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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2006
or
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-28275
PFSWEB, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 75-2837058 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification Number) | |
| 500 North Central Expressway, Plano, Texas | 75074 | |
| (Address of principal executive offices) | (Zip code) |
Registrant’s telephone number, including area code:
972-881-2900
972-881-2900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
Common Stock, par value $.001 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. o Yes þ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or 15(d) of the Act. o Yes þ No
Indicate by a 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. Yes o No þ
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.
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). o Yes þ No
The aggregate market value of the voting stock held by non-affiliates of the registrant as of
June 30, 2006 (based on the closing price as reported by the National Association of Securities
Dealers Automated Quotation System) was $39,002,187.
As of March 26, 2007, there were 46,476,708 shares of the registrant’s Common Stock, $.001 par
value, outstanding, excluding 86,300 shares of common stock in treasury.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Annual Report, to the extent not set forth
herein, is incorporated herein by reference from the registrant’s definitive proxy statement
relating to the annual meeting of stockholders, which definitive proxy statement shall be filed
with the Securities and Exchange Commission within 120 days after the end of the fiscal year to
which this Annual Report relates.
INDEX
Unless otherwise indicated, all references to “PFSweb” “the Company,” “we,” “us” and “our”
refer to PFSweb, Inc., a Delaware corporation, and its subsidiaries.
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PART I
Item 1. Business
General
PFSweb is 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 recertified brand-name merchandise. We derive our revenues from
three business segments: business process outsourcing, a master distributor and an online discount
retailer.
First, in our business process outsourcing business segment operated by our Priority
Fulfillment Services subsidiaries (“PFS”) we derive our revenues from a broad range of services as
we process individual business transactions on our clients’ behalf. These business transactions may
include the answering of a phone call or an e-mail, the design and hosting of a client web-site,
the receipt and storage of a client’s inventory, the kitting and assembly of products to meet a
client’s specifications, the shipping of products to our client’s customer base, the management of
a complex set of electronic data transactions designed to keep our client’s suppliers and customers
accounting records in balance, or the processing of a returned package. In the business process
outsourcing segment, we do not own the inventory or the resulting accounts receivable, but provide
management services for these client-owned assets.
In our second business segment operated by our Supplies Distributors subsidiaries we act as a
master distributor of product for IBM and certain other clients. In this capacity, we purchase and
resell, for our own account, IBM and other manufacturers’ inventory. Accordingly, in this business
segment, we recognize product revenue and own the accounts receivable and inventory.
Our third business segment is eCOST.com, an online discount retailer of new, “close-out” and
recertified brand-name merchandise. This web-commerce product revenue model is focused on the sale
of products to a broad range of consumer and business customers. We
currently offer approximately 75,000 products in several primary merchandise categories, including
computer hardware and software, home electronics, digital imaging, watches and jewelry, housewares,
DVD movies, video games and cellular/wireless.
We are headquartered in Plano, Texas where our executive and administrative offices are
located as well as our primary technology operations and hosting facilities. We have an office in
El Segundo, CA which consists of sales, marketing and purchasing operations for our online discount
retail segment. We operate state-of-the-art call centers from our U.S. facilities located in
Plano, Texas, and Memphis, Tennessee, and from our international facilities located in Markham,
Canada and Liege, Belgium. We lease or manage warehouse facilities of approximately 2.0 million
square feet of warehouse space, many containing highly automated and state of the art material
handling and communications equipment, in Memphis, TN, Southaven, MS, Grapevine, TX, Markham,
Canada and Liege, Belgium, allowing us to provide global distribution solutions. We recently
opened a 6,500 square foot facility in the Philippines to provide call center and customer service
functions.
BUSINESS PROCESS OUTSOURCING SEGMENT
PFS is a global provider of web commerce and business process outsourcing solutions. PFS’
service breadth includes logistics and fulfillment, freight and transportation management,
real-time order management, kitting and assembly, customer care, facility operations and
management, turn-key web-commerce infrastructure, payment processing and financial services and
more. Collectively, we define our offering as Business Process Outsourcing because we extend our
clients’ infrastructure and technology capabilities, addressing an entire business transaction
cycle from demand generation to product delivery. Our solutions support both business-to-business
(“B2B”) and business-to-consumer (“B2C”) sales channels.
