security and authentication necessary to effect secure transmission of sensitive
customer information such as customer credit card numbers. Advances in computer capabilities, new
discoveries in the field of cryptography or other events or developments may result in a compromise
or breach of the algorithms that eCOST uses to protect customer transaction data. If any such
compromise of security were to occur, it could subject eCOST to liability, damage its reputation
and diminish the value of its brand-name. A party who is able to circumvent the security measures
could misappropriate proprietary information or cause interruptions in operations. eCOST may be
required to expend significant capital and other resources to protect against such security
breaches or to alleviate problems caused by such breaches. eCOSTs security measures are designed
to prevent security breaches, but its failure to prevent such security breaches could subject eCOST
to liability, damage its reputation and diminish the value of its brand-name.
Moreover, for the convenience of its customers, eCOST provides non-secured channels for
customers to communicate. Despite the increased security risks, customers may use such channels to
send personal information and other sensitive data. In addition, phishing incidents are on the
rise. Phishing involves an online companys customers being tricked into providing their credit
card numbers or account information to someone pretending to be the online companys
representative. Such incidents have recently given rise to litigation against online companies for
failing to take sufficient steps to police against such activities by third parties, and may
discourage customers from using online services.
eCOST may be subject to product liability claims that could be costly and time consuming.
eCOST sells products manufactured and distributed by third parties, some of which may be
defective. If any product that eCOST sells were to cause physical injury or damage to property, the
injured party or parties could bring claims against eCOST as the retailer of the product. eCOSTs
insurance coverage may not be adequate to cover every claim that could be asserted. If a successful
claim were brought against eCOST in excess of its insurance coverage, it could expose it to
significant liability. Even unsuccessful claims could result in the expenditure of funds and
management time and could decrease profitability.
Risks Related to eCOSTs Industry
eCOSTs success is tied to the continued use of the Internet and the adequacy of the Internet
infrastructure.
eCOSTs future revenues and profits, if any, substantially depend upon the continued
widespread use of the Internet as an effective medium of business and communication. If use of the
Internet declines or the Internet infrastructure becomes an ineffective medium for business
transactions and communication, eCOST may not be able to effectively implement its growth strategy
and it could lose customers.
46
Widespread use of the Internet could decline as a result of
disruptions, computer viruses or other damage to Internet servers or users computers.
Additionally, if the Internets infrastructure does not expand fast enough to meet increasing
levels of use, it may become a less effective medium of business transactions and communications.
The security risks of e-commerce may discourage customers from purchasing goods over the Internet.
In order for the e-commerce market to develop successfully, eCOST and other market
participants must be able to transmit confidential information securely over public networks. Third
parties may have the technology or know-how to breach the security of customer transaction data.
Any breach could cause customers to lose confidence in the security of eCOSTs website and choose
not to purchase from the website. If someone is able to circumvent our security measures, he or she
could destroy or steal valuable information or disrupt operations. Concerns about the security and
privacy of transactions over the Internet could inhibit the growth of the Internet and e-commerce.
Security measures may not effectively prohibit others from obtaining improper access to
information. Any security breach could expose eCOST to risks of loss, litigation and liability and
could seriously disrupt its operations.
Credit card fraud could decrease eCOSTs revenues and profitability.
eCOST does not currently carry insurance against the risk of credit card fraud, so the failure
to adequately control fraudulent credit card transactions could reduce its revenues and gross
margin. eCOST may in the future suffer losses as a result of orders placed with fraudulent credit
card data even though the associated financial institution approved payment of the orders. Under
current credit card practices, eCOST may be liable for fraudulent credit card transactions because
it did not obtain a cardholders signature. If eCOST is unable to detect or control credit card
fraud, or if credit card companies require more burdensome terms or refuse to accept credit card
charges, eCOSTs revenues and profitability could decrease.
Additional sales and use taxes could be imposed on past or future sales of eCOSTs products or
other products sold on eCOSTs website, which could adversely affect eCOSTs revenues and
profitability.
In accordance with current industry practice and eCOSTs interpretation of applicable law,
eCOST collects and remits sales taxes only with respect to physical shipments of goods into states
where eCOST has a physical presence. If any state or other jurisdiction successfully challenges
this practice and imposes sales and use taxes on orders on which eCOST does not collect and remit
sales taxes, eCOST could be exposed to substantial tax liabilities for past sales and could suffer
decreased sales in that state or jurisdiction in the future. In addition, a number of states, as
well as the U.S. Congress, have been considering various legislative initiatives that could result
in the imposition of additional sales and use taxes on Internet sales. If any of these initiatives
are enacted, eCOST could be required to collect sales and
use taxes in states where eCOST does not have a physical presence. Future changes in the
operation of eCOSTs business also could result in the imposition of additional sales and use tax
obligations. The imposition of additional sales and use taxes on past or future sales could
adversely affect eCOSTs revenues and profitability.
Existing or future government regulation could expose eCOST to liabilities and costly changes in
its business operations, and could reduce customer demand for its products.
eCOST is subject to general business regulations and laws, as well as regulations and laws
specifically governing the Internet and e-commerce. Such existing and future laws and regulations
may impede the growth of the Internet or other online services. These regulations and laws may
cover taxation, user privacy, marketing and promotional practices, database protection, pricing,
content, copyrights, distribution, electronic contracts, email and other communications, consumer
protection, product safety, the provision of online payment services, intellectual property rights,
unauthorized access (including the Computer Fraud and Abuse Act), and the characteristics and
quality of products and services. It is unclear how existing laws governing issues such as property
ownership, sales and other taxes, libel, trespass, data mining and collection, and personal privacy
apply to the Internet and e-commerce. Unfavorable resolution of these issues may expose eCOST to
liabilities and costly changes in its business operations, and could reduce customer demand. The
growth and demand for online commerce has and may continue to result in more
47
stringent consumer
protection laws that impose additional compliance burdens on online companies. For example,
California law requires notice to California customers if certain personal information about them
is obtained by an unauthorized person, such as a computer hacker. These consumer protection laws
could result in substantial compliance costs and could decrease profitability.
Laws or regulations relating to privacy and data protection may adversely affect the growth of
eCOSTs Internet business or its marketing efforts.
eCOST is subject to increasing regulation relating to privacy and the use of personal user
information. For example, eCOST is subject to various telemarketing and anti-spam laws that
regulate the manner in which it may solicit future suppliers and customers. Such regulations, along
with increased governmental or private enforcement, may increase the cost of growing the business.
In addition, several jurisdictions, including California, have adopted legislation limiting the
uses of personal user information gathered online or require online services to establish privacy
policies. Pursuant to the Childrens Online Privacy Protection Act, the Federal Trade Commission
has adopted regulations regarding the collection and use of personal identifying information
obtained from children under 13 years of age. Increasingly, federal, state and foreign laws and
regulations extend online privacy protection to adults. Moreover, in jurisdictions where eCOST does
business, there is a trend toward requiring companies to establish procedures to notify users of
privacy and security policies, to obtain prior consent from users for the collection, use and
disclosure of personal information (even disclosure to affiliates), and to provide users with the
ability to access, correct and delete personal information stored by companies. These data
protection regulations and enforcement efforts may restrict eCOSTs ability to collect, use or
transfer demographic and personal information from users, which could be costly or harm marketing
efforts. Further, any violation of privacy or data protection laws and regulations may subject
eCOST to fines, penalties and damages, as well as harm to its reputation, which could decrease its
revenues and profitability.
ITEM 2. Changes in Securities and Use of Proceeds
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
A special meeting of stockholders of PFSweb was held on January 24, 2006. At the meeting, the
following matters were voted upon as indicated:
1. Approve the issuance of common stock in connection with the eCOST merger:
11,591,019 For; 459,820 Against; 55,595 Abstentions
2. Approve the amendment to the PFSweb Certificate of Incorporation to increase the number of
authorized shares:
11,403,755 For; 607,953 Against; 94,726 Abstentions
48
3. Approve the proposal to grant discretionary authority to adjourn the meeting:
11,230,669 For; 781,135 Against; 94,630 Abstentions
ITEM 5. Other Information
None.
ITEM 6. Exhibits
|
|
|
Exhibit |
|
|
No. |
|
Description of Exhibits |
2.1 (1)
|
|
Agreement and Plan of Merger, dated as of November 29, 2005, by
and among PFSweb, Inc., Red Dog Acquisition Corp and eCOST.com,
Inc. |
|
|
|
3.1(2)
|
|
Amended and Restated Certificate of Incorporation |
|
|
|
3.2(2)
|
|
Amended and Restated Bylaws |
|
|
|
10.1*
|
|
Fourth Amended and Restated Notes Payable Subordination Agreement
by and between Priority Fulfillment Services, Inc., Supplies
Distributors, Inc. and IBM Credit Corporation. |
|
|
|
10.2*
|
|
Amendment 7 to Agreement for Inventory Financing |
|
|
|
10.3*
|
|
Amendment 6 to Amended and Restated Platinum Plan Agreement |
|
|
|
10.4*
|
|
Agreement for IBM Global Financing Platinum Plan Invoice
Discounting Schedule. |
|
|
|
10.5*
|
|
Second Amendment to Loan and Security Agreement by and between
eCOST.com, Inc. and Wachovia Capital Finance Corporation
(Western). |
|
|
|
10.6*
|
|
Amendment 4 to Loan and Security Agreement |
|
|
|
10.7*
|
|
Guaranty by PFSweb, Inc. in favor of Wachovia Capital Finance
Corporation (Western) |
|
|
|
10.8*
|
|
Second Amendment to First Amended and Restated Loan and Security
Agreement by and between Comerica Bank and Priority Fulfillment
Services, Inc. |
|
|
|
31.1*
|
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
31.2*
|
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
32.1*
|
|
Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
(1) |
|
Incorporated by reference from PFSweb, Inc. Current Report on Form 8-K filed on November 30,
2005. |
|
(2) |
|
Incorporated by reference from PFSweb, Inc. Registration Statement on Form S-1 (Commission
File No. 333-87657) and Annual Report on Form 10-K for the Fiscal Year ended December 31, 2005
filed on March 31, 2006. |
|
* |
|
Filed herewith |
49
SIGNATURES
Pursuant to the requirements 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.
Date: May 15, 2006
|
|
|
|
|
|
PFSweb, Inc.
|
|
|
By: |
/s/ Thomas J. Madden
|
|
|
|
Thomas J. Madden |
|
|
|
Chief Financial Officer,
Chief Accounting Officer,
Executive Vice President |
|
50
INDEX TO EXHIBITS
|
|
|
Exhibit |
|
|
No. |
|
Description of Exhibits |
2.1(1)
|
|
Agreement and Plan of Merger, dated as of November 29, 2005, by
and among PFSweb, Inc., Red Dog Acquisition Corp and eCOST.com,
Inc. |
|
|
|
3.1(2)
|
|
Amended and Restated Certificate of Incorporation |
|
|
|
3.2(2)
|
|
Amended and Restated Bylaws |
|
|
|
10.1*
|
|
Fourth Amended and Restated Notes Payable Subordination Agreement
by and between Priority Fulfillment Services, Inc., Supplies
Distributors, Inc. and IBM Credit Corporation. |
|
|
|
10.2*
|
|
Amendment 7 to Agreement for Inventory Financing |
|
|
|
10.3*
|
|
Amendment 6 to Amended and Restated Platinum Plan Agreement |
|
|
|
10.4*
|
|
Agreement for IBM Global Financing Platinum Plan Invoice
Discounting Schedule. |
|
|
|
10.5*
|
|
Second Amendment to Loan and Security Agreement by and between
eCOST.com, Inc. and Wachovia Capital Finance Corporation
(Western). |
|
|
|
10.6*
|
|
Amendment 4 to Loan and Security Agreement |
|
|
|
10.7*
|
|
Guaranty by PFSweb, Inc. in favor of Wachovia Capital Finance
Corporation (Western) |
|
|
|
10.8*
|
|
Second Amendment to First Amended and Restated Loan and Security
Agreement by and between Comerica Bank and Priority Fulfillment
Services, Inc. |
|
|
|
31.1*
|
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
31.2*
|
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
32.1*
|
|
Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
(1) |
|
Incorporated by reference from PFSweb, Inc. Current Report on Form 8-K filed on November 30,
2005. |
|
(2) |
|
Incorporated by reference from PFSweb, Inc. Registration Statement on Form S-1 (Commission
File No. 333-87657) and Annual Report on Form 10-K for the Fiscal Year ended December 31, 2005
filed on March 31, 2006. |
|
* |
|
Filed herewith |
53
exv10w1
Exhibit 10.01
IBM Credit LLC
FOURTH AMENDED AND RESTATED
NOTES PAYABLE SUBORDINATION AGREEMENT
IBM CREDIT LLC
North Castle Drive
Armonk, NY 10504
Ladies and/or Gentlemen:
This Fourth Amended and Restated Notes Payable Subordination Agreement amends and restates in
its entirety the Amended and Restated Notes Payable Subordination Agreement dated November 13,
2002 executed by Priority Fulfillment Services, Inc. (PFS). Supplies Distributors, Inc., with
its principal place of business at 500 North Central Expressway, Piano, TX 75074 (SDI), is/may
become further indebted to PFS. PFS represents that no part of said indebtedness has been assigned
to or subordinated in favor of any other person, firm or corporation, other than pursuant to the
Notes Payable Subordination Agreement, dated as of March 29, 2002 by and between PFS and Congress
Financial Corporation (Southwest) (Congress) (Notes Payable Subordination Agreement) and that
PFS does not hold any security therefor. Capitalized terms used herein without definition shall
have the meaning ascribed thereto in the Financing Agreement referred to below.
To induce IBM Credit LLC (IBM Credit) to continue financing SDI under the terms of the
Agreement for Inventory Financing dated March 29, 2002 with SDI (as amended, modified, and
supplemented from time to time, the Financing Agreement) and in consideration of any loans,
advances, payments, extensions or credit (including the extension or renewal, in whole or in part,
of any antecedent or other debt), benefits or financial accommodations heretofore or hereafter
made, granted or extended by IBM Credit or which IBM Credit has or will become obligated to make,
grant or extend to or for the account of SDI whether under the Financing Agreement or otherwise,
and in consideration of any obligations heretofore or hereafter incurred by SDI to IBM Credit,
whether under the Financing Agreement or otherwise, PFS agrees to make the payment of the
indebtedness referred to in the first paragraph hereof and any and all other present or future
indebtedness of SDI to PFS together with any and all interest accrued thereon (collectively the
Secondary Obligations) subject and subordinate to the prior indefeasible payment in full of any
and all debts, obligations and liabilities of SDI to IBM Credit, whether absolute or contingent,
due or to become due, now existing or hereafter arising and whether direct or acquired by IBM
Credit by transfer, assignment or otherwise (collectively the Primary Obligations) and that SDI
shall make no payments to PFS until the Primary Obligations have been indefeasibly paid in full as
acknowledged in writing by IBM Credit. Notwithstanding the foregoing, SDI may make payments in
respect of the Secondary Obligations provided that (i) no Default or Event of Default exists
immediately prior to the payment of the Secondary Obligations and that no Default or Event of
Default will occur after any payment in respect of the Secondary Obligations (ii) any such payment
shall not cause the total amount of the Secondary Obligations to be less than Six Million Five
Hundred Thousand Dollars ($6,500,000), and (iii) such payment would be permitted under the Notes
Payable Subordination Agreement. Except as provided above, PFS agrees not to ask, demand, sue for,
take or receive payment or security for all or any part of the Secondary Obligations until and
unless all of the Primary Obligations shall have been fully paid and discharged.
Upon any distribution of any assets of SDI whether by reason of sale, reorganization,
liquidation, dissolution, arrangement, bankruptcy, receivership, assignment for the benefit of
creditors, foreclosure or otherwise, IBM Credit shall be entitled to receive payment in full of the
Primary Obligations prior to the payment of any part of the Secondary Obligations. To enable IBM
Credit to enforce its rights hereunder in any such proceeding or upon the happening of any such
event, IBM Credit or any person whom IBM Credit may from time to time designate is hereby
irrevocably appointed attorney-in-fact for PFS with full power to act in the place and stead of PFS
including the right to make, present, file and vote proofs of claim against SDI on account of all
or any part of said Secondary Obligations as IBM Credit may deem advisable and to
Page 1 of 3
receive and collect any and all payments made thereon and to apply the same on account of
the Primary Obligations. PFS will execute and deliver to such instruments as IBM Credit may require
to enforce each of the Secondary Obligations, to effectuate said power of attorney and to effect
collection of any and all dividends or other payments which may be made at any time on account
thereof.