PFS serves as the “brand behind the brand” for companies seeking to increase their operation’s
efficiencies. As a business process outsourcer, we offer scalable and cost-effective solutions for
manufacturers, distributors, online retailers and direct marketing organizations across a wide
range of industry segments, from consumer goods to
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aviation. We provide our clients with seamless
and transparent solutions to support their business strategies,
allowing them to focus on their core competencies. Leveraging PFS’ technology, expertise and
proven methodologies, we enable client organizations to develop and deploy new products and
implement new business strategies or address new distribution channels rapidly and efficiently
through our optimized solutions. Our clients engage us both as a consulting partner to assist them
in the design of a business solution as well as a virtual and physical infrastructure partner
providing the mission critical operations required to build and manage their business solution.
Together, we not only help our clients define new ways of doing business, but also provide them the
technology, physical infrastructure and professional resources necessary to quickly implement this
new business model. We allow our clients to quickly and dramatically change how they
‘go-to-market.’
Each client has a unique business model and unique strategic objectives that require highly
customized solutions. PFS supports clients in a wide array of industries including technology
products, consumer goods, aviation, collectibles, luxury goods, food and beverage, apparel and home
furnishings. These clients turn to PFS for help in addressing a variety of business issues that
include customer satisfaction and retention, time-definite logistics, vendor managed inventory and
integration, supply chain compression, cost model realignments, transportation management and
international expansion, among others. We also act as a constructive agent of change, providing
clients the ability to alter their current distribution model, establish direct relationships with
end-customers, and reduce the overall time and costs associated with existing distribution channel
strategies. Our clients are seeking solutions that will provide them with dynamic supply chain and
multi-channel marketing efficiencies, while ultimately delivering a world-class customer service
experience.
Our technology and business infrastructure offering is flexible, reliable and fully scalable.
This flexibility allows us to design custom, variable cost solutions to fit the business
requirements of our clients’ strategies.
Our capabilities are expansive. To offer the most necessary and resourceful solutions to our
clients, we are continually developing capabilities to meet the pressing business issues in the
marketplace. Our business objective is to focus on “Leading the Evolution of
OutsourcingTM.” As our tagline suggests, we will continue to evolve our service offering
to meet the needs of the marketplace and the demands of unique client requirements. We are most
successful when we provide a new capability to enable a client to pursue a new initiative and we
are then able to leverage that revolutionary development across other client or prospect solutions,
as it becomes “best practice” in the marketplace. Our team of experts design and build diverse
solutions for online retailers, technology and consumer goods manufacturers, aviation brands as
well as other major brand name clients around a flexible core of technology and physical
infrastructure that includes:
| • | Technology collaboration provided by our suite of technology services, called the Entente Suite(SM), that are e-commerce and collaboration services that enable buyers and suppliers to fully automate their business transactions within their supply chain. Entente supports industry standard collaboration techniques including XML based protocols such as BizTalk and RosettaNet, real-time application interfaces, text file exchanges via secured FTP, and traditional electronic data interchange (“EDI”); | ||
| • | Managed hosting and Internet application development services, including web site design, creation, integration and ongoing maintenance, support and enhancement of web sites; | ||
| • | Order management, including order processing from any source of entry, back order processing and future order processing, tracking and tracing, credit management, electronic payment processing, calculation and collection of sales tax and VAT, comprehensive freight calculation and email notification, all with multiple currency and language options; | ||
| • | Customer Relationship Management (“CRM”), including interactive voice response (“IVR”) technology and web-enabled customer contact services through world-class call centers utilizing voice, e-mail, voice over internet protocol (“VOIP”) and internet chat communications that are fully integrated with real-time systems and historical data archives to provide complete customer lifecycle management; | ||
| • | International fulfillment and distribution services, including warehouse management, inventory management, vendor managed inventory, inventory postponement, product warehousing, order picking and packing, freight and transportation management and reverse logistics; |
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| • | Facility Operations and Management (“FOM”) that includes process reengineering, facility design and engineering and employee administration; | ||
| • | Kitting and assembly services, including light assembly, procurement services, supplier relationship management, specialized kitting, and supplier consigned inventory hub in our distribution facilities or co-located in other facilities; | ||
| • | Product management and inspection services, including management of coupon programs, de-kitting and salvage operations and inspection, testing and repackaging services; | ||
| • | Information management, including real-time data interfaces, data exchange services and data mining; | ||
| • | Financial services, including secure online credit card processing related services, fraud protection, invoicing, credit management and collection, and working capital solutions; and | ||
| • | Professional consulting services, including a consultative team of experts that customize solutions to each client and continuously seek out ways to increase efficiencies and produce benefits for the client. |
Industry Overview
Business activities in the public and private sectors continue to operate in an environment of
rapid technological advancement, increasing competition and continuous pressure to improve
operating and supply chain efficiency while decreasing costs. We currently see the following trends
within the industry:
| • | Manufacturers strive to restructure their supply chains to maximize efficiency and reduce costs in both B2B and B2C markets and to create a variable-cost supply chain able to support the multiple, unique needs of each of their initiatives, including traditional and electronic commerce. | ||
| • | Companies in a variety of industries seek outsourcing as a method to address one or more business functions that are not within their core business competencies, to reduce operating costs or to improve the speed or cost of implementation. |
Supply Chain Management Trend
As companies maintain focus on improving their businesses and balance sheet financial ratios,
significant efforts and investments continue to be made identifying ways to maximize supply chain
efficiency and extend supply chain processes. Working capital financing, vendor managed inventory,
supply chain visibility software solutions, distribution channel skipping, direct to consumer
e-commerce sales initiatives, and complex upstream supply chain collaborative technology are
products that manufacturers seek to help them achieve greater supply chain efficiency.
A key business challenge facing many manufacturers and retailers as they evaluate their supply
chain efficiency is in determining how the trend toward increased direct-to-customer business
activity will impact their traditional B2B and B2C commerce business models. Order management and
small package fulfillment and distribution capabilities are becoming increasingly important
processes as this trend evolves. We believe manufacturers will look to outsource their non-core
competency functions to support this modified business model. According to Jupiter Research, U.S.
online retail spending will grow to $144 billion in 2010 and the Internet will influence nearly
half of total retail sales compared to just 27% in 2005. We believe that companies will continue
to strategically plan for the impact that e-commerce and other new technology advancements will
have on their traditional commerce business models and their existing technology and infrastructure
capabilities.
Manufacturers, as buyers of materials, are also imposing new business practices and policies
on their supplier partners in order to shift the normal supply chain costs and risks associated
with inventory ownership away from their own balance sheets. Through techniques like Vendor Managed
Inventory or Consigned Inventory Programs (“CIP”), manufacturers are asking their suppliers, as a
part of the supplier selection process, to provide capabilities where the manufacturer need not
own, or even possess, inventory prior to the exact moment that unit of inventory is
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required as a raw material component or for shipping to a customer. To be successful for all parties, business
models such as these often require a sophisticated collection of technological capabilities that
allow for complete integration and collaboration of the information technology environments of both
the buyer and supplier. For example, for an inventory unit to arrive at the precise required moment in the manufacturing facility, it is
necessary for the Manufacturing Resource Planning systems of the manufacturer to integrate with the
CRM systems of the supplier. When hundreds of supplier partners are involved, this process can
become quite complex and technologically challenging. Buyers and suppliers are seeking solutions
that utilize XML based protocols like BizTalk, RosettaNet and other traditional EDI standards in
order to ensure an open systems platform that promotes easier technology integration in these
collaborative solutions.
Outsourcing Trend
In response to growing competitive pressures and technological innovations, we believe many
companies, both large and small, are focusing their critical resources on the core competencies of
their business and utilizing business process outsourcing to accelerate their business plans in a
cost-effective manner and perform non-core business functions. Outsourcing can provide many key
benefits, including the ability to:
| • | Enter new business markets or geographic areas rapidly; | ||
| • | Increase flexibility to meet changing business conditions and demand for products and services; | ||
| • | Enhance customer satisfaction and gain competitive advantage; | ||
| • | Reduce capital and personnel investments and convert fixed investments to variable costs; | ||
| • | Improve operating performance and efficiency; and | ||
| • | Capitalize on skills, expertise and technology infrastructure that would otherwise be unavailable or expensive given the scale of the business. |
Typically, outsourcing service providers are focused on a single function, such as information
technology, call center management, credit card processing, warehousing or package delivery. This
focus creates several challenges for companies looking to outsource more than one of these
functions, including the need to manage multiple outsourcing service providers, to share
information with service providers and to integrate that information into their internal systems.
Additionally, the delivery of these multiple services must be transparent to the customer and
enable the client to maintain brand recognition and customer loyalty. Furthermore, traditional
commerce outsourcers are frequently providers of domestic-only services versus international
solutions. As a result, companies requiring global solutions must establish additional
relationships with other outsourcing parties.