While this instrument remains in effect, PFS will not assign to or subordinate in favor of any
other person, firm or corporation, (except for Congress subject to terms of the Intercreditor
Agreement dated the date hereof between Congress and IBM Credit) any right, claim or interest in or
to the Secondary Obligations or commence or join with any other creditor in commencing any
bankruptcy, reorganization or insolvency proceeding against SDI. IBM Credit may at any time, in its
discretion, renew or extend the time of payment of all or any portion of the Primary Obligations or
waive or release any collateral which may be held therefor and IBM Credit may enter into such
agreements with SDI as IBM Credit may deem desirable without notice to or further assent from PFS
and without adversely affecting IBM Credits rights hereunder in any manner whatsoever.
In furtherance of the foregoing and as collateral security for the payment and discharge in
full of any and all of the Primary Obligations, PFS hereby transfers and assigns to IBM Credit the
Secondary Obligations and all collateral security therefor to which PFS now is or may at any time
be entitled and all rights under all guarantees thereof and agrees to deliver to IBM Credit
endorsed in blank all notes or other instruments now or hereafter evidencing said Secondary
Obligations. IBM Credit may file one or more financing statements concerning any security interest
hereby created without the signature of PFS appearing thereon.
The within instrument is and shall be deemed to be a continuing subordination and shall be
and remain in full force and effect until all Primary Obligations have been performed and paid in
full and IBM Credits commitment, if any, under the Financing Agreement has been terminated.
Dated March _____ , 2006.
|
|
|
|
|
|
|
|
|
PRIORITY FULFILLMENT SERVICES, INC. |
|
|
|
|
|
|
|
|
|
|
|
By: |
|
|
|
|
|
Name:
|
Thomas J. Madden
|
|
|
|
|
Title:
|
CFO |
|
|
|
|
|
500 North Central Expressway |
|
|
|
|
|
Plano, TX 75074 |
|
|
Page 2 of 3
To: IBM Credit LLC
SDI hereby acknowledge notice of the within and foregoing subordination and agree to be
bound by all the terms, provisions and conditions thereof. SDI further agrees not to repay all or
any part of the Secondary Obligations, or to issue any note or other instrument evidencing the
same or to grant any collateral security therefor without IBM Credits prior written consent.
|
|
|
|
|
|
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|
|
SUPPLIES DISTRIBUTORS, INC. |
|
|
|
|
|
|
|
|
|
|
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By: |
|
|
|
|
|
|
|
|
|
|
|
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Name:
|
|
Joseph Farrell |
|
|
|
|
|
|
|
|
|
|
|
Title:
|
|
President / CEO |
|
|
|
|
|
|
|
ACCEPTED: |
|
|
|
|
|
|
|
IBM CREDIT LLC |
|
|
|
|
|
|
|
By: |
|
|
|
|
|
|
|
|
|
Name:
|
|
Thomas Harahan |
|
|
|
|
|
|
|
Title:
|
|
Manager, Credit |
|
|
ACKNOWLEDGMENT OF SUBORDINATION
On the day of March, 2006,
appeared before me
to me known to be
the individual described in and who executed the foregoing instrument, and who acknowledged to me
that the same was executed as his or her free and voluntary act for the uses and purposes therein
set forth.
Page 3 of 3
exv10w2
Exhibit 10.02
AMENDMENT NO. 7
TO
AGREEMENT FOR INVENTORY FINANCING
This Amendment No. 7 (Amendment) to the Agreement for Inventory Financing is made as of
March 28, 2006 by and among IBM Credit LLC, a Delaware limited liability company, formerly IBM
Credit Corporation (IBM Credit), Business Supplies Distributors Holdings, LLC, a limited
liability company duly organized under the laws of the state of Delaware (Holdings), Supplies
Distributors, Inc. (formerly known as BSD Acquisition Corp.), a corporation duly organized under
the laws of the state of Delaware (Borrower), Priority Fulfillment Services, Inc., a corporation
duly organized under the laws of the state of Delaware (PFS) and PFSweb, Inc., a corporation duly
organized under the laws of the state of Delaware (PFSweb) (Borrower, Holdings, PFS, PFSweb, and
any other entity that executes this Agreement or any Other Document, including without limitation
all Guarantors, are each individually referred to as a Loan Party and collectively referred to as
Loan Parties).
RECITALS:
A. Each Loan Party and IBM Credit have entered into that certain Agreement for Inventory
Financing dated as of March 29, 2002 (as amended, supplemented or otherwise modified from time
to time,
the Agreement); and
B. The parties have agreed to modify the Agreement as more specifically set forth below, upon
and subject to the terms and conditions set forth herein.
AGREEMENT
NOW THEREFORE, in consideration of the premises and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, Borrower, the other
Loan Parties and IBM Credit hereby agree as follows:
Section 1. Definitions. All capitalized terms not otherwise defined herein shall have
the respective meanings set forth in the Agreement.
Section 2. Amendment.
Subject to the satisfaction of the conditions precedents set forth in Section 3 hereof, the
Agreement is hereby amended as follows:
A. Section 1 of the Agreement is hereby amended by amending the definition of Amended
and Restated Notes Payable Subordination Agreement to read in its entirety as follows:
Amended and Restated Notes Payable Subordination Agreement: the Fourth Amended and
Restated Notes Payable Subordination Agreement dated March 28, 2006 executed by PFS in favor of
IBM Credit.
B. Section 1 of the Agreement is hereby amended by amending the definition of Termination
Date to read in its entirety as follows:
Termination Date: shall mean March 31, 2007 or such other date as IBM Credit and the
Borrower may agree to from time to time in writing.
C. Section 7.1 (N) of the Agreement is hereby amended by amending this Section to read in
its entirety as follows:
Page 1 of 8
(N) Unless as otherwise agreed to in writing, Borrower shall deliver prior to
5:00 p.m. (Pacific Standard Time) to IBM Credit: (i) on the 5th day of each month a
Collateral Management Report as of the last day of the immediately preceding month and (ii) on the
20th day of each month a Collateral Management Report as of the 15th day of
the current month.
D. Section 8.6 of the Agreement is hereby amended by amending this Section to read in its
entirety as follows:
8.6. Restricted Payments. Borrower will not, directly or indirectly make any of the following
payments (Restricted Payments) without prior written consent from IBM Credit, which shall not be
unreasonably delayed or denied: (i) declare or pay any dividend (other than dividends payable
solely in common stock of Borrower) on, or make any payment on account of, or set apart assets for
a sinking or other analogous fund for, the purchase, redemption, defeasance, retirement or other
acquisition of, any shares of any class of capital stock of Borrower or any warrants, options or
rights to purchase any such capital stock or Equity Interests, whether now or hereafter
outstanding, or make any other distribution in respect thereof, either directly or indirectly,
whether in cash or property or in obligations of Borrower; or (ii) make any optional payment or
prepayment on or redemption (including, without limitation, by making payments to a sinking or
analogous fund) or repurchase of any Indebtedness (other than the Obligations), provided,
however, that Borrower (a) may in the ordinary course administration thereof make payments on the
revolving loans made by Congress pursuant to the Congress Credit Agreement, except as permitted by
the Amended and Restated Notes Payable Subordination Agreement and (b) may in fiscal year 2006 pay
cash dividends not to exceed the aggregate of One Million Two Hundred Fifty Thousand Dollars ($1,250,000.00) plus the United States Dollar equivalent of dividends the Borrower receives in
fiscal year 2006 from BSD Europe.
E. Attachment A to the Agreement is hereby amended by deleting such Attachment A in its
entirety and substituting, in lieu thereof, the Attachment A attached hereto. Such new
Attachment A shall
be effective as of the date specified in the new Attachment A. The changes contained in the
new
Attachment A include, without limitation, the following:
Section II (C) of Attachment A is hereby amended by amending the Credit Line to read in its
entirety as follows:
(C) Product Financing Charge: Prime Rate plus 0.50%
Section II (F) of Attachment A is hereby amended by amending the Credit Line to read in its
entirety as follows:
(F) PRO Finance Charge: Prime Rate plus 0.50%
Section 3. Conditions of Effectiveness of Amendment. This Amendment shall become effective upon the
receipt by IBM Credit of: (i) this Amendment shall have been authorized, executed and delivered by
each of the parties hereto and IBM Credit shall have received a copy of a fully executed Amendment,
(ii) the Fourth Amended and Restated Notes Payable Subordination Agreement executed by PFS, and
(iii) a subordinated demand note issued in favor of IBM Credit and Congress Financial Corporation
(Southwest), in form and substance satisfactory to IBM Credit, in the amount of Six Million Five
Hundred Thousand Dollars ($6,500,000).
Section 4. Representations and Warranties. Each Loan Party makes to IBM Credit the following
representations and warranties all of which are material and are made to induce IBM Credit to
enter into this Amendment.
Page 2 of 8
Section 4.1 Accuracy and Completeness of Warranties and Representations. All
representations made by the Loan Party in the Agreement were true and accurate and complete in
every respect as of the date made, and, as amended by this Amendment, all representations made by
the Loan Party in the Agreement are true, accurate and complete in every material respect as of
the date hereof, and do not fail to disclose any material fact necessary to make representations
not misleading.
Section 4.2 Violation of Other Agreements and Consent. The execution and delivery of this
Amendment and the performance and observance of the covenants to be performed and observed
hereunder (a) do not violate or cause any Loan Party not to be in compliance with the terms of any
agreement to which such Loan Party is a party, and (b) require the consent of any Person.
Section 4.3 Litigation. Except as has been disclosed by the Loan Party to IBM Credit in writing,
there is no litigation, proceeding, investigation or labor dispute pending or threatened against
any Loan Party, which, if adversely determined, would materially adversely affect the Loan Partys
ability to perform such Loan Partys obligations under the Agreement and the other documents,
instruments and agreements executed in connection therewith or pursuant hereto.
Section 4.4 Enforceability of Amendment. This Amendment has been duly authorized, executed and
delivered by each Loan Party and is enforceable against each Loan Party in accordance with its
terms.
Section 5. Ratification of Agreement. Except as specifically amended hereby, all of the provisions
of the Agreement shall remain unamended and in full force and effect. Each Loan Party hereby
ratifies, confirms and agrees that the Agreement, as amended hereby, represents a valid and
enforceable obligation of such Loan Party, and is not subject to any claims, offsets or defenses.
Section 6. Ratification of Guaranty and Notes Payable Subordination Agreement. Each of Holdings,
PFSweb and PFS hereby ratify and confirm their respective guaranties in favor of IBM Credit and
agree that such guaranties remain in full force and effect and that the term Liabilities, as used
therein include, without limitation the indebtedness liabilities and obligations of the Borrower
under the Agreement as amended hereby.
Section 7. Governing Law. This Amendment shall be governed by and interpreted
in accordance with the laws which govern the Agreement.
Section 8. Counterparts. This Amendment may be executed in any number of counterparts, each of
which shall be an original and all of which shall constitute one agreement.
(The remainder of this page is intentionally left blank.)
Page 3 of 8
IN WITNESS WHEREOF, each Loan Party has read this entire Amendment, and has
caused its authorized representatives to execute this Amendment and has caused its corporate
seal, if any, to be affixed hereto as of the date first written above.
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Supplies Distributors, Inc. |
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Business Supplies Distributors Holdings, LLC |
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Priority Fulfillment Services, Inc. |
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By:
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PFSweb, Inc. |
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Page 4 of 8
ATTACHMENT A (ATTACHMENT A) TO AGREEMENT FOR INVENTORY FINANCING (AGREEMENT)
DATED MARCH 29, 2002
EFFECTIVE DATE OF THIS ATTACHMENT A: March 28, 2006
SECTION I. BORROWER/LOAN PARTIES:
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(A) |
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BORROWER: |
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ORGANIZATION NO. (Assigned by State of Org). |
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Supplies Distributors, Inc.
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3416326 |
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(B)
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ADDITIONAL LOAN PARTIES: |
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Business Supplies Distributors Holdings, LLC
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3410894 |
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Priority Fulfillment Services, Inc.
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2606094 |
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PFSweb, Inc.
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3062550 |
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SECTION II. FEES, RATES AND REPAYMENT TERMS:
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(A) |
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Credit Line: Thirty Million Five Hundred Thousand Dollars ($30,500,000) |
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In the event that the amount of any Participation is reduced or any Participation
Agreement expires or is terminated for any reason, the Credit Line shall be reduced,
upon forty-five (45) days written notice by IBM Credit to Borrower, by an amount equal
to the amount that is no longer subject to a Participation Agreement as determined by
IBM Credit pursuant to Section 2.1 of the Agreement. |
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(B) |
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Borrowing Base: |
(i) 100% of the Borrowers inventory in the Borrowers possession as of the date of
determination as reflected in the Borrowers most recent Collateral Management Report
constituting Products (other than service parts) financed through a Product Advance by
IBM Credit, so long as (1) IBM Credit has a first priority security interest in such
Products and (2) such Products are in new and un-opened boxes;
(ii) 80% of price protection payments, credits, discounts, incentive payments, rebated
and refunds relating to IBM Products (Accounts) in the aggregate not to exceed Two
Million Five Hundred Thousand Dollars ($2,500,000.00) provided that (i) Borrower
obtains (and provides to IBM Credit along with the monthly Collateral Management
Report required under Section 7.1 (O)) from IBM written confirmation (a) acknowledging
the obligation of IBM to pay such amount or that they have received the billing from
the Borrower, (b) stating the date the amount is due to be paid and (c) IBM waiving
its right to setoff such amounts owed to Borrower with any amount Borrower may owe to
IBM, (ii) such Accounts do not remain unpaid for more than sixty (60) days from the
date the obligation of IBM occurred; and (iii) such Accounts are delivered directly to
IBM Credit.
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Product Financing Charge: Prime Rate plus 0.50% |
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(D) |
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Product Financing Period: 90 days |
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(E) |
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Collateral Insurance Amount: Thirty Million Five Hundred Thousand Dollars
($30,500,000.00) |
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(F) |
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PRO Finance Charge: Prime Rate plus 0.50% |
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(G) |
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Delinquency Fee Rate: Prime Rate plus 6.500% |
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(I) |
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Free Financing Period Exclusion Fee: Product Advance multiplied
by 0.25% |
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(J) |
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Other Charges: |
Page 5 of 8
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(i) |
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Monthly Service Fee: |
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1,000.00 |
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(ii) |
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Annual Renewal Fee: |
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15,000.00 |
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SECTION III. FINANCIAL COVENANTS:
(A) Definitions: The following terms shall have the following respective meanings in this
Attachment. All amounts shall be determined in accordance with generally accepted accounting
principles (GAAP).
Consolidated Net Income shall mean, for any period, the net income (or loss), after
taxes, of Borrower on a consolidated basis for such period determined in accordance with
GAAP.
Current shall mean within the ongoing twelve month period.
Current Assets shall mean assets that are cash, restricted cash applicable to cash
received into a lockbox from collections of trade accounts receivable or expected to become
cash within the ongoing twelve months.
Current Liabilities shall mean payment obligations resulting from past or current
transactions that require settlement within the ongoing twelve month period. All
indebtedness to IBM Credit and Congress shall be considered a Current Liability for
purposes of determining compliance with the Financial Covenants. All subordinated
indebtedness shall not be considered current liabilities.
EBITDA shall mean, for any period (determined on a consolidated basis in accordance with
GAAP), (a) the Consolidated Net Income of Borrower for such period, plus (b) each of the
following to the extent reflected as an expense in the determination of such Consolidated
Net Income: (i) the Borrowers provisions for taxes based on income for such period; (ii)
Interest Expense for such period; and (iii) depreciation and amortization of tangible and
intangible assets of Borrower for such period.
Fixed Charges shall mean, for any period, an amount equal to the sum, without
duplication, of the amounts for such as determined for the Borrower on a consolidated
basis, of (i) scheduled repayments of principal of all Indebtedness (as reduced by
repayments thereon previously made), (ii) Interest Expense, (iii) capital expenditures (iv)
dividends, (v) leasehold improvement expenditures and (vi) all provisions for U.S. and non
U.S. Federal, state and local taxes.
Fixed Charge Coverage Ratio shall mean the ratio as of the last day of any fiscal period
of (i) EBITDA as of the last day of such fiscal period to (ii) Fixed Charges.
Interest Expense shall mean, for any period, the aggregate consolidated interest expense
of Borrower during such period in respect of Indebtedness determined on a consolidated basis
in accordance with GAAP, including, without limitation, amortization of original issue
discount on any Indebtedness and of all fees payable in connection with the incurrence of
such Indebtedness (to the extent included in interest expense), the interest portion of any
deferred payment obligation and the interest component of any capital lease obligations.
Long Term shall mean beyond the ongoing twelve month period.
Long Term Assets shall mean assets that take longer than a year to be converted to cash.
They are divided into four categories: tangible assets, investments, intangibles and other.
Long Term Debt shall mean payment obligations of indebtedness which mature more than
twelve months from the date of determination, or mature within twelve months from such date
but are
Page 6 of 8
renewable or extendible at the option of the debtor to a date more than
twelve months from the date of determination.
Net Profit after Tax shall mean Revenue plus all other income, minus all costs,
including applicable taxes.