Another vital point for major brand name companies seeking to outsource is the protection of
their brand. When looking for an outsourcing partner to provide infrastructure solutions, brand
name companies must find a company that can ensure the same quality performance and superior
experience that their customers expect from their brands. Working with an outsourcing partner
requires finding a partner that can maintain the consistency of their brand image, which is one of
the most valuable intangible assets that recognized brand name companies possess.
The PFS Solution
PFS serves as the “brand behind the brand” for companies seeking to increase the efficiencies
of all aspects of their supply chain.
Our value proposition is to become an extension of our clients’ businesses by delivering a
superior experience that increases and enhances sales and market growth, customer satisfaction and
customer retention. We act as both a virtual and a physical infrastructure for our clients’
businesses. By utilizing our services, our clients are able to:
Quickly Capitalize on Market Opportunities. Our solutions empower clients to rapidly
implement their supply chain and e-commerce strategies and to take advantage of opportunities
without lengthy integration and implementation efforts. We have ready built technology and physical
infrastructure that is flexible in its design, which facilitates quick integration and
implementation. The PFS solution is designed to allow our clients to deliver consistent quality
service as transaction volumes grow and also to handle daily and seasonal peak periods. Through our
international locations, our clients can sell their products throughout the world.
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Improve the Customer Experience. We enable our clients to provide their customers with a
high-touch, positive buying experience thereby maintaining and promoting brand loyalty. Through our
use of advanced technology, we can respond directly to customer inquiries by e-mail, voice or data
communication and assist them with online ordering and product information. We offer our clients a
“world-class” level of service, including 24-hour, seven- day-a-week, Web-enabled customer care service centers, detailed CRM reporting and exceptional
order accuracy. We have significant experience in the development of Internet web sites that allows
us to recommend features and functions that are easily navigated and understood by our client’s
customers. Our technology platform is designed to ensure high levels of reliability and fast
response times for our clients’ customers. Because our technology is “world-class,” our clients
benefit from being able to offer the latest in customer communication and response conveniences to
their customers.
Minimize Investment and Improve Operating Efficiencies. One of the most significant benefits
that outsourcing can provide is the ability to transform fixed costs into variable costs. By
eliminating the need to invest in a fixed capital infrastructure, our clients’ costs typically
become directly correlated with volume increases or declines. Further, as volume increases drive
the demand for greater infrastructure or capacity, we are able to quickly deploy additional
resources. We provide services to multiple clients, which enables us to offer our clients economies
of scale, and resulting cost efficiency, that they may not have been able to obtain on their own.
Additionally, because of the large number of daily transactions we process, we have been able to
justify investments in levels of automation, security surveillance, quality control processes and
transportation carrier interfaces that are typically outside the scale of investment that our
clients might be able to cost justify on their own. These additional capabilities can provide our
clients the benefits of enhanced operating performance and efficiency, reduced inventory shrinkage,
and expanded customer service options.
Access a Sophisticated Technology Infrastructure. We provide our clients with ready access to
a sophisticated technology infrastructure through our Entente Suite(SM), which is designed to
interface seamlessly with their systems. We provide our clients with vital product and customer
information that can be immediately available to them on their own systems or through web based
graphic user interfaces for use in data mining, analyzing sales and marketing trends, monitoring
inventory levels and performing other management functions.
PFS Services
We offer a comprehensive and integrated set of business infrastructure solutions that are
tailored to our clients’ specific needs and enable them to quickly and efficiently implement their
supply chain strategies. Our services include:
Technology Collaboration. We have created the Entente Suite(SM), which illustrates the level
of electronic cooperation that is possible when we construct solutions with our clients using this
technology service offering. This set of technology services encompasses a wide range of business
functions from order processing and inventory reporting to total e-commerce design and
implementation. The Entente Suite(SM) comprises five key services— EntenteWeb®, EntenteDirect®,
EntenteMessage®, EntenteReport® and EntentePartnerConnect™.
EntenteWeb® is a one-stop shop for the entire e-commerce process, particularly for companies
with unusual needs or specific requests that are not easily met by the typical e-commerce
development packages. EntenteWeb® is a service utilizing our revolutionary GlobalMerchant
Commerceware™ e-commerce software platform that is particularly focused to enable global commerce
strategies with its extensive currency and language functionality. EntenteDirect® provides clients
with a real-time, user-friendly interface between their system and our order processing, warehouse
management and related functions. Using real-time or batch processes, EntenteMessage® is a file
exchange service for clients using our warehousing and distribution facilities. EntenteReport® is
a reporting and inquiry service particularly suited to companies that need to put key e-commerce
information into the hands of business users, but do not have the IT resources to facilitate the
necessary data extraction, manipulation and presentation. EntenteReport® consists of an
industry-standard browser-based report writer and a client-customized data warehouse configuration.