Revenue shall mean the monetary expression of the aggregate of products or services
transferred by an enterprise to its customers for which said customers have paid or
are obligated to pay, plus other income as allowed.
Subordinated Debt shall mean Borrowers indebtedness to third parties as evidenced by
an executed Notes Payable Subordination Agreement in favor of IBM Credit.
Tangible Net Worth shall mean Total Net Worth minus goodwill.
Total Assets shall mean the total of Current Assets and Long Term Assets. For the
purpose of calculating Total Assets for Borrower, the accumulated earnings and foreign
currency translation adjustments applicable to Borrowers Canadian and European
subsidiaries are excluded.
Total Liabilities shall mean the Current Liabilities and Long Term Debt less
Subordinated Debt, resulting from past or current transactions, that require
settlement in the future.
Total Net Worth (the amount of owners or stockholders ownership in an enterprise)
is equal to Total Assets minus Total Liabilities. For the purpose of calculating Total
Net Worth of Borrower, following shall be excluded (i) accumulated earnings and foreign
currency translation adjustments applicable to Borrowers Canadian and European
subsidiaries and (ii) all income and losses applicable to foreign currency adjustments
for each period but not excluding such foreign currency adjustments for annual periods
that must comply with GAAP.
Working Capital shall mean Current Assets minus Current Liabilities.
(B) 1. Borrower will be required to maintain the following financial ratios, percentages
and amounts as of the last day of the fiscal period under review (quarterly, annually) by IBM
Credit:
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Covenant |
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Covenant Requirement |
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(i)
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Revenue on an Annual Basis* (i.e. the
current fiscal year-to-date Revenue
annualized) to Working Capital
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Greater than Zero
and Equal to or Less
than 43.0:1.0 |
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* Annualized Revenue from intercompany
sales are excluded from this calculation. |
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(ii)
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Net Profit after Tax to Revenue**
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Equal to or Greater
than 0.20 percent |
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** Excluding all income and losses applicable
to (a) 100% ownership in Canadian and
European subsidiaries and (b) foreign
currency adjustments for each period but
not excluding such foreign currency
adjustments for annual periods that must
comply with GAAP and excluding revenue from
intercompany sales. |
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(iii)
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Total Liabilities to Tangible Net Worth***
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Greater than Zero
and Equal to or Less
than 7.0:1.0 |
Page 7 of 8
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*** Accumulated earnings and foreign currency
translation adjustments applicable to
Borrowers Canadian and European
subsidiaries are excluded from calculation
of Borrowers Total
Assets and Total Net Worth. |
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2. Business Supplies Distributors Holdings, LLC will be required to maintain the following
financial
ratios, percentages and amounts as of the last day of the fiscal period under review
(quarterly, annually) by IBM Credit:
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Covenant |
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Covenant Requirement |
(i)
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Revenue on an Annual Basis (i.e. the
current fiscal year-to-date Revenue
annualized) to Working Capital
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Greater than Zero and Equal to or Less
than 43.0:1.0 |
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(ii)
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Net Profit after Tax to Revenue*
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Equal to or Greater than 0.15 percent |
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*Excluding all (a) income and losses
applicable to foreign currency
adjustments for each period but not
excluding such foreign currency
adjustments for annual periods that
must comply with GAAP and (b) revenue
from intercompany sales. |
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(iii)
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Total Liabilities to Tangible Net Worth
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Greater than Zero and Equal to or Less
than 8.0:1.0 |
3. PFSweb, Inc. will be required to maintain the following financial ratios, percentages
and amounts as of the last day of the fiscal period under review (quarterly, annually) by IBM
Credit:
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Covenant |
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Covenant Requirement |
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As of Date |
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Minimum Tangible Net Worth |
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$18,000,000.00 |
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03/31/03 and thereafter |
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Page 8 of 8
exv10w3
Exhibit
10.03
AMENDMENT 6
TO
AMENDED AND RESTATED PLATINUM PLAN AGREEMENT (WITH INVOICE DISCOUNTING)
This Amendment 6 (Amendment) dated March 28, 2006 is made to the AMENDED AND RESTATED
PLATINUM PLAN AGREEMENT (WITH INVOICE DISCOUNTING) by and among IBM BELGIUM FINANCIAL SERVICES
S.A., with a registered number of R.C. Brussels 451.673 with an address of Avenue du Bourget 42,
BE- 1130 Brussels VAT BE 424300467 (IBM GF or
us), Suppliers Distributors S.A. with a
registered number of RC Liege 208795 with an address of Rue Louis Blériot 5, B-4460 Gráce-Hollogne,
Belgium (SDSA), and Business Supplies Distributors Europe BV a Netherlands company registered in
Maastricht with a Netherlands trade registration number of HR Maastricht 14062763 with an address
of Dalderhaag 13, 6136 KM Sittard, The Netherlands
(BSDE) (SDSA and BSDE collectively,
you),
PFS Web B.V. SPRL a company registered in The Netherlands, having the statutory seat in Amsterdam
under the number 17109541, and having the administration and direction seat in Grace Hollogne, with
a Belgian trade registration number of R.C. Liege 204162, VAT BE 466681054 (PFS Web B.V. ) (SDSA,
BSDE and PFS Web B.V. collectively, the Loan Parties)
RECITALS:
A. The Loan Parties and IBM GF have entered into that certain AMENDED AND RESTATED PLATINUM
PLAN AGREEMENT (WITH INVOICE DISCOUNTING) dated as of March 29, 2002 (as amended and modified from
time to time, the Agreement);
B. The Loan Parties have requested and IBM GF has agreed to extend the Agreement for twelve
months;
C. The Loan Parties agree to certain financial covenants revisions by IBM GF; and
D. The parties have agreed to modify the Agreement as more specifically set forth below,
upon and subject to the terms and conditions set forth herein.
AGREEMENT
NOW THEREFORE, in consideration of the premises and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, IBM GF and the Loan Parties hereby agree
as follows:
Section 1. Definitions. All capitalized terms not otherwise defined herein shall have the
respective meanings set forth in the Agreement.
Section 2. Amendment. Subject to Section 4 hereof, the Agreement is hereby amended as follows:
A. The Agreement is hereby amended as follows:
(a) Section 1.1 is hereby amended by adding the following definition:
Termination Date: means March 31, 2007 or such other date as to which
IBM GF and the Loan Parties may agree from time to time.
(b) Section 8.2.7 is hereby amended by deleting it in its entirety and substituting, in lieu
thereof, the following:
Page 1 of 5
Financial Covenants
You agree to comply with the Financial Covenants, if any, set out in the relevant supplements
or the Schedule. You also agree that you will not, without our consent, make any of the following
payments (Restricted Payments) without our prior written consent (i) declare or pay any dividend
(other than dividends payable solely in common stock of BSDE and/or SDSA and the aggregate amount
of such dividends under this Agreement and the AIF does not cause you or Holdings to violate such
Financial Covenants on, or make any payment on account of, or set apart assets for a sinking or
other analogous fund for, the purchase, redemption, defeasance, retirement or other acquisition of,
any shares of any class of capital stock of BSDE and/or SDSA or any warrants, options or rights to
purchase any such capital stock or Equity Interests, whether now or hereafter outstanding, or make
any other distribution in respect thereof, either directly or indirectly, whether in cash or
property or in obligations of BSDE and/or SDSA ; or (ii) make any optional payment or prepayment on
or redemption (including, without limitation, by making payments to a sinking or analogous fund) or
repurchase of any Indebtedness (other than the Obligations)), except as permitted by the Amended
and Restated Notes Payable Subordination Agreement. However, as long as you are not in violation
with any such Financial Covenants prior to or subsequent to the following transactions, (i) BSDE
may pay cash dividends to Supplies Distributors, Inc. up to an amount not to exceed BSDEs
liquidation value, and (ii) SDSA may pay cash dividends in an amount not to exceed 1,275,000 euros
to Supplies Distributors, Inc. in fiscal year 2006.
(c) Section 10.1 is hereby amended by deleting it in its entirety and substituting, in lieu
thereof, the following:
This Agreement will remain in force until the Termination Date. However
following the occurrence of an Event of Default that we have not waived in
writing we may by notice with immediate effect terminate this Agreement.
Upon any termination of this Agreement we shall have all the rights and
remedies set out in Clause 9.2 until the complete discharge of all the
Loan Parties obligations to us. Any such termination shall not affect any
right we have in relation to the IBM Reimbursables and IBM Receivables or
the Receivables Rights and the Supplier Obligations and the Product
Rights.
B. The Schedule to the Agreement is hereby amended by deleting such Schedule in its entirety
and substituting, in lieu thereof, the Schedule attached hereto. Such new Schedule shall be
effective as of the date specified in the new Schedule. The changes contained in the new Schedule
include, without limitation, the following:
Credit Line: 12,500,000
VAT Receivables: Deleted from Collateral Valuation
Prepayment Percentage: (i) 80% of Eligible IBM Reimbursables (1) and (ii) 80% of Eligible IBM
Receivables
Collateral Value of Stock-in-Trade: (A) 100% of paid for IBM Printing Systems Division
inventory (other than (a) machines which IBM Printing Systems Division has declared obsolete at
least 60 days prior to the date of determination and (b) service parts) which (i) we have purchased
the associated Supplier Invoice from the Authorised Supplier on or after the Closing Date (ii)
purchased directly from IBM prior to the Closing Date and not subject to retention of title,
provided, however, we have a first priority security interest in such inventory, (iii) is
repurchasable under a repurchase agreement with the Authorized Supplier and (iv) is secured and
managed through a pledge with Disposition, with coverage percentage acceptable to us (such
acceptable percentage to be determined by us within 60 days of
Page 2 of 5
the date this Schedule is executed)The value to be assigned to such inventory shall be based
upon the Supplier Invoice net of all applicable credit notes.
Financial Covenant Definitions: Changed for net Profit After Tax, Revenue and Working Capital
Turnover.
FINANCIAL COVENANTS
SDSA and BSDE will be required, on a consolidated basis, to maintain the following financial
ratios, percentages and amounts on a year to date basis as of the last day of the fiscal period
under review (quarterly and annually) by us and IBM Credit:
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Covenant |
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Covenant Requirement |
(i)
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Debt to Tangible Net Worth
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Greater than Zero and
Less than 7.0:1.0 |
(ii)
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Net Profit after Tax to Revenue
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Greater than 0.10 percent |
(iii)
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Working Capital Turnover (WCTO)
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Greater than Zero and |
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Less than 43.0:1.0 |
PFSweb, Inc. will be required to maintain the following financial ratios, percentages and amounts
as of the last day of the fiscal period under review (quarterly and annually) by IBM Credit:
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Covenant |
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Covenant |
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(i)
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Minimum Tangible |
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Net Worth
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18,000,000.00 |
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03/31/06 and |
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beyond |
Section 3. Conditions of Effectiveness of Consent and Amendment. This Amendment shall
have been authorized, executed and delivered by each of the parties hereto and IBM GF shall have
received a copy of a fully executed Amendment.
Section 4. Representations and Warranties. Each Loan Party makes to IBM GF the following representations and warranties all of which are material and are made to induce IBM GF to
enter into this Amendment.
Section 4.1 Accuracy and Completeness of Warranties and Representations. All representations made by the Loan Party in the Agreement were true and accurate and complete in
every respect as of the date made, and, as amended by this Amendment, all representations made by
the Loan Party in the Agreement are true, accurate and complete in every material respect as of the
date hereof, and do not fail to disclose any material fact necessary to make representations not
misleading.
Section 4.2 Violation of Other Agreements. The execution and delivery of this Amendment and the performance and observance of the covenants to be performed and observed
hereunder do not violate or cause any Loan Party not to be in compliance with the terms of any
agreement to which such Loan Party is a party.
Section 4.3 Litigation. Except as has been disclosed by the Loan Party to IBM GF in writing, there
is no litigation, proceeding, investigation or labor dispute pending or threatened against any Loan
Party, which, if adversely determined, would materially adversely affect the Loan Partys ability
to perform such Loan Partys obligations under the Agreement and the other documents, instruments
and agreements executed in connection therewith or pursuant hereto.
Page 3 of 5
Section 4.4
Enforceability of Amendment. This Amendment has been duly authorized, executed and delivered by each Loan Party and is enforceable against each Loan Party in accordance
with its terms.
Section 5. Ratification of Agreement. Except as specifically amended hereby, all of the provisions
of the Agreement shall remain unamended and in full force and effect. Each Loan Party hereby
ratifies, confirms and agrees that the Agreement, as amended hereby, represents a valid and
enforceable obligation of such Loan Party, and is not subject to any claims, offsets or defenses.
Section 6. Ratification of Guaranty. Each of Holdings, SDI, PFSweb and PFS hereby ratify and
confirm their respective guaranties in favor of IBM GF and agree that such guaranties remain in
full force and effect and that the term Liabilities, as used therein include, without limitation
the indebtedness liabilities and obligations of SDSA and BSDE under the Agreement as amended
hereby. SDI hereby ratifies and confirms its Notes Payable Subordination Agreement executed by SDI
on March 29, 2002 and confirms such Notes Payable Subordination Agreement remains in full force and
effect.
Section 7. Governing Law. This Amendment shall be governed by and interpreted in accordance with the laws which govern the Agreement.
Section 8. Counterparts. This Amendment may be executed in any number of counterparts, each of
which shall be an original and all of which shall constitute one agreement.
IN WITNESS WHEREOF, each Loan Party has read this entire Amendment, and has caused its
authorized representatives to execute this Amendment and has caused its corporate seal, if any, to
be affixed hereto as of the date first written above.
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IBM BELGIUM FINANCIAL SERVICES S.A. |
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SUPPLIERS DISTRIBUTORS S.A. |
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BUSINESS SUPPLIES DISTRIBUTORS EUROPE BV |
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PFS WEB B.V. SPRL |
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The following parties agree to Section 6 as applicable to them.
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SUPPLIES DISTRIBUTORS, INC. |
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PRIORITY FULFILLMENT SERVICES, INC. |
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Page 4 of 5
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BUSINESS SUPPLIES DISTRIBUTORS
HOLDINGS, LLC |
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Page 5 of 5
Agreement for IBM Global Financing Platinum Plan
Invoice Discounting Schedule
Supplies Distributors S.A./Business Supplies Distributors Europe B.V.
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Your Name
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Supplies Distributors
S.A.
and Business Supplies
Distributors Europe B.V.
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Schedule Number
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6 |
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Your Number
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SDSA RC Liege
208795
BSDE HR
Maastricht
14062763
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Effective date of
Schedule
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28 March 2006 |
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Credit Limit
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12,500,000
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Commencement Date
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27 September 2001 |
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No Charge Period
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IBM 45 days
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Prepayment
Percentage
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(i) 80% of Eligible IBM
Reimbursables (1)
(ii) 80% of Eligible IBM
Receivables |
Collateral Value of Stock-in-Trade
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(A) |
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100% of paid for IBM Printing Sytems Division inventory (other than (a) machines which IBM
Printing Systems Division has declared obsolete at least 60 days prior to the date of
determination and (b) service parts) which (i) we have purchased the associated Supplier Invoice
from the Authorised Supplier on or after the Closing Date (ii) purchased directly from IBM prior
to the Closing Date and not subject to retention of title, provided, however, we have a first
priority security interest in such inventory, (iii) is repurchasable under a repurchase agreement
with the Authorized Supplier and (iv) is secured and managed through a pledge with Dispostion,
with coverage percentage acceptable to us (such acceptable percentage to be determined by us
within 60 days of the date this Schedule is executed)The value to be assigned to such inventory shall be
based upon the Supplier Invoice net of all applicable credit notes. |
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(B) |
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IBM Ireland is added as Authorised Supplier as well as IBM Endicott and IBM
Singapore |
1
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FINANCE CHARGES (2)
Base Rate (3)
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EURIBOR
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REPORTING
Audited Accounts (4)
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90 days after fiscal
year |
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Discount
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Base Rate plus 1.5.%
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Management (unaudited)
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35 days after fiscal |
Charge (5)
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Accounts
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calendar quarter |
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Default Rate
Shortfall Fee
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Base Rate plus 7%
0.30% of Shortfall Amount
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Collateral Management
Report
Aged Creditor Report
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10 days after calendar
month
10 days after calendar
month |
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Banking
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Nil
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Stock Report
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10 days after calendar |
Transfer
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month |
Charge |
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Service Fee per
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N/A
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Fixed Asset Register
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10 days after calendar |
Notification
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month |
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Monthly
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1,500 plus VAT per
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Surveys
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A maximum of 4 times |
Service Fee,
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month
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per year and not more |
Set up Fee
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than one per quarter |
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Survey Fee
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5,000 plus VAT per IBM
GF survey
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Financial Covenant
Compliance Certificate
from both SDSA and
Holdings
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45 days after fiscal
period
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Security Filing Fee |
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Any fees required as a result of Uniform
Commercial Code filings
in US in connection with
Collateralised Guarantees
granted by SDI, Holdings
and PFS
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Extended Credit Period |
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in 10 day increments up to 30 days |
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Unused Line
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Equal to thirty seven and |
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Fee
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one half (37.5) basis
points times the weekly
average unused portion of
the Credit Line, accruable
from the closing date and
computed on the basis of
a 360-day year, payable
quarterly in arrears and
upon the maturity or
termination of the Credit
Line |
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Extended
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Base Rate plus 1.5% |
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Credit Charge |
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2
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ADDITIONAL COLLATERAL |
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This Agreement |
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Stock Pledge Agreement among Supplies
Distributors, Inc (SDI), and IBM GF, whereby SDI
pledges 65% of its shares in SDSA and BSDE to IBM GF |
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Amended and Restated Stock Pledge |
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Liens: Charges: Pledges: Fixed and Floating Charge over
all IBM inventory of SDSA and BSDE and Convention de
Gage of SDSA to be registered at Commercial Court |
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As provided by us |
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Guarantees of payment of amounts due under the agreement. |
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Amended and Restated Collateralised Guarantees
from PFS, Holdings, and SDI
Amended and Restated Corporate Guaranty from
PFSweb |
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Amended and Restated Notes Payable Subordination from
SDI in respect of SDSA |
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As provided by us |
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Opinion of Counsel |
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a favourable opinion of counsel for Loan Parties (to
be provided post closing) in substantially the form
provided to you by us satisfactory to us and from
counsel satisfactory to it;. |
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Certificate of Authority |
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a certificate of the secretary or an assistant
secretary of each Loan Party as applicable, certifying
that, among other items, (i) BSDE is duly organized
under the laws of the Netherlands and is registered to
conduct business in Belgium, (ii) SDSA and PFS Web
B.V. are duly organized under the laws of the Kingdom
of Belgium and registered to do business there (iii)
true and complete copies of the articles of
incorporation, or corresponding organizational
documents, as applicable, and your by-laws are
delivered therewith, together with all amendments and
addenda thereto as in effect on the date thereof, (iv)
the resolution as stated in the certificate is a true,
accurate and compared copy of the resolution adopted
by your Board of Directors authorizing the execution,
delivery and performance of this Agreement and each
other document executed and delivered in connection
herewith, and (v) the names and true signatures of
your officers authorized to sign this Agreement and
the other documents; |
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Miscellaneous
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Listing of all creditors (if any)
providing accounts receivable financing to you; |
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A duly executed compliance certificate as to your
compliance with the financial covenants set forth
below as of the last fiscal month you have published
financial statements; |
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A copy of an all-risk insurance certificate pursuant to Clause
8.2.5 of the Agreement. |
3
OTHER CONDITIONS
1. Valid and enforceable customary documentation for the Collateral provided by BSDE, SDSA and PFS
Web B.V.
2. Any strategic changes in the structure of the group, significant management changes and/or any
major changes in Capex/investment plans to be advised to IBM GF immediately.
3. Prepayments under the Platinum Plan are not to be used for early repayment of commercial
loans.
4. The Financial Statements of SDSA and BSDA as of Closing Date in form and substance satisfactory
to us in our sole discretion;
5. A certified copy of the current organization chart of Loan Parties;
6. Evidence satisfactory to us that UCC-1 statements have been filed against SDI, Holdings and PFS
with IBM GF as the Lien holder;
7. IBM Credit is satisfied that all conditions precedent in accordance with the AIF have been met;
and
8. Liquidation of BSD Europe B.V. is approved on terms that SDSA acknowledges that it will
remain liable solely for all obligations owed or be come owing by both entities currently under this
Agreement.
FINANCIAL COVENANTS
SDSA and BSDE will be required, on a consolidated basis, to maintain the following financial
ratios, percentages and amounts on a year to date basis as of the last day of the fiscal period
under review (quarterly and annually) by us and IBM Credit:
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Covenant |
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Covenant Requirement |
(i)
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Debt to Tangible Net Worth
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Greater than Zero and
Less than 7.0:1.0 |
(ii)
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Net Profit after Tax to Revenue
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Greater than 0.10 percent |
(iii)
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Working Capital Turnover (WCTO)
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Greater than Zero and
Less than 43.0:1.0 |
PFSweb, Inc. will be required to maintain the following financial ratios, percentages and
amounts as of the last day of the fiscal period under review ( quarterly and annually) by IBM
Credit:
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Covenant |
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Covenant Requirement |
(v)
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Tangible Net Worth
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Greater than $18,000,000.00 for period |
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ending 03/31/06 and beyond. |
FINANCIAL COVENANT DEFINITIONS
The following terms shall have the following respective meanings in this Schedule. All amounts
shall be determined in accordance with generally accepted accounting principles (GAAP).
Consolidated Net Income shall mean, for any period, the consolidated net income (or
loss), after taxes, of SDSA and BSDE on a consolidated basis for such period determined in
accordance with GAAP.
Current shall mean within the ongoing twelve-month period.
Current Assets shall mean assets that are cash or expected to become cash within the
ongoing twelve months.
4
Current Liabilities shall mean payment obligations resulting from past or current
transactions that require settlement within the ongoing twelve-month period. All indebtedness
to IBM GF shall be considered a Current Liability for purposes of determining compliance with
the Financial Covenants.
Debt shall mean all liabilities or obligations to pay another person/company a certain amount
at a specified date excluding subordinated debt.
Long Term shall mean beyond the ongoing twelve-month period.
Long Term Assets shall mean assets that take longer than a year to be converted to cash. They
are divided into four categories: tangible assets, investments, intangibles and other.
Long Term Debt shall mean payment obligations of indebtedness which mature more than twelve
months from the date of determination, or mature within twelve months from such date but are
renewable or extendible at the option of the debtor to a date more than twelve months from the
date of determination.
Net Profit after Tax shall mean Revenue plus all other income, minus all costs (excluding
amortization of good will), including applicable taxes, excluding currency adjustments for each
period (other than for annual periods to the extent required by GAAP).
Revenue shall mean the monetary expression of the aggregate of products or services
transferred by an enterprise to its customers (excluding intercompany transactions) for which
said customers have paid or are obligated to pay, plus other income as allowed.
Subordinated Debt shall mean SDSAs indebtedness to third parties as evidenced by an executed
Notes Payable Subordination Agreement in favor of IBM GF (all Subordinated Debt shall not be
considered Current Liabilities).
Tangible Net Worth shall mean Total Net Worth minus goodwill
Total Assets shall mean the total of Current Assets and Long Term Assets.
Total Liabilities shall mean the Current Liabilities and Long Term Debt less Subordinated
Debt, resulting from past or current transactions, that require settlement in the future.
Total Net Worth (the amount of owners or stockholders ownership in an enterprise) is equal
to Total Assets minus Total Liabilities.
Working Capital shall mean Current Assets minus Current Liabilities.
Working Capital Turnover (WCTO) shall mean annualised Revenue divided by Working Capital.
5
Addresses
Pursuant to Clause 11.9 of the Agreement, the following are the addresses of the parties to the
Agreement:
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(i) if to IBM GF:
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(ii) if to SDSA: |
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IBM
Belgium Financial Services S.A.
Avenue du Bourget
, BE- 42 1130 Brussels
VAT BE 424300467
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Supplies Distributors S.A.
Rue Louis Blériot 5
B-4460 Gráce-Hollogne
Belgium |
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: |
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(iii) if to BSDE:
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(iv) if to PFS Web B.V. |
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Business Supplies Distributors Europe BV
Markt 28, 6211 CF Maastricht
The Nederlands
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PFS Web B.V. SPRL
c/o SDSA |
Footnotes:
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(1) |
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The maximum value for collateral representing IBM Reimbursables is 2 million. |
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(2) |
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All charges are exclusive of any taxes and duties. You agree to pay all applicable taxes and
duties. |
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(3) |
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EURIBOR, is the one month rate for Euros determined by the Banking Federation of the European
Union appearing on Reuters page 01 at or about 11:00 am (Central European Time) on the relevant
day. Reuters page 01 means the display designated as Page 01 on the Reuters Service (or such
other page as may replace Page 01 on that service or such other service as may replace it). On the
first Business Day of a calendar month the Base Rate will be changed to EURIBOR appearing for the
last Business Day of the previous calendar month. If at any time, EURIBOR changes by 0.25% or more,
the Base Rate will be changed by the same amount on the day of such change or the next following
Business Day. Charges accruing from day to day will be calculated on the basis of a year of 360
days and the actual number of days elapsed. If the Due Date for payment in Euros is not a day on
which settlement in Euros can be effected, the payment will be made on the preceding Business Day
on which settlement can be effected. |
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(4) |
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Audited Accounts within 90 days of fiscal year end. Revised business plans/budgets will also be
required at this time to enable an annual facility and covenant review to be effected by us
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6
By signing below all parties accept the terms of the Schedule. This Schedule amends and replaces
any Schedule issued and/or dated previously to this one.
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Signed on behalf of
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Signed on behalf of |
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SUPPLIES DISTRIBUTORS S.A.
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IBM BELGIUM FINANCIAL SERVICES
S.A. |
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TVA BE 475.286.142
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TVA BE 424.300.467 |
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Signed:
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Signed: |
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By Name:
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By Name: |
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Title:
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Title: |
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Signature:
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Signature: |
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Date:
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Date: |
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BUSINESS SUPPLIES DISTRIBUTORS |
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PFS WEB B.V. SPRL |
EUROPE BV |
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Signed:
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Signed: |
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By Name:
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By Name: |
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Title:
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Title: |
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Signature:
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Signature: |
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Date:
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Date: |
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7
exv10w4
Exhibit 10.04
Agreement
for IBM Global Financing Platinum Plan
Invoice Discounting Schedule
Supplies Distributors S.A./Business Supplies Distributors Europe B.V.
|
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Your Name
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Supplies
Distributors S.A. and
Business Supplies
Distributors Europe
B.V.
|
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Schedule Number
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6 |
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Your Number
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SDSA RC Liege
208795 BSDE-HR
Maastricht
14062763
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Effective date of
Schedule
|
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28 March 2006
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Credit Limit
|
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12,500,000
|
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Commencement Date
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27 September 2001
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No Charge Period
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IBM 45 days
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Prepayment
Percentage
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(i) 80% of Eligible
IBM Reimbursables (1) (ii)
80% of Eligible IBM
Receivables
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Collateral Value of Stock-in-Trade
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(A) |
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100% of paid for IBM Printing Systems Division inventory (other than (a)
machines which
IBM Printing Systems Division has declared obsolete at least 60 days prior to the date
of
determination and (b) service parts) which (i) we have purchased the associated Supplier
Invoice from the Authorised Supplier on or after the Closing Date (ii) purchased
directly from
IBM prior to the Closing Date and not subject to retention of title, provided, however,
we
have a first priority security interest in such inventory, (iii) is repurchasable under
a
repurchase agreement with the Authorized Supplier and (iv) is secured and managed
through a pledge with Disposition, with coverage percentage acceptable to us (such
acceptable percentage to be determined by us within 60 days of the date this Schedule is
executed)The value to be assigned to such inventory shall be based upon the Supplier
Invoice net of all applicable credit notes. |
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(B) |
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IBM Ireland is added as Authorised Supplier as well as IBM Endicott and IBM Singapore |
1
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FINANCE CHARGES (2) |
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Base Rate (3)
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EURIBOR |
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Discount Charge
(5)
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Base Rate plus 1.5.% |
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Default Rate
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Base Rate plus 7% |
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Shortfall Fee
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0.30% of Shortfall Amount |
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Banking Transfer Charge
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Nil |
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Service Fee per Notification
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N/A |
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Monthly Service Fee,
Set up Fee
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1,500 plus VAT per month |
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Survey Fee
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5,000 plus VAT per IBM GF
survey |
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Security Filing Fee
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Any fees required as a result of
Uniform Commercial Code filings in US in
connection with Collateralised
Guarantees granted by SDI, Holdings and
PFS |
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Unused Line Fee
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Equal to thirty seven and one
half (37.5) basis points times the
weekly average unused portion of the
Credit Line, accruable from the closing
date and computed on the basis of a
360-day year, payable quarterly in
arrears and upon the maturity or
termination of the Credit Line |
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Extended Credit Charge
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Base Rate plus 1.5% |
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REPORTING |
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Audited Accounts (4)
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90 days after fiscal year |
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Management (unaudited)
Accounts
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35 days after fiscal calendar
quarter |
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Collateral Management
Report
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10 days after calendar
month |
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Aged Creditor Report
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10 days after calendar
month |
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Stock Report
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10 days after calendar
month |
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Fixed Asset Register
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10 days after calendar
month |
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Surveys
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A maximum of 4 times per year
and not more than one per
quarter |
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Financial Covenant
Compliance Certificate from both
SDSA and Holdings
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45 days after fiscal
period |
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Extended Credit Period
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in 10 day increments up to 30
days |
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ADDITIONAL COLLATERAL |
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This Agreement |
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Stock Pledge Agreement among
Supplies Distributors, Inc (SDI), and
IBM GF, whereby SDI pledges 65% of its
shares in SDSA and BSDE to IBM GF
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Amended and Restated Stock Pledge |
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Liens: Charges: Pledges: Fixed
and Floating Charge over all IBM
inventory of SDSA and BSDE and
Convention de Gage of SDSA to be
registered at Commercial Court
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As provided by us |
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Guarantees of payment of amounts
due under the agreement.
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Amended and Restated
Collateralised Guarantees from PFS,
Holdings, and SDI
Amended and Restated
Corporate Guaranty from PFSweb |
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Amended and Restated Notes
Payable Subordination from SDI in
respect of SDSA
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As provided by us |
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Opinion of Counsel
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a favourable opinion of counsel for
Loan Parties (to be provided post
closing) in substantially the form
provided to you by us satisfactory to us and
from counsel satisfactory to it;. |
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Certificate of Authority
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a certificate of the secretary or an
assistant secretary of each Loan Party
as applicable, certifying that, among
other items, (i) BSDE is duly organized
under the laws of the Netherlands and is
registered to conduct business in Belgium,
(ii) SDSA and PFS Web B.V. are duly
organized under the laws of the Kingdom of
Belgium and registered to do business there
(iii) true and complete copies of the
articles of incorporation, or corresponding
organizational documents, as
applicable, and your by-laws are delivered
therewith, together with all amendments and
addenda thereto as in effect on the date
thereof, (iv) the resolution as stated in
the certificate is a true, accurate
and compared copy of the resolution adopted
by your Board of Directors authorizing the
execution, delivery and performance of this
Agreement and each other document executed
and delivered in connection
herewith, and (v) the names and true
signatures of your officers authorized to
sign this Agreement and the other
documents; |
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Miscellaneous
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Listing of all creditors
(if any) providing accounts receivable
financing to you; A duly executed
compliance certificate as to your compliance
with the financial covenants set forth below
as of the last fiscal month you have
published financial statements; A copy
of an all-risk insurance certificate
pursuant to Clause 8.2.5 of the
Agreement. |
3
OTHER CONDITIONS
1. Valid and enforceable customary documentation for the Collateral provided by
BSDE, SDSA and
PFS Web B.V.
2. Any strategic changes in the structure of the group, significant management changes
and/or any
major changes in Capex/investment plans to be advised to IBM GF immediately.
3. Prepayments under the Platinum Plan are not to be used for early repayment of commercial
loans.
4. The Financial Statements of SDSA and BSDA as of Closing Date in form and substance
satisfactory
to us in our sole discretion;
5. A certified copy of the current organization chart of Loan Parties;
6. Evidence satisfactory to us that UCC-1 statements have been filed against SDI,
Holdings and PFS
with IBM GF as the Lien holder;
7. IBM Credit is satisfied that all conditions precedent in accordance with the AIF have been
met; and
8. Liquidation of BSD Europe B.V. is approved on terms that SDSA acknowledges that it
will remain
liable solely for all obligations owed or be come owing by both entities currently under
this Agreement.
FINANCIAL COVENANTS
SDSA and BSDE will be required, on a consolidated basis, to maintain the following
financial ratios, percentages and amounts on a year to date basis as of the last day of
the fiscal period under review (quarterly and annually) by us and IBM Credit:
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Covenant |
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Covenant Requirement |
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(i)
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Debt to Tangible Net Worth
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Greater than Zero and Less than 7.0:1.0
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(ii)
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Net Profit after Tax to Revenue
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Greater than 0.10 percent |
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(iii)
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Working Capital Turnover (WCTO)
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Greater than Zero and Less than 43.0:1.0 |
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PFSweb, Inc. will be required to maintain the following financial ratios,
percentages and amounts as of the last day of the fiscal period under review ( quarterly
and annually) by IBM Credit:
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Covenant |
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Covenant Requirement |
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(v)
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Tangible Net Worth
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Greater than
$18,000,000.00 for period
ending 03/31/06 and
beyond.