EntentePartnerConnect™ is a data repository and retrieval service for providing our clients
with access to comprehensive product and service information across a wide variety of product and
service categories. This information is aggregated from multiple sources including PFS business
partners such as Etilize that specialize in
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creating product content in certain categories. We
also rely on other relationships and public-domain information sources to supply raw data for this
service. Access to this information will be provided through the other Entente Suite(SM)
components including web sites created using EntenteWeb® and real-time or batch interfaces
available through EntenteDirect® and EntenteMessage®. The first subscriber to the
EntentePartnerConnect™ service is our wholly-owned subsidiary eCOST via the eCOST.com web site.
The content available for the wide-range of products offered on eCOST.com is provided by EntentePartnerConnect™. The information available
from EntentePartnerConnect™ for additional product categories should help eCOST increase revenues
through an expanded product offering and potential future product category expansion.
EntentePartnerConnect™ will be officially made available to PFS clients during 2007 beginning with
clients for which we host web sites using our EntenteWeb® hosted web service and GlobalMerchant
Commerceware platform.
The Entente Suite(SM) operates in an open systems environment and features the use of
industry-standard XML, enabling customized e-commerce solutions with minimal changes to a client’s
systems or our Enterprise Resource Planning (“ERP”) systems. The result is a faster implementation
process. Additionally, by using XML, the Entente Suite(SM) offers companies a more robust
electronic information transfer option than text file FTP or EDI, although the text file FTP, EDI
and other transfer methods are still supported.
EntenteWeb® Managed Hosting and Internet Application Development. Our EntenteWeb® service
provides a complete e-commerce website solution for our clients. We engage collaboratively with
our clients to design, build, host, and manage fully branded, fully customized and fully integrated
e-commerce web applications for B2C and B2B channels. As with all major brand name companies,
consistency within the brand image is vital; therefore, our web designers create online stores that
seamlessly integrate and mirror the exact brand image of our clients.
We offer a broad range of hosting and support plans that can be tailored to fit the needs of
each client. Utilizing IBM’s eServer xSeries servers, Microsoft’s.NET Technologies and our
proprietary GlobalMerchant Commerceware platform, we maintain a robust hosting environment for our
hosted client web site properties. Additionally, our EntenteWeb® service includes state-of-the-art
web analytics via Web Trends OnDemand — Enterprise Edition. This highly advanced and flexible
analytics tool delivers the critical e-business information that our clients need to maximize the
effectiveness of their online store.
EntenteWeb® is a complete front-to-back e-commerce service that incorporates components
ranging from the look of the user interface to specific business purchasing, warehousing and
shipping needs, enabling companies to define in exact terms their desired e-commerce site
functionality.
Order Management. Our order management solutions provide clients with interfaces that allow
for real-time information retrieval, including information on inventory, sales orders, shipments,
delivery, purchase orders, warehouse receipts, customer history, accounts receivable and credit
lines. These solutions are seamlessly integrated with our web-enabled customer contact centers,
allowing for the processing of orders through shopping cart, phone, fax, mail, email, web chat, and
other order receipt methods. As the information backbone for our total supply chain solution, order
management services can be used on a stand-alone basis or in conjunction with our other business
infrastructure offerings, including customer contact, financial or distribution services. In
addition, for the B2B market, our technology platform provides a variety of order receipt methods
that facilitate commerce within various stages of the supply chain. Our systems provide the ability
for both our clients and their customers to track the status of orders at any time. Our services
are transparent to our clients’ customers and are seamlessly integrated with our clients’ internal
systems platforms and web sites. By synchronizing these activities, we can capture and provide
critical customer information, including:
| • | Statistical measurements critical to creating a quality customer experience, containing real-time order status, order exceptions, back order tracking, allocation of product based on timing of online purchase and business rules, the ratio of customer inquiries to purchases, average order sizes and order response time; | ||
| • | B2B supply chain management information critical to evaluating inventory positioning, for the purpose of reducing inventory turns, and assessing product flow through and end-consumer demand; | ||
| • | Reverse logistics information including customer response and reason for the return or rotation of product and desired customer action; |
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| • | Detailed marketing information about what was sold and to whom it was sold, by location and preference; and | ||
| • | Web traffic reporting showing the number of visits (“hits”) received, areas visited, and products and information requested. |
Customer Relationship Management. We offer a completely customized CRM solution for clients.