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FINANCIAL COVENANT DEFINITIONS
The following terms shall have the following respective meanings in this
Schedule. All amounts shall be determined in accordance with generally accepted
accounting principles (GAAP).
Consolidated Net Income shall mean, for any period, the consolidated net
income (or loss), after taxes, of SDSA and BSDE on a consolidated basis for such
period determined in accordance with GAAP.
Current shall mean within the ongoing twelve-month period.
Current Assets shall mean assets that are cash or expected to become cash
within the ongoing twelve months.
4
Current Liabilities shall mean payment obligations resulting from past or current transactions
that require settlement within the ongoing twelve-month period. All indebtedness to IBM GF shall
be considered a Current Liability for purposes of determining compliance with the Financial
Covenants.
Debt shall mean all liabilities or obligations to pay another person/company a certain amount at
a specified date excluding subordinated debt.
Long Term shall mean beyond the ongoing twelve-month period.
Long Term Assets shall mean assets that take longer than a year to be converted to cash. They
are divided into four categories: tangible assets, investments, intangibles and other.
Long Term Debt shall mean payment obligations of indebtedness which mature more than twelve
months from the date of determination, or mature within twelve months from such date but are
renewable or extendible at the option of the debtor to a date more than twelve months from the
date of determination.
Net Profit after Tax shall mean Revenue plus all other income, minus all costs (excluding
amortization of good will), including applicable taxes, excluding currency adjustments for each
period (other than for annual periods to the extent required by GAAP).
Revenue shall mean the monetary expression of the aggregate of products or services transferred
by an enterprise to its customers (excluding intercompany transactions) for which said customers
have paid or are obligated to pay, plus other income as allowed.
Subordinated Debt shall mean SDSAs indebtedness to third parties as evidenced by an executed
Notes Payable Subordination Agreement in favor of IBM GF (all Subordinated Debt shall not be
considered Current Liabilities).
Tangible Net Worth shall mean Total Net Worth minus goodwill
Total Assets shall mean the total of Current Assets and Long Term Assets.
Total Liabilities shall mean the Current Liabilities and Long Term Debt less Subordinated Debt,
resulting from past or current transactions, that require settlement in the future.
Total Net Worth (the amount of owners or stockholders ownership in an enterprise) is equal to
Total Assets minus Total Liabilities.
Working Capital shall mean Current Assets minus Current Liabilities.
Working Capital Turnover (WCTO) shall mean annualised Revenue divided by Working Capital.
5
Addresses
Pursuant to Clause 11.9 of the Agreement, the following are the addresses of the parties to
the Agreement:
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(i)
if to IBM GF:
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(ii) if to SDSA: |
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IBM Belgium Financial
Services S.A. Avenue du
Bourget, BE- 42 11 30
Brussels VAT BE 424300467
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Supplies Distributors S.A. Rue Louis
Blériot 5 B-4460 Grace-Hollogne
Belgium: |
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(iii) if to BSDE:
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(iv) if to PFS Web B.V. |
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Business Supplies Distributors
Europe BV Markt 28,
6211 CF Maastricht The Nederlands
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PFS Web B.V. SPRL c/o SDSA |
Footnotes:
(1) |
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The maximum value for collateral representing IBM Reimbursables is 2 million. |
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(2) |
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All charges are exclusive of any taxes and duties. You agree to pay all applicable
taxes and duties. |
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(3) |
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EURIBOR, is the one month rate for Euros determined by the Banking Federation of
the
European Union appearing on Reuters page 01 at or about 11:00 am (Central European
Time) on the relevant day. Reuters page 01 means the display designated as Page 01
on
the Reuters Service (or such other page as may replace Page 01 on that service or such
other service as may replace it). On the first Business Day of a calendar month the
Base Rate
will be changed to EURIBOR appearing for the last Business Day of the previous calendar
month. If at any time, EURIBOR changes by 0.25% or more, the Base Rate will be changed
by the same amount on the day of such change or the next following Business Day.
Charges
accruing from day to day will be calculated on the basis of a year of 360 days and the
actual
number of days elapsed. If the Due Date for payment in Euros is not a day on which
settlement in Euros can be effected, the payment will be made on the preceding Business
Day on which settlement can be effected. |
(4)Audited Accounts within 90 days of fiscal year end. Revised business plans/budgets will
also be required at this time to enable an annual facility and covenant review to be effected
by us
6
By signing below all parties accept the terms of the Schedule. This Schedule amends and
replaces any Schedule issued and/or dated previously to this one.
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Signed on behalf of |
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Signed on behalf of |
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SUPPLIES DISTRIBUTORS S.A. |
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IBM BELGIUM FINANCIAL SERVICES S.A. |
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TVA BE 475.286.142 |
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TVA BE 424.300.467 |
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Signed: |
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Signed: |
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By Name: |
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By Name: |
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Signature: |
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Signature: |
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Date: |
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Date: |
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BUSINESS SUPPLIES DISTRIBUTORS
EUROPE BV |
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PFS WEB B.V. SPRL |
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7
exv10w5
Exhibit 10.05
SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT (this Amendment), dated as of
March 31, 2006, is entered into by and between WACHOVIA CAPITAL FINANCE CORPORATION (WESTERN), a
California corporation formerly known as Congress Financial Corporation (Western)
(Lender), and ECOST.COM, INC., a Delaware corporation, (Borrower).
RECITALS
A. Borrower and Lender have previously entered into that certain Loan and Security Agreement
dated August 3, 2004, as amended by that certain First Amendment to Loan and Security Agreement
dated November ___, 2005, and as modified by that certain letter agreement dated November 29, 2005
(such letter agreement, the Consent) (as amended, restated, supplemented or otherwise
modified at any time or from time to time, the Loan Agreement), pursuant to which Lender
has made certain loans and financial accommodations available to Borrower.
B. Borrower has entered into that certain Agreement and Plan of Merger dated as of November
29, 2005 (the Merger Agreement), by and among Borrower, Red Dog Acquisition Corp., a
Delaware corporation (Merger Sub) and PFSweb, Inc., a Delaware corporation
(PFSweb), which Merger Agreement provides for the merger of Merger Sub with and into
Borrower.
C. Pursuant to the Consent, and subject to the terms and conditions set forth therein, Lender
has consented to the Merger Agreement and the transactions contemplated thereby (such agreement and
transactions, collectively, the Merger).
D. On February 1, 2006, Merger Sub merged with and into Borrower, with Borrower as the
surviving corporation.
E. Lender and Borrower now wish to amend the Loan Agreement on the terms and conditions set
forth herein.
F. Each of Borrower and Lender is entering into this Amendment with the understanding and
agreement that, except as specifically provided herein, none of Lenders rights or remedies as set
forth in the Loan Agreement is being waived or modified by the terms of this Amendment.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein contained,
and for other good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
1. Defined Terms. Unless otherwise defined in this Amendment, any initially
capitalized terms used in this Amendment shall have the respective meanings ascribed thereto in the
Loan Agreement.
2. Amendments to Loan Agreement.
(a) Section 1 of the Loan Agreement is hereby amended by adding the following definition as
Section 1.79 of the Loan Agreement:
1.79 PFSweb shall mean PFSweb, Inc., a Delaware corporation.
(b) The following words shall be added after the words forty five (45) days after the end of
each fiscal month in clause (i) of the third sentence of Section 9.6(a) of the Loan Agreement:
for each of the monthly periods ending up to and including December 31, 2006 and
within thirty five (35) days for any periods thereafter
(c) Clause (ii) of the third sentence of Section 9.6(a) of the Loan Agreement is hereby
amended and restated to read in its entirety as follows:
(ii) within ninety (90) days after the end of each fiscal year, consolidated
financial statements and consolidating financial statement of Borrower and its
Subsidiaries (including in each case balance sheets, statements of income and loss,
statements of cash flow and statements of shareholders equity), and the
accompanying notes thereto, all in reasonable detail, fairly presenting the
financial position and the results of the operations of Borrower and its
Subsidiaries as of the end of and for such fiscal year, together with a certificate
of Borrowers chief financial officer that such financial statements have been
prepared in accordance with GAAP, and present fairly the results of operations and
financial condition of Borrower and its Subsidiaries as of the end of and for the
fiscal year then ended.
(d) The following sentence is hereby added at the end of Section 9.6(c) of the Loan Agreement:
Borrower shall also promptly after the filing thereof furnish or cause to be
furnished to Lender copies of all reports and statements which PFSweb files with the
Securities and Exchange Commission, including without limitation any Form 10-K
annual report and Form 10-Q quarterly report which, for periods from after February
1, 2006, shall include a segment break out of Borrower when required.
(e) Section 9.9 of the Loan Agreement is hereby amended by (i) deleting the word and at the
end of Section 9.9(e), (ii) deleting the period at the end of Section 9.9(f) and adding ; and in
the place of such deleted period, and (iii) adding the following as Section 9.22(g):
(g) Indebtedness of Borrower or any Subsidiary of Borrower under a loan agreement
or similar contractual arrangements for any loan by PSFweb or its Affiliates to
Borrower or such Subsidiary; provided that no payment may be made on
account of such Indebtedness if an Event of Default has occurred and is continuing
or would result from such payment, or if such payment would reduce
2
the
total of the
principal sum of such Indebtedness outstanding plus capital advances paid in cash to
Borrower by PFSweb or its affiliates to an amount less than Two Million Dollars
($2,000,000).
(f) Section 9.12 of the Loan Agreement is hereby amended by adding the following immediately
before the period at the end of such Section:
and except for any repayments of Indebtedness permitted by Section 9.9(g) hereof.
(g) Section 9.17 of the Loan Agreement is hereby amended and restated to read in its entirety
as follows:
9.17 Adjusted Tangible Net Worth. Borrower shall maintain a sum of
Adjusted Tangible Net Worth plus the amount of any Indebtedness on account of any
loan by PFSweb or its Affiliates to Borrower of not less than One Million Dollars
($1,000,000) as of the last day of each month commencing December 31, 2005.
3. Amendments to Consent. Section 3 of the Consent shall hereby be amended and
restated to read in its entirety as follows:
3. Availability Created by Eligible Inventory. Notwithstanding anything
to the contrary in the Loan Agreement or any other Financing Agreement, any
availability of Borrower that is created by or with respect to Eligible Inventory
shall be subject to Borrower providing reports of Eligible Inventory in form and
substance satisfactory to Lender.
Additionally, Section 4 of the Consent (Reduction of Eligible Inventory Sublimit) is hereby deleted
in its entirety. Except as specifically amended above, all of the terms and provisions of the
Consent shall continue to be in full force and effect (including without limitation Section 5
thereof regarding a Reserve equal to One Million Dollars ($1,000,000)).
4. Waivers. Lender waives the requirement that the monthly financial statements as
required in clause (i) of the third sentence of Section 9.6(a) of the Loan Agreement for the fiscal
months of January 2006 and February 2006 be furnished to Lender within forty-five (45) days of
fiscal month end, provided, that, such statements shall be furnished to Lender no
later than April 30, 2006. Lender further waives the requirements that the annual financial
statements as required in clause (ii) of that third sentence for the fiscal year ended December 31,
2005 be audited and accompanied by the opinion of independent certified public accountants and be
furnished to Lender within ninety (90) days of fiscal year end, provided, that,
such statements shall be certified to be correct by the vice president controller of Borrower and
shall be furnished to Lender no later than April 30, 2006. Except as specifically provided above,
all of
the financial statements and other documents described in Section 9.6(a) of the Loan Agreement
shall be furnished to Lender as and when required in Section 9.6(a) as amended above.
5. Effectiveness of this Amendment. The following shall have occurred before this
Amendment is effective:
3
(a) Amendment. Lender shall have received this Amendment in form and substance
satisfactory to Lender in all respects, duly executed by Borrower in a sufficient number of
counterparts for distribution to all parties.
(b) Guaranty. Lender shall have received a Guaranty in form and substance
satisfactory to Lender in all respects, duly executed by PFSweb and covering all Obligations of
Borrower to Lender, together with a certified copy of its board of directors resolutions and such
other documents as Lender may require to establish the due power and authority of PFSweb to execute
and deliver, and the due execution and delivery of, such Guaranty.
(c) Amendment Fee. Lender shall have received an amendment fee in the amount of
Forty-Five Thousand Dollars ($45,000), which fee is fully earned as of and due and payable on the
date hereof.
(d) Representations and Warranties. The representations and warranties set forth
herein and in each Financing Agreement (after giving effect to this Amendment) shall be true and
correct (other than any such representations or warranties that, by their terms, are specifically
made as of a date other than the date hereof).
(e) Other Required Documentation. All other documents and legal matters in connection
with the transactions contemplated by this Amendment shall have been delivered or executed or
recorded, as applicable, and shall be in form and substance satisfactory to Lender in all respects.
6. Representations and Warranties. Borrower represents and warrants to Lender as
follows:
(a) Authority and Due Execution. Borrower has all requisite corporate power and
authority to execute and deliver this Amendment, and to perform its obligations hereunder and under
the Financing Agreements (as amended or modified hereby). The execution, delivery and performance
by Borrower of this Amendment (i) are within the power of Borrower, (ii) have been duly authorized
and approved by all necessary corporate action and no other corporate proceedings are necessary to
consummate such transactions, and (iii) have received all necessary governmental approvals, if any,
and do not contravene any law or any contractual obligations or restrictions binding on Borrower.
(b) Enforceability. This Amendment has been duly executed and delivered by Borrower.
This Amendment and each Financing Agreement (as amended or modified hereby) is the legal, valid and
binding obligation of Borrower, enforceable against Borrower in accordance with its terms, and is
in full force and effect.
(c)
Representations and Warranties. The representations and warranties contained in
each Financing Agreement (other than any such representations or warranties that, by their terms,
are specifically made as of a date other than the date hereof) are true and correct on and as of
the date hereof as though made on and as of the date hereof provided Lender acknowledges that
Borrower has heretofore given notice to Bank that since the date of the last audited financial
statements provided by Borrower to Lender, Borrower has experienced
4
significant operating losses
and additionally a large customer owing the Borrower approximately $2 million is insolvent.
(d) No Default. No event has occurred and is continuing that constitutes a Default or
an Event of Default.
7. Governing Law. The validity, interpretation, construction and enforcement of this
Amendment and the rights of the parties hereunder, shall be determined under, governed by and
construed in accordance with the internal laws of the State of California but excluding any
principles of conflicts of law or other rule of law that would cause the application of the law of
any jurisdiction other than the laws of the State of California.
8. Counterparts. This Amendment may be executed in any number of counterparts and by
different parties and separate counterparts, each of which when so executed and delivered, shall be
deemed an original, and all of which, when taken together, shall constitute one and the same
instrument. Delivery of an executed counterpart of a signature page to this Amendment by
telefacsimile shall be effective as delivery of a manually executed counterpart of this Amendment.
Any party delivering an executed counterpart of this Amendment by telefacsimile shall also deliver
an original executed counterpart, but the failure to do so shall not affect the validity,
enforceability or binding effect of this Amendment.
9. Reference to and Effect on the Financing Agreements.
(a) Upon and after the effectiveness of this Amendment, each reference in the Loan Agreement
to this Agreement, hereunder, hereof or words of like import referring to the Loan Agreement,
and each reference in the other Financing Agreements to the Loan Agreement, thereunder,
thereof or words of like import referring to the Loan Agreement, shall mean and be a reference to
the Loan Agreement as modified and amended hereby.
(b) Except as specifically amended above, the Loan Agreement and all other Financing
Agreements, are and shall continue to be in full force and effect and are hereby in all respects
reaffirmed, ratified, approved and confirmed and shall constitute the legal, valid, binding and
enforceable obligations of Borrower to Lender.
(c) The execution, delivery and effectiveness of this Amendment shall not, except as expressly
provided herein, operate as a waiver of any right, power or remedy of Lender under any of the
Financing Agreements, nor constitute a waiver of any provision of any of the Financing Agreements.
(d) To the extent that any terms and conditions in any of the Financing Agreements shall
contradict or be in conflict with any terms or conditions of the Loan Agreement, after giving
effect to this Amendment, such terms and conditions are hereby deemed modified or amended accordingly to reflect the terms and conditions of the Loan Agreement as
modified or amended hereby.
10. Estoppel. To induce Lender to enter into this Amendment and to continue to make
advances to Borrower under the Loan Agreement, and without limiting Borrowers rights to contest
Lenders monthly statements in accordance with Section 6.2 of the Loan Agreement,
5
Borrower hereby
acknowledges and agrees that, as of the date hereof, there exists no right of offset, defense,
counterclaim or objection in favor of Borrower as against Lender with respect to the Obligations.
11. No Waiver. The execution of this Amendment and acceptance of any other documents
related hereto shall not be deemed to be a waiver of any Event of Default under the Loan Agreement
or any breach, default or event of default under any other Financing Agreement, whether or not
known to Lender and whether or not existing on the date of this Amendment.
12. Successors and Assigns. This Amendment shall be binding upon and inure to the
benefit of each of Borrower and Lender and their respective successors and assigns.
13. Captions and Headings. The captions or section headings at various places in this
Amendment are intended for convenience only and do not constitute and shall not be interpreted as
part of this Amendment.
14. Integration. This Amendment, together with the other Financing Agreements,
incorporates all negotiations of the parties hereto with respect to the subject matter hereof and
is the final expression and agreement of the parties hereto with respect to the subject matter
hereof.
15. Severability. In case any provision in this Amendment shall be invalid, illegal
or unenforceable, such provision shall be severable from the remainder of this Amendment and the
validity, legality and enforceability of the remaining provisions shall not in any way be affected
or impaired thereby.
16. No Strict Construction. The parties hereto have participated jointly in the
negotiation and drafting of this Amendment. In the event an ambiguity or question of intent or
interpretation arises, this Amendment shall be construed as if drafted jointly by the parties
hereto and no presumption or burden of proof shall arise favoring or disfavoring any party by
virtue of the authorship of any provisions of this Amendment.
17. No Other Changes. Except as explicitly amended or modified by this Amendment, all
of the terms and conditions of the Loan Agreement shall remain in full force and effect.
[Remainder of Page Intentionally Blank]
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IN WITNESS WHEREOF, the parties hereto have caused their duly authorized officers to execute
and deliver this Amendment as of the date first above written.
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ECOST.COM, INC. |
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WACHOVIA CAPITAL FINANCE CORPORATION (WESTERN) |
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7
exv10w6
Exhibit 10.06
FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT (this Amendment) is made and
entered into as of the ___day of April, 2006 by and between CONGRESS FINANCIAL CORPORATION
(SOUTHWEST), a Texas corporation (Lender), and SUPPLIES DISTRIBUTORS, INC., a Delaware
corporation (Borrower).
WHEREAS, Borrower and Lender are parties to that certain Loan and Security Agreement dated as
of March 29, 2002 as amended by that certain First Amendment to Loan and Security Agreement dated
as of April 20, 2004 and by that certain Second Amendment to Loan and Security Agreement dated as
of December 21, 2004, and by that certain Third Amendment to Loan and Security Agreement dated as
of June 24, 2005 (as amended from time to time, the Loan Agreement);
WHEREAS, Borrower and Lender desire to amend the Loan Agreement in the manner provided below;
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto hereby agree as follows:
ARTICLE I.
DEFINITIONS
Section 1.01. Definitions. Capitalized terms used in this Amendment, to the extent
not otherwise defined herein, shall have the same meaning as in the Loan Agreement, as amended
hereby.
ARTICLE II.
AMENDMENTS
Section 2.01. Amendment to Section 9.11(c) of the Loan Agreement. Effective as of the
date hereof, Section 9.11(c) of the Loan Agreement is hereby amended and restated in its
entirety to read as follows: (c) the aggregate amount of all such dividends does not exceed (i)
$1,250,000 per year, plus (ii) an amount equal to the proceeds received by Borrower related to the
liquidation of Business Supplies Distributors Europe BV, plus (iii) an amount equal to any cash
dividends received by Borrower from Supplies Distributors SA.
ARTICLE III.
NO WAIVER
Section 3.01. No Waiver. Nothing contained in this Amendment shall be construed as a
waiver by Lender of any covenant or provision of the Loan Agreement, the other documents and
agreements relating hereto or thereto (hereinafter individually referred to as a Loan
Document and collectively referred to as the Loan Documents), this Amendment, or of
any other contract or instrument between Borrower and Lender, and the failure of Lender at any time
or times
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hereafter to require strict performance by Borrower of any provision thereof shall not waive,
affect or diminish any right of Lender to thereafter demand strict compliance therewith. Lender
hereby reserves all rights granted under the Loan Agreement, the other Loan Documents, this
Amendment and any other contract or instrument between Borrower and Lender.
ARTICLE IV.
CONDITIONS PRECEDENT
Section 4.01. Conditions. The effectiveness of this Amendment is subject to the
satisfaction of the following conditions precedent, unless specifically waived by Lender:
(a) Lender shall have received, in form and substance satisfactory to Lender in its
sole discretion, (i) this Amendment, duly executed by Borrower and each of the attached
Consent, Ratification and Releases duly executed by the Guarantors, and (ii) such
additional documents, instruments and information as Lender or its legal counsel may
request;
(b) The representations and warranties contained herein, in the Loan Agreement, as
amended hereby, and/or in the other Loan Documents shall be true and correct as of the date
hereof as if made on the date hereof;
(c) No default shall have occurred under the Loan Agreement and be continuing and no
default shall exist under the Loan Agreement unless such default has been specifically
waived in writing by Lender; and
(d) All corporate proceedings taken in connection with the transactions contemplated by
this Amendment and all documents, instruments and other legal matters incident thereto shall
be satisfactory to Lender and its legal counsel, Patton Boggs LLP.
ARTICLE V.
RATIFICATIONS, REPRESENTATIONS AND WARRANTIES
Section 5.01. Ratifications. The terms and provisions set forth in this Amendment
shall modify and supersede all inconsistent terms and provisions set forth in the Loan Agreement
and except as expressly modified and superseded by this Amendment, the terms and provisions of the
Loan Agreement are ratified and confirmed and shall continue in full force and effect.
Section 5.02. Representations and Warranties. Borrower hereby represents and warrants
to Lender that (i) the execution, delivery and performance of this Amendment and any and all other
Loan Documents executed and/or delivered in connection herewith have been authorized by all
requisite corporate action on the part of Borrower and will not violate the Articles of
Incorporation or Bylaws of Borrower, (ii) the representations and warranties contained in the Loan
Agreement, as amended hereby, and any other Loan Document are true and correct on and as of the
date hereof as though made on and as of the date hereof, (iii) Borrower is in full compliance with
all covenants and agreements contained in the Loan Agreement, as amended hereby, and (iv) Borrower
has not amended its Articles of Incorporation or Bylaws since March 29, 2002.
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ARTICLE VI.
MISCELLANEOUS
Section 6.01. Survival of Representations and Warranties. All representations and
warranties made in the Loan Agreement or any other document or documents relating thereto,
including, without limitation, any Loan Document furnished in connection with this Amendment, shall
survive the execution and delivery of this Amendment and the other Loan Documents, and no
investigation by Lender or any closing shall affect the representations and warranties or the right
of Lender to rely upon them.
Section 6.02. Reference to Loan Agreement. Each of the Loan Documents, including the
Loan Agreement and any and all other agreements, documents or instruments now or hereafter executed
and delivered pursuant to the terms hereof or pursuant to the terms of the Loan Agreement as
amended hereby, are hereby amended so that any reference in such Loan Documents to the Loan
Agreement shall mean a reference to the Loan Agreement as amended hereby.
Section 6.03. Expenses of Lender. As provided in the Loan Agreement, Borrower agrees
to pay all reasonable costs and expenses incurred by Lender in connection with the preparation,
negotiation and execution of this Amendment and the other Loan Documents executed pursuant hereto
and any and all amendments, modifications, and supplements thereto, including without limitation
the reasonable costs and fees of Lenders legal counsel, and all reasonable costs and expenses
incurred by Lender in connection with the enforcement or preservation of any rights under the Loan
Agreement, as amended hereby, or any other Loan Document, including without limitation the
reasonable costs and fees of Lenders legal counsel.
Section 6.04. Severability. Any provision of this Amendment held by a court of
competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder
of this Amendment and the effect thereof shall be confined to the provision so held to be invalid
or unenforceable. Furthermore, in lieu of each such invalid or unenforceable provision there shall
be added automatically as a part of this Amendment a valid and enforceable provision that comes
closest to expressing the intention of such invalid or unenforceable provision.
Section 6.05. APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER LOAN DOCUMENTS EXECUTED
PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE PERFORMABLE IN DALLAS, TEXAS AND SHALL
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.
Section 6.06. Successors and Assigns. This Amendment is binding upon and shall inure
to the benefit of Lender and Borrower and their respective successors and assigns, except Borrower
may not assign or transfer any of its rights or obligations hereunder without the prior written
consent of Lender.
Section 6.07. Counterparts. This Amendment may be executed in one or more
counterparts, each of which when so executed shall be deemed to be an original, but all of which
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when taken together shall constitute one and the same instrument.
Section 6.08. Effect of Waiver. No consent or waiver, express or implied, by Lender
to or for any breach of or deviation from any covenant or condition of the Loan Agreement shall be
deemed a consent or waiver to or of any other breach of the same or any other covenant, condition
or duty.
Section 6.09. Headings. The headings, captions, and arrangements used in this
Amendment are for convenience only and shall not affect the interpretation of this Amendment.
Section 6.10. NO ORAL AGREEMENTS. THE LOAN AGREEMENT AND THE OTHER LOAN DOCUMENTS
REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.
Section 6.11. RELEASE. BORROWER HEREBY ACKNOWLEDGES THAT IT HAS NO DEFENSE,
COUNTERCLAIM, OFFSET, CROSS-COMPLAINT, CLAIM OR DEMAND OF ANY KIND OR NATURE WHATSOEVER THAT CAN BE
ASSERTED TO REDUCE OR ELIMINATE ALL OR ANY PART OF ITS LIABILITY TO REPAY THE OBLIGATIONS OR TO
SEEK AFFIRMATIVE RELIEF OR DAMAGES OF ANY KIND OR NATURE FROM LENDER. BORROWER HEREBY VOLUNTARILY
AND KNOWINGLY RELEASES AND FOREVER DISCHARGES LENDER, ITS PREDECESSORS, AGENTS, EMPLOYEES,
SUCCESSORS AND ASSIGNS, FROM ALL POSSIBLE CLAIMS, DEMANDS, ACTIONS, CAUSES OF ACTION, DAMAGES,
COSTS, EXPENSES, AND LIABILITIES WHATSOEVER, KNOWN OR UNKNOWN, ANTICIPATED OR UNANTICIPATED,
SUSPECTED OR UNSUSPECTED, FIXED, CONTINGENT, OR CONDITIONAL, AT LAW OR IN EQUITY, ORIGINATING IN
WHOLE OR IN PART ON OR BEFORE THE DATE THIS AMENDMENT IS EXECUTED, WHICH THE BORROWER MAY NOW OR
HEREAFTER HAVE AGAINST LENDER, ITS PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS, IF ANY,
AND IRRESPECTIVE OF WHETHER ANY SUCH CLAIMS ARISE OUT OF CONTRACT, TORT, VIOLATION OF LAW OR
REGULATIONS, OR OTHERWISE, AND ARISING FROM ANY LOANS, INCLUDING, WITHOUT LIMITATION, ANY
CONTRACTING FOR, CHARGING, TAKING, RESERVING, COLLECTING OR RECEIVING INTEREST IN EXCESS OF THE
HIGHEST LAWFUL RATE APPLICABLE, THE EXERCISE OF ANY RIGHTS AND REMEDIES UNDER THE LOAN AGREEMENT OR
OTHER AGREEMENTS, AND NEGOTIATION FOR AND EXECUTION OF THIS AMENDMENT.
[Remainder of Page Intentionally Left Blank; Signature Page Follows]
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IN WITNESS WHEREOF, this Amendment has been duly executed by Borrower and Lender to be
effective as of the date first above written.
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LENDER: |
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CONGRESS FINANCIAL CORPORATION |
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SUPPLIES DISTRIBUTORS, INC., |
(SOUTHWEST) |
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By:
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Name:
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Address: |
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Chief Executive Office: |
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5001 LBJ Freeway, Suite 1050 |
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500 North Central Expressway, 5th Floor |
Dallas, Texas 75244 |
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Plano, Texas 75074 |
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CONSENT, RATIFICATION AND RELEASE
Each of the undersigned hereby consents to the terms of the within and foregoing Amendment,
confirms and ratifies the terms of that certain Secured Guarantee dated March 29, 2002 and that
certain General Security Agreement dated March 29, 2002 each as amended from time to time and as
executed by the undersigned for the benefit of Lender (the Guaranty Documents), and
acknowledges that the Guaranty Documents are in full force and effect and ratifies the same, that
the undersigned has no defense, counterclaim, set-off or any other claim to diminish the
undersigneds liability under such documents, that the undersigneds consent is not required to the
effectiveness of the within and foregoing Amendment, and that no consent by the undersigned is
required for the effectiveness of any future amendment, modification, forbearance or other action
with respect to the Obligations, the Collateral, or any of the other Loan Documents. THE
UNDERSIGNED HEREBY VOLUNTARILY AND KNOWINGLY RELEASES AND FOREVER DISCHARGES LENDER, ITS
PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS, FROM ALL POSSIBLE CLAIMS, DEMANDS,
ACTIONS, CAUSES OF ACTION, DAMAGES, COSTS, EXPENSES, AND LIABILITIES WHATSOEVER, KNOWN OR UNKNOWN,
ANTICIPATED OR UNANTICIPATED, SUSPECTED OR UNSUSPECTED, FIXED, CONTINGENT, OR CONDITIONAL, AT LAW
OR IN EQUITY, ORIGINATING IN WHOLE OR IN PART ON OR BEFORE THE DATE THIS AMENDMENT IS EXECUTED,
WHICH THE UNDERSIGNED MAY NOW OR HEREAFTER HAVE AGAINST LENDER, ITS PREDECESSORS, AGENTS,
EMPLOYEES, SUCCESSORS AND ASSIGNS, IF ANY, AND IRRESPECTIVE OF WHETHER ANY SUCH CLAIMS ARISE OUT OF
CONTRACT, TORT, VIOLATION OF LAW OR REGULATIONS, OR OTHERWISE, AND ARISING FROM ANY LOANS,
INCLUDING, WITHOUT LIMITATION, ANY CONTRACTING FOR, CHARGING, TAKING, RESERVING, COLLECTING OR
RECEIVING INTEREST IN EXCESS OF THE HIGHEST LAWFUL RATE APPLICABLE, THE EXERCISE OF ANY RIGHTS AND
REMEDIES UNDER THE LOAN AGREEMENT OR OTHER AGREEMENTS, AND NEGOTIATION FOR AND EXECUTION OF THIS
AMENDMENT.
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PRIORITY FULFILLMENT SERVICES, INC. |
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BUSINESS SUPPLIES DISTRIBUTORS HOLDINGS, LLC |
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CONSENT, RATIFICATION AND RELEASE
The undersigned hereby consents to the terms of the within and foregoing Amendment, confirms
and ratifies the terms of that certain Guarantee dated March 29, 2002 as amended from time to time
and as executed by the undersigned for the benefit of Lender (the Guaranty Documents),
and acknowledges that the Guaranty Documents are in full force and effect and ratifies the same,
that the undersigned has no defense, counterclaim, set-off or any other claim to diminish the
undersigneds liability under such documents, that the undersigneds consent is not required to the
effectiveness of the within and foregoing Amendment, and that no consent by the undersigned is
required for the effectiveness of any future amendment, modification, forbearance or other action
with respect to the Obligations, the Collateral, or any of the other Loan Documents. THE
UNDERSIGNED HEREBY VOLUNTARILY AND KNOWINGLY RELEASES AND FOREVER DISCHARGES LENDER, ITS
PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS, FROM ALL POSSIBLE CLAIMS, DEMANDS,
ACTIONS, CAUSES OF ACTION, DAMAGES, COSTS, EXPENSES, AND LIABILITIES WHATSOEVER, KNOWN OR UNKNOWN,
ANTICIPATED OR UNANTICIPATED, SUSPECTED OR UNSUSPECTED, FIXED, CONTINGENT, OR CONDITIONAL, AT LAW
OR IN EQUITY, ORIGINATING IN WHOLE OR IN PART ON OR BEFORE THE DATE THIS AMENDMENT IS EXECUTED,
WHICH THE UNDERSIGNED MAY NOW OR HEREAFTER HAVE AGAINST LENDER, ITS PREDECESSORS, AGENTS,
EMPLOYEES, SUCCESSORS AND ASSIGNS, IF ANY, AND IRRESPECTIVE OF WHETHER ANY SUCH CLAIMS ARISE OUT OF
CONTRACT, TORT, VIOLATION OF LAW OR REGULATIONS, OR OTHERWISE, AND ARISING FROM ANY LOANS,
INCLUDING, WITHOUT LIMITATION, ANY CONTRACTING FOR, CHARGING, TAKING, RESERVING, COLLECTING OR
RECEIVING INTEREST IN EXCESS OF THE HIGHEST LAWFUL RATE APPLICABLE, THE EXERCISE OF ANY RIGHTS AND
REMEDIES UNDER THE LOAN AGREEMENT OR OTHER AGREEMENTS, AND NEGOTIATION FOR AND EXECUTION OF THIS
AMENDMENT.
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PFSWEB, INC. |
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exv10w7
Exhibit 10.07
GUARANTY
March 31, 2006
Wachovia Capital Finance Corporation (Western)
251 South Lake Avenue, Suite 900
Pasadena, California 91101
Re: ECOST.COM, INC., a Delaware corporation (Borrower)
Ladies and Gentlemen:
Wachovia Capital Finance Corporation (Western) (Lender) and Borrower have entered
into certain financing arrangements pursuant to which Lender may make loans and advances and
provide other financial accommodations to Borrower as set forth in the Loan and Security Agreement,
dated August 3, 2004 as amended, by and between Borrower and Lender (as the same now exists or may
hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, the
Loan Agreement), and other agreements, documents and instruments referred to therein or
at any time executed and/or delivered in connection therewith or related thereto, including, but
not limited to, this Guaranty (all of the foregoing, together with the Loan Agreement, as the same
now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced, being collectively referred to herein as the Financing Agreements).
Due to the close business and financial relationships between Borrower and the undersigned
(Guarantor), in consideration of the benefits which will accrue to Guarantor and as an
inducement for and in consideration of Lender making loans and advances and providing other
financial accommodations to Borrower pursuant to the Loan Agreement and the other Financing
Agreements, Guarantor hereby agrees in favor of Lender as follows:
1. Guaranty.
(a) Guarantor absolutely and unconditionally guarantees and agrees to be liable for the full
and indefeasible payment and performance when due of the following (all of which are collectively
referred to herein as the Guaranteed Obligations): (i) all obligations, liabilities and
indebtedness of any kind, nature and description of Borrower to Lender and/or its affiliates,
including principal, interest, charges, fees, costs and expenses, however evidenced, whether as
principal, surety, endorser, guarantor or otherwise, whether arising under the Loan Agreement, the
other Financing Agreements or otherwise, whether now existing or hereafter arising, whether arising
before, during or after the initial or any renewal term of the Loan Agreement or after the
commencement of any case with respect to Borrower under the United States Bankruptcy Code or any
similar statute (including, without limitation, the payment of interest and other amounts, which
would accrue and become due but for the commencement of such case, whether or not such amounts are
allowed or allowable in whole or in part in any such case and including loans, interest, fees,
charges and expenses related thereto and all other obligations of Borrower or its successors to
Lender arising after the commencement of such
case), whether direct or indirect, absolute or contingent, joint or several, due or not due,
primary or secondary, liquidated or unliquidated, secured or unsecured, and however acquired by
Lender and (ii) all expenses (including, without limitation, attorneys fees and legal expenses)
incurred by Lender in connection with the preparation, execution, delivery, recording,
administration, collection, liquidation, enforcement and defense of Borrowers obligations,
liabilities and indebtedness as aforesaid to Lender, the rights of Lender in any collateral or
under this Guaranty and all other Financing Agreements or in any way involving claims by or against
Lender directly or indirectly arising out of or related to the relationships between Borrower,
Guarantor or any other Obligor (as hereinafter defined) and Lender, whether such expenses are
incurred before, during or after the initial or any renewal term of the Loan Agreement and the
other Financing Agreements or after the commencement of any case with respect to Borrower or
Guarantor under the United States Bankruptcy Code or any similar statute.
(b) This Guaranty is a guaranty of payment and not of collection. Guarantor agrees that
Lender need not attempt to collect any Guaranteed Obligations from Borrower, Guarantor or any other
Obligor or to realize upon any collateral, but may require Guarantor to make immediate payment of
all of the Guaranteed Obligations to Lender when due, whether by maturity, acceleration or
otherwise, or at any time thereafter. Lender may apply any amounts received in respect of the
Guaranteed Obligations to any of the Guaranteed Obligations, in whole or in part (including
attorneys fees and legal expenses incurred by Lender with respect thereto or otherwise chargeable
to Borrower or Guarantor) and in such order as Lender may elect.
(c) Payment by Guarantor shall be made to Lender at the office of Lender from time to time on
demand as Guaranteed Obligations become due. Guarantor shall make all payments to Lender on the
Guaranteed Obligations free and clear of, and without deduction or withholding for or on account
of, any setoff, counterclaim, defense, duties, taxes, levies, imposts, fees, deductions,
withholding, restrictions or conditions of any kind. One or more successive or concurrent actions
may be brought hereon against Guarantor either in the same action in which Borrower or any other
Obligor is sued or in separate actions. In the event any claim or action, or action on any
judgment, based on this Guaranty is brought against Guarantor, Guarantor agrees not to deduct,
set-off, or seek any counterclaim for or recoup any amounts which are or may be owed by Lender to
Guarantor.
2. Waivers and Consents.
(a) Notice of acceptance of this Guaranty, the making of loans and advances and providing
other financial accommodations to Borrower and presentment, demand, protest, notice of protest,
notice of nonpayment or default and all other notices to which Borrower or Guarantor is entitled
are hereby waived by Guarantor. Guarantor also waives notice of and hereby consents to, (i) any
amendment, modification, supplement, extension, renewal, or restatement of the Loan Agreement and
any of the other Financing Agreements, including, without limitation, extensions of time of payment
of or increase or decrease in the amount of any of the Guaranteed Obligations, the interest rate,
fees, other charges, or any collateral, and the guaranty made herein shall apply to the Loan
Agreement and the other Financing Agreements and the Guaranteed Obligations as so amended,
modified, supplemented, renewed, restated or extended, increased or decreased, (ii) the taking,
exchange, surrender and releasing of collateral or guarantees now or at any time held by or
available to Lender for the obligations of Borrower
or any other party at any time liable on or in respect of the Guaranteed Obligations or who is
the owner of any property which is security for the Guaranteed Obligations (individually, an
Obligor and collectively, the Obligors), (iii) the exercise of, or refraining
from the exercise of any rights against Borrower or any other Obligor or any collateral, (iv) the
settlement, compromise or release of, or the waiver of any default with respect to, any of the
Guaranteed Obligations and (v) any financing by Lender of Borrower under Section 364 of the United
States Bankruptcy Code or consent to the use of cash collateral by Lender under Section 363 of the
United States Bankruptcy Code. Guarantor agrees that the amount of the Guaranteed Obligations
shall not be diminished and the liability of Guarantor hereunder shall not be otherwise impaired or
affected by any of the foregoing.
(b) No invalidity, irregularity or unenforceability of all or any part of the Guaranteed
Obligations shall affect, impair or be a defense to this Guaranty, nor shall any other circumstance
which might otherwise constitute a defense available to or legal or equitable discharge of Borrower
in respect of any of the Guaranteed Obligations, or Guarantor in respect of this Guaranty, affect,
impair or be a defense to this Guaranty. Without limitation of the foregoing, the liability of
Guarantor hereunder shall not be discharged or impaired in any respect by reason of any failure by
Lender to perfect or continue perfection of any lien or security interest in any collateral or any
delay by Lender in perfecting any such lien or security interest. As to interest, fees and
expenses, whether arising before or after the commencement of any case with respect to Borrower
under the United States Bankruptcy Code or any similar statute, Guarantor shall be liable therefor,
even if Borrowers liability for such amounts does not, or ceases to, exist by operation of law.
Guarantor acknowledges that Lender has not made any representations to Guarantor with respect to
Borrower, any other Obligor or otherwise in connection with the execution and delivery by Guarantor
of this Guaranty and Guarantor is not in any respect relying upon Lender or any statements by
Lender in connection with this Guaranty.
(c) Guarantor hereby irrevocably and unconditionally waives and relinquishes all statutory,
contractual, common law, equitable and all other claims against Borrower, any collateral for the
Guaranteed Obligations or other assets of Borrower or any other Obligor, for subrogation,
reimbursement, exoneration, contribution, indemnification, setoff or other recourse in respect to
sums paid or payable to Lender by Guarantor hereunder and Guarantor hereby further irrevocably and
unconditionally waives and relinquishes any and all other benefits which Guarantor might otherwise
directly or indirectly receive or be entitled to receive by reason of any amounts paid by or
collected or due from Guarantor, Borrower or any other Obligor upon the Guaranteed Obligations or
realized from their property.
(d) Guarantor hereby irrevocably and unconditionally waives and relinquishes any right to
revoke this Guaranty that Guarantor may now have or hereafter acquire.
(e) Without limiting the generality of any other waiver or other provision set forth in this
Guaranty, in accordance with Section 2856 of the California Civil Code, Guarantor hereby
irrevocably and unconditionally waives all rights and defenses arising out of an election of
remedies by Lender, even though that election of remedies, such as a nonjudicial foreclosure with
respect to security for a Guaranteed Obligation, has destroyed Guarantors rights of
subrogation and reimbursement against Borrower by operation of Section 580d of the California
Code of Civil Procedure or otherwise.
(f) Without limiting the generality of any other waiver or other provision set forth in this
Guaranty, in accordance with Section 2856 of the California Civil Code, Guarantor waives all rights
and defenses that Guarantor may have because the Guaranteed Obligations are secured by real
property. This means, among other things: (i) Lender may collect from Guarantor without first
foreclosing on any real or personal property collateral pledged by Borrower; and (ii) if Lender
forecloses on any real property collateral pledged by Borrower: (A) the amount of the Guaranteed
Obligations may be reduced only by the price for which that collateral is sold at the foreclosure
sale, even if the collateral is worth more than the sale price and (B) the Lender may collect from
Guarantor even if Lender, by foreclosing on the real property collateral, has destroyed any right
Guarantor may have to collect from Borrower. This is an unconditional and irrevocable waiver of
any rights and defenses Guarantor may have because the Guaranteed Obligations are secured by real
property. These rights and defenses include, but are not limited to, any rights or defenses based
upon Sections 580a, 580b, 580d, or 726 of the California Code of Civil Procedure.
(g) Without limiting the generality of any other waiver or other provision set forth in this
Guaranty, Guarantor hereby irrevocably and unconditionally waives and relinquishes, to the maximum
extent such waiver or relinquishment is permitted by applicable law, any and all rights, claims and
defenses arising directly or indirectly under Sections 2787 through 2855, inclusive, of the
California Civil Code and Sections 580a, 580b, 580c, 580d and 726 of the California Code of Civil
Procedure or any similar laws of any other jurisdiction.
3. Subordination. Payment of all amounts now or hereafter owed to Guarantor by
Borrower or any other Obligor is hereby subordinated in right of payment to the indefeasible
payment in full to Lender of the Guaranteed Obligations and all such amounts and any security and
guarantees therefor are hereby assigned to Lender as security for the Guaranteed Obligations.
4. Acceleration. Notwithstanding anything to the contrary contained herein or any of
the terms of any of the other Financing Agreements, the liability of Guarantor for the entire
Guaranteed Obligations shall mature and become immediately due and payable, even if the liability
of Borrower or any other Obligor therefor does not, upon the occurrence of any act, condition or
event which constitutes an Event of Default as such term is defined in the Loan Agreement.
5. Account Stated. The books and records of Lender showing the account between Lender
and Borrower shall be admissible in evidence in any action or proceeding against or involving
Guarantor as prima facie proof of the items therein set forth, and the monthly
statements of Lender rendered to Borrower, to the extent to which no written objection is made
within thirty (30) days from the date of sending thereof to Borrower, shall be deemed conclusively
correct and constitute an account stated between Lender and Borrower and be binding on Guarantor.
6. Termination. This Guaranty is continuing, unlimited, absolute and unconditional.
All Guaranteed Obligations shall be conclusively presumed to have been created in reliance on this
Guaranty. This Guaranty may not be terminated and shall continue so long as the Loan Agreement
shall be in effect (whether during its original term or any renewal, substitution or extension
thereof) or any Guaranteed Obligations shall be outstanding.
7. Reinstatement. If after receipt of any payment of, or proceeds of collateral
applied to the payment of, any of the Guaranteed Obligations, Lender is required to surrender or
return such payment or proceeds to any Person for any reason, then the Guaranteed Obligations
intended to be satisfied by such payment or proceeds shall be reinstated and continue and this
Guaranty shall continue in full force and effect as if such payment or proceeds had not been
received by Lender. Guarantor shall be liable to pay to Lender, and does indemnify and hold Lender
harmless for the amount of any payments or proceeds surrendered or returned. This Section 7 shall
remain effective notwithstanding any contrary action which may be taken by Lender in reliance upon
such payment or proceeds. This Section 7 shall survive the termination of this Guaranty.
8. Amendments and Waivers. Neither this Guaranty nor any provision hereof shall be
amended, modified, waived or discharged orally or by course of conduct, but only by a written
agreement signed by an authorized officer of Lender. Lender shall not by any act, delay, omission
or otherwise be deemed to have expressly or impliedly waived any of its rights, powers and/or
remedies unless such waiver shall be in writing and signed by an authorized officer of Lender. Any
such waiver shall be enforceable only to the extent specifically set forth therein. A waiver by
Lender of any right, power and/or remedy on any one occasion shall not be construed as a bar to or
waiver of any such right, power and/or remedy which Lender would otherwise have on any future
occasion, whether similar in kind or otherwise.
9. Corporate Existence, Power and Authority. Guarantor is a corporation duly
organized and in good standing under the laws of its state or other jurisdiction of incorporation
and is duly qualified as a foreign corporation and in good standing in all states or other
jurisdictions where the nature and extent of the business transacted by it or the ownership of
assets makes such qualification necessary, except for those jurisdictions in which the failure to
so qualify would not have a material adverse effect on the financial condition, results of
operation or businesses of Guarantor or the rights of Lender hereunder or under any of the other
Financing Agreements. The execution, delivery and performance of this Guaranty is within the
corporate powers of Guarantor, have been duly authorized and are not in contravention of law or the
terms of the certificates of incorporation, by-laws, or other organizational documentation of
Guarantor, or any indenture, agreement or undertaking to which Guarantor is a party or by which
Guarantor or its property are bound. This Guaranty constitutes the legal, valid and binding
obligation of Guarantor enforceable in accordance with its terms.
10. Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver.
(a) The validity, interpretation and enforcement of this Guaranty and any dispute arising out
of the relationship between Guarantor and Lender, whether in contract, tort, equity or otherwise,
shall be governed by the internal laws of the State of California (without giving effect to
principles of conflicts of law).
(b) Guarantor hereby irrevocably consents and submits to the non-exclusive jurisdiction of the
Courts of the State of California and the United States District Court for the Central District of
California and waives any objection based on venue or forum non conveniens
with respect to any action instituted therein arising under this Guaranty or any of the other
Financing Agreements or in any way connected with or related or incidental to the dealings of
Guarantor and Lender in respect of this Guaranty or any of the other Financing Agreements or the
transactions related hereto or thereto, in each case whether now existing or hereafter arising and
whether in contract, tort, equity or otherwise, and agrees that any dispute arising out of the
relationship between Guarantor or Borrower and Lender or the conduct of any such persons in
connection with this Guaranty, the other Financing Agreements or otherwise shall be heard only in
the courts described above (except that Lender shall have the right to bring any action or
proceeding against Guarantor or its property in the courts of any other jurisdiction which Lender
deems necessary or appropriate in order to realize on any collateral at any time granted by
Borrower or Guarantor to Lender or to otherwise enforce its rights against Guarantor or its
property).
(c) Guarantor hereby waives personal service of any and all process upon it and consents that
all such service of process may be made by certified mail (return receipt requested) directed to
its address set forth on the signature pages hereof and service so made shall be deemed to be
completed five (5) days after the same shall have been so deposited in the U.S. mails, or, at
Lenders option, by service upon Guarantor in any other manner provided under the rules of any such
courts. Within thirty (30) days after such service, Guarantor shall appear in answer to such
process, failing which Guarantor shall be deemed in default and judgment may be entered by Lender
against Guarantor for the amount of the claim and other relief requested.
(d) GUARANTOR HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE
OF ACTION (i) ARISING UNDER THIS GUARANTY OR ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANY
WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF GUARANTOR AND LENDER IN RESPECT OF
THIS GUARANTY OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS RELATED HERETO OR
THERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT,
EQUITY OR OTHERWISE. GUARANTOR HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR
CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT GUARANTOR OR LENDER MAY
FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE
CONSENT OF GUARANTOR AND LENDER TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
(e) If any action or proceeding is filed in a court of the State of California by or against
any party hereto in connection with any of the transactions contemplated by this Guaranty, (a) the
court shall, and is hereby directed to, make a general reference pursuant to California Code of
Civil Procedure Section 638 to a referee or referees to hear and determine all of the issues in
such action or proceeding (whether of fact or of law) and to report a statement of decision,
provided that at the option of Lender, any such issues pertaining to a provisional
remedy as defined in California Code of Civil Procedure Section 1281.8 shall be heard and
determined by the court, and (b) Guarantor shall be solely responsible to pay all fees and expenses
of any referee appointed in such action or proceeding.
(f) Lender shall not have any liability to Guarantor (whether in tort, contract, equity or
otherwise) for losses suffered by Guarantor in connection with, arising out of, or in any way
related to the transactions or relationships contemplated by this Guaranty, or any act, omission or
event occurring in connection herewith, unless it is determined by a final and non-appealable
judgment or court order binding on Lender that the losses were the result of acts or omissions
constituting gross negligence or willful misconduct. In any such litigation, Lender shall be
entitled to the benefit of the rebuttable presumption that it acted in good faith and with the
exercise of ordinary care in the performance by it of the terms of the Loan Agreement and the other
Financing Agreements.
11. Notices. All notices, requests and demands hereunder shall be in writing and (a)
made to Lender at its address set forth above and to Guarantor at its chief executive office set
forth below, or to such other address as either party may designate by written notice to the other
in accordance with this provision, and (b) deemed to have been given or made: if delivered in
person, immediately upon delivery; if by telex, telegram or facsimile transmission, immediately
upon sending and upon confirmation of receipt; if by nationally recognized overnight courier
service with instructions to deliver the next business day, one (1) business day after sending; and
if by certified mail, return receipt requested, five (5) days after mailing.
12. Partial Invalidity. If any provision of this Guaranty is held to be invalid or
unenforceable, such invalidity or unenforceability shall not invalidate this Guaranty as a whole,
but this Guaranty shall be construed as though it did not contain the particular provision held to
be invalid or unenforceable and the rights and obligations of the parties shall be construed and
enforced only to such extent as shall be permitted by applicable law.
13. Entire Agreement. This Guaranty represents the entire agreement and understanding
of this parties concerning the subject matter hereof, and supersedes all other prior agreements,
understandings, negotiations and discussions, representations, warranties, commitments, proposals,
offers and contracts concerning the subject matter hereof, whether oral or written.
14. Successors and Assigns. This Guaranty shall be binding upon Guarantor and its
successors and assigns and shall inure to the benefit of Lender and its successors, endorsees,
transferees and assigns. The liquidation, dissolution or termination of Guarantor shall not
terminate this Guaranty as to such entity or as to Guarantor.
15. Construction. All references to the term Guarantor wherever used herein shall
mean Guarantor and its successors and assigns (including, without limitation, any receiver, trustee
or custodian for Guarantor or any of its assets or Guarantor in its capacity as debtor or
debtor-in-possession under the United States Bankruptcy Code). All references to the term Lender
wherever used herein shall mean Lender and its successors and assigns and all references to the
term Borrower wherever used herein shall mean Borrower and its successors and assigns (including,
without limitation, any receiver, trustee or custodian for Borrower or any
of its assets or Borrower in its capacity as debtor or debtor-in-possession under the United
States Bankruptcy Code). All references to the term Person or person wherever used herein
shall mean any individual, sole proprietorship, partnership, corporation (including, without
limitation, any corporation which elects subchapter S status under the Internal Revenue Code of
1986, as amended), limited liability company, limited liability partnership, business trust,
unincorporated association, joint stock corporation, trust, joint venture or other entity or any
government or any agency or instrumentality or political subdivision thereof. All references to
the plural shall also mean the singular and to the singular shall also mean the plural.
IN WITNESS WHEREOF, Guarantor has executed and delivered this Guaranty as of the day and year
first above written.
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PFSWEB, INC., a Delaware corporation |
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Name: |
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[CORPORATE SEAL]
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Title: |
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Chief Executive Office |
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500 North Central Expressway |
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Suite 500 |
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Plano, TX 75074 |
exv10w8
Exhibit 10.08
SECOND AMENDMENT TO FIRST AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
THIS SECOND AMENDMENT TO FIRST AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (herein called
this Amendment) made as of the 31st day of March, 2006 by and between Priority Fulfillment
Services, Inc. (Borrower) and Comerica Bank (Bank),
W I T N E S S E T H:
WHEREAS, Borrower and Bank have entered into that certain First Amended and Restated Loan and
Security Agreement dated as of December 29, 2004 (as from time to time amended or modified, the
Original Agreement) for the purposes and consideration therein expressed, pursuant to which Bank
became obligated to make loans to Borrower as therein provided; and
WHEREAS, Borrower and Bank desire to amend the Original Agreement to provide for term loans
and for the other purposes set forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements
contained herein and in the Original Agreement, in consideration of the loans which may hereafter
be made by Bank to Borrower, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto do hereby agree as follows:
ARTICLE I.
Definitions and References
1.1 Terms Defined in the Original Agreement. Unless the context otherwise requires or unless
otherwise expressly defined herein, the terms defined in the Original Agreement shall have the same
meanings whenever used in this Amendment.
1.2. Other Defined Terms. Unless the context otherwise requires, the following terms when
used in this Amendment shall have the meanings assigned to them in this 1.2.
Amendment means this Second Amendment to First Amended and Restated Loan and
Security Agreement.
Loan Agreement means the Original Agreement as amended hereby.
ARTICLE II.
Amendments to Original Agreement
2.1Defined Terms.
(a) Clause (c) of the definition of Permitted Indebtedness in Exhibit A to the Original
Agreement is hereby amended in its entirety to read as follows:
(c) Indebtedness secured by a lien described in clause (c) of the defined term Permitted
Liens, provided (i) such Indebtedness does not exceed the lesser of the cost or fair market value
of the equipment financed with such Indebtedness and (ii) the aggregate amount of such
Indebtedness incurred in any fiscal year of Borrower shall not exceed $5,000,000 for fiscal year
2006 and $3,000,000 for all subsequent fiscal years..
(b) The definition of Permitted Indebtedness in Exhibit A to the Original Agreement is
hereby amended to add the following clause (n):
(n) Indebtedness of eCost.com owing to Borrower for working capital needs of eCost.com,
provided that (i) the aggregate outstanding principal amount of loans made by Borrower to
eCost.com shall not exceed $3,500,000 , (ii) at the time of incurrence of such Indebtedness and
after giving effect thereto, no Event of Default has occurred and is continuing, and (iii) the
aggregate outstanding amount of Indebtedness incurred by eCost.com pursuant to this clause (n)
when added to the aggregate amount of Investments made by Borrower pursuant to clause (p) of the
definition of Permitted Investments and the aggregate amount of Permitted Distributions does not
exceed $3,500,000 .
(c) The definition of Permitted Investments in Exhibit A to the Original Agreement is hereby
amended to add the following clause (p):
(p) Investments by Borrower in eCost.com for working capital needs of eCost.com,
provided that (i) the aggregate amount of Investments made by Borrower in eCost.com shall
not exceed $3,500,000, (ii) at the time of such Investment and after giving effect thereto,
no Event of Default has occurred and is continuing, and (iii) the aggregate amount of
Investments made pursuant to this clause (p) when added to the aggregate outstanding amount
of Indebtedness incurred by eCost.com pursuant to clause (n) of the definition of Permitted
Indebtedness and the aggregate amount of Permitted Distributions does not exceed
$3,500,000.
(d) Clause (c) of the definition of Permitted Liens in Exhibit A to the Original Agreement
is hereby amended in its entirety to read as follows:
(c) Liens (i) upon or in any Equipment acquired or held by Borrower or any of its
Subsidiaries to secure the purchase price of such Equipment or Indebtedness incurred solely for
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the purpose of financing the acquisition or lease of such Equipment, or (ii) existing on the
Equipment at the time of its acquisition, provided that the Lien is confined solely to the
property so acquired and improvements thereon, and the proceeds of such Equipment; provided that
the aggregate amount of such Liens incurred in any fiscal year shall not exceed (A) $5,000,000 for
FYE 2006 and (B) $3,000,000 at all other times.
(e) The definition of Permitted Transfer in Exhibit A to the Original Agreement is hereby
amended to add the following clause (g):
(g) Transfers by Borrower to eCost.com which constitute Permitted Indebtedness,
Permitted Investments and Permitted Distributions. .
(e) The following definitions of Inflow Transfer and Permitted Distribution are hereby
added to Exhibit A of the Original Agreement in the correct alphabetical order:
Inflow Transfer means any transfer of Cash made by any Affiliate, Subsidiary, or
Parent of Borrower to Borrower occurring after March 29, 2006.
Permitted Distribution means any dividend or distribution by Borrower to Guarantor,
provided that (i) such dividend or distribution is loaned, contributed or otherwise transferred by
Guarantor to eCOST.com for its working capital needs, (ii) the aggregate amount of such dividends
or distributions shall not exceed $3,500,000, (iii) at the time of such dividend or distribution
and after giving effect thereto, no Event of Default has occurred and is continuing, and (iv) the
aggregate amount of such dividends or distributions, when added to the aggregate outstanding
amount of Indebtedness incurred by eCost.com pursuant to clause (m) of the definition of Permitted
Indebtedness and the aggregate amount of Investments made pursuant to clause (p) of the definition
of Permitted Investments does not exceed $3,500,000.
§2.2 Capital Expenditures. Section 7.12 of the Original Agreement is hereby amended in its
entirety to read as follows:
7.12 Capital Expenditures. Make capital expenditures in an aggregate amount (including all
capital expenditures made by Borrowers Subsidiaries) greater than (i) $3,000,000 in any fiscal
year (other than 2006), (ii) $5,000,000 in fiscal year 2006,; provided that not less than
$2,000,000 of capital expenditures made by Borrower in fiscal year 2006 shall be financed with
Indebtedness from third parties. As used herein, the term capital expenditures does not include
(i) any software that is internally developed by Borrower, whether or not Borrower capitalized the
development costs, and (ii) any equipment ordered, but not yet accepted or paid for, by Borrower.
§2.3 Pledge of Cash. The following Section 6.12 is hereby added to the Original Agreement:
6.12 Pledge of Cash. In the event that (i) the aggregate amount of Permitted
Investments, Permitted Indebtedness and Permitted Distributions in eCOST exceeds
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$2,500,000 and (ii) Borrower fails to receive at least an additional $400,000 in Inflow Transfers
between April 1, 2006 and July 31, 2006, then, within ___15___days thereafter, Borrower shall grant
a perfected first priority Lien to Bank in a deposit account to be held with Bank. Until Borrower
receives at least $400,000 in Inflow Transfers before July 31, 2006, Borrower shall not permit the
funds held in such pledged deposit account
to be less than $400,000 less Inflow Transfers received between April 1, 2006 and July 31, 2006 at
any time. If Borrower fails to perform its obligations under this Section 6.12, the same shall
not constitute a default hereunder, but notwithstanding anything to the contrary contained in this
Agreement, Bank shall have no obligation to make any Advances until Borrower satisfies its
obligations under this Section 6.12.
§2.4 Permitted Distribution. Section 7.6 of the Original Agreement is hereby amended by adding
the following thereto: and make one or more Permitted Distributions.
ARTICLE III.
Conditions of Effectiveness
3.1. Effective Date. This Amendment shall become effective as of the date first above
written when and only when Bank shall have received, at Banks office, a counterpart of this
Amendment executed and delivered by Borrower.
ARTICLE IV.
Representations and Warranties
4.1. Representations and Warranties of Borrower. In order to induce Bank to
enter into this
Amendment, Borrower represents and warrants to Bank that:
(a) The representations and warranties contained in Article 5 of the Original Agreement are
true and correct at and as of the time of the effectiveness hereof; provided Bank acknowledges
that Borrower has heretofore given written notice to Bank of Borrower being named as a
co-defendant along with certain former directors of Daisytek in a lawsuit regarding the transfer
of certain assets of Daisytek and that an eCOST receivable of approximately $2,000,000 may be
written off.
(b) Borrower is duly authorized to execute and deliver this Amendment and is and will
continue to be duly authorized to borrow and to perform its obligations under the Loan Agreement.
Borrower has duly taken all corporate action necessary to authorize the execution and delivery of
this Amendment and to authorize the performance of the obligations of Borrower hereunder.
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(c) The execution and delivery by Borrower of this Amendment, the performance by Borrower of
its obligations hereunder and the consummation of the transactions contemplated hereby do not and
will not conflict with any provision of law, statute, rule or regulation or of the organizational
documents of Borrower, or of any material agreement, judgment, license, order or permit applicable
to or binding upon Borrower, or result in the creation of any lien, charge or encumbrance upon any
assets or properties of Borrower. Except for those which have been duly obtained, no consent,
approval, authorization or order of any court or governmental authority or third party is
required in connection with the execution and delivery by Borrower of this Amendment or to
consummate the transactions contemplated hereby.
(d) When duly executed and delivered, each of this Amendment and the Loan Agreement will be a
legal and binding instrument and agreement of Borrower, enforceable in accordance with its terms,
except as limited by bankruptcy, insolvency and similar laws applying to creditors rights
generally and by principles of equity applying to creditors rights generally.
ARTICLE V
Miscellaneous
5.1. Ratification of Agreements. The Original Agreement as hereby amended is hereby ratified
and confirmed in all respects. Any reference to the Loan Agreement in any Loan Document shall be
deemed to be a reference to the Original Agreement as hereby amended. The execution, delivery and
effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver
of any right, power or remedy of Bank under the Loan Agreement or any other Loan Document nor
constitute a waiver of any provision of the Loan Agreement or any other Loan Document.
5.2. Survival of Agreements. All representations, warranties, covenants and
agreements of
Borrower herein shall survive the execution and delivery of this Amendment and the performance
hereof, including without limitation the making or granting of the Advances, and shall further
survive until all of the Obligations are paid in full. All statements and agreements contained in
any certificate or instrument delivered by Borrower hereunder or under the Loan Agreement to Bank
shall be deemed to constitute representations and warranties by, or agreements and covenants of,
Borrower under this Amendment and under the Loan Agreement.
5.3. Loan Documents. This Amendment is a Loan Document, and all provisions in the Loan
Agreement pertaining to Loan Documents apply hereto.
5.4. Governing Law. This Amendment shall be governed by and construed in accordance with the
laws of the State of California and any applicable laws of the United States of America in all
respects, including construction, validity and performance.
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5.5. Counterparts. This Amendment may be separately executed in counterparts and by the
different parties hereto in separate counterparts, each of which when so executed shall be deemed
to constitute one and the same Amendment.
THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES
AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS OF THE PARTIES.
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IN WITNESS WHEREOF, this Amendment is executed as of the date first above written.
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PRIORITY FULFILLMENT SERVICES, INC.
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By: |
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Name: |
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COMERICA BANK
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7
CONSENT AND AGREEMENT
PFSWEB, INC., a Delaware corporation, hereby consents to the provisions of this Amendment and
the transactions contemplated herein, and hereby ratifies and confirms the Guaranty dated as of
December ___, 2004, made by it for the benefit of Bank, and agrees that its obligations and
covenants thereunder are unimpaired hereby and shall remain in full force and effect.
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PFSWEB, INC.
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8
exv31w1
EXHIBIT 31.1
CERTIFICATIONS OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
I, Mark Layton, certify that:
1. I have reviewed this report on Form 10-Q of PFSweb, 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 periods 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 operation
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)) for
the registrant and have:
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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; |
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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;
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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. |
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 registrants board of directors (or persons performing the equivalent function):
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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 |
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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. |
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Date:
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May 15, 2006 |
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By:
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/s/ Mark C. Layton
Chief Executive Officer
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exv31w2
EXHIBIT 31.2
CERTIFICATIONS OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
I, Tom Madden, certify that:
1. I have reviewed this report on Form 10-Q of PFSweb, 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 periods 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 operation
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)) for
the registrant and have:
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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; |
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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 |
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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. |
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 registrants board of directors (or persons performing the equivalent function):
a) |
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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 |
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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. |
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Date:
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May 15, 2006 |
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By:
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/s/ Thomas J. Madden
Chief Financial Officer
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exv32w1
EXHIBIT 32.1
CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section
1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of PFSweb, Inc.
(the Company), does hereby certify that:
The Quarterly Report on Form 10-Q for the period ended March 31, 2006 (the Form 10-Q) of the
Company fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the
Securities Exchange Act of 1934 and the information contained in the Form 10-Q fairly presents, in
all material respects, the financial condition and results of operations of the Company as of, and
for, the periods presented in the Form 10-Q.
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May 15, 2006 |
/s/ Mark C. Layton
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Mark C. Layton |
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Chief Executive Officer |
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May 15, 2006 |
/s/ Thomas J. Madden
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Thomas J. Madden |
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Chief Financial Officer |
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The foregoing certification is being furnished as an exhibit to the Form 10-Q pursuant to Item
601(b)(32) of Regulation S-K and Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and
(b) of Section 1350, Chapter 63 of Title 18, United States Code) and, accordingly, is not being
filed as part of the Form 10-Q for purposes of Section 18 of the Securities Exchange Act of 1934,
as whether made before or after the date hereof, regardless of any general incorporation language
in such filing.
A signed original of this written statement required by Section 906 has been provided to PFSweb,
Inc. and will be retained by PFSweb, Inc. and furnished to the Securities and Exchange Commission
or its staff upon request.
54