Our CRM solution encompasses a full-scale customer contact management service offering, as well as
a fully integrated customer analysis program. All customer contacts are captured and customer
purchases are documented. Full-scale reporting on all customer transactions is available for
evaluation purposes. Through each of our customer touch-points, information can be analyzed and
processed for current or future use in business evaluation, product effectiveness and positioning,
and supply chain planning.
An important feature of evolving commerce remains the ability for the customer to speak with a
live customer service representative. Our experience has been that a majority of consumers tell us
they visited the web location for information, but not all of those consumers chose to place their
order online. Our customer care services utilize features that integrate voice, e-mail, standard
mail, data and Internet chat communications to respond to and handle customer inquiries. Our
customer care representatives answer various questions, acting as virtual representatives of our
client’s organization, regarding order status, shipping, billing, returns and product information
and availability as well as a variety of other questions. For certain clients, we handle Level I
and Level II technical support. Level I technical support involves assisting clients’ customers
with basic technical issues, i.e. computer application issues. Level II support may involve a more
in-depth question and answer session with the customer. These customer care representatives are
certified in the appropriate applications and have the ability to evaluate hardware, compatibility
and software installation issues. Our web-enabled customer care technology identifies each customer
contact automatically and routes it to the available customer care representative who is
individually certified in the client’s business and products.
Our web-enabled customer care centers are designed so that our customer care representatives
can handle several different clients and products in a shared environment, thereby creating economy
of scale benefits for our clients as well as highly customized dedicated support models that
provide the ultimate customer experience and brand reinforcement. Our advanced technology also
enables our representatives to up-sell, cross-sell and inform customers of other products and sales
opportunities. The web-enabled customer care center is fully integrated into the data management
and order processing system, allowing full visibility into customer history and customer trends.
Through this fully integrated system, we are able to provide a complete CRM solution.
With the need for efficiency and cost optimization for many of our clients, we have integrated
IVR as another option for customer contacts. IVR creates an “electronic workforce” with virtual
agents that can assist customers with vital information at any time of the day or night. IVR allows
for our clients’ customers to deal interactively with our system to handle basic customer
inquiries, such as account balance, order status, shipment status, catalog requests, product and
price inquiries, and routine order entry for established customers. The inclusion of IVR to our
service offering allows us to offer a cost effective way to handle high volume, low complexity
calls.
International Fulfillment and Distribution Services. An integral part of our solution is the
warehousing and distribution of inventory either owned by our clients or owned by us through our
master distributor relationships. We currently have approximately 2 million square feet of leased
or managed warehouse space domestically and internationally to store and process our and our
clients’ inventory. We receive client inventory in our distribution centers, verify shipment
accuracy, unpack and audit packages (a process that includes spot-checking a small percentage of
the client’s inventory to validate piece counts and check for damages that may have occurred during
shipping, loading and unloading). Upon request, we inspect for other damages or defects, which may
include checking fabric, stitching and zippers for soft goods, or ‘testing’ power-up capabilities
for electronic items. We generally stock for sale within one business day of unloading. On behalf
of our clients, we pick, pack and ship their customer orders and can provide customized packaging,
inserts and promotional literature for distribution with customer orders. For many clients, we
provide gift-wrapping services including customized gift-wrapping paper, ribbon, gift-box and
gift-messaging.
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Our distribution facilities contain computerized sortation equipment, highly mobile
pick-to-light carts, powered material handling equipment, scanning and bar-coding systems and
automated conveyors, in-line scales and x-ray equipment used to inspect shipment contents for
automatic accuracy checking. Our international distribution complexes include several advanced
technology enhancements, such as radio frequency technology in product receiving processing to
ensure accuracy, as well as an automated package routing and a pick-to-light paperless order
fulfillment system. Our advanced distribution systems provide us with the capability to warehouse
an extensive number of stock keeping units (SKUs) for our clients, ranging from large high-end
laser printers to small cosmetic compacts. Our facilities are flexibly configured to process B2B and single pick B2C orders
from the same central location.
In addition to our advanced distribution systems, our pick-to-light carts and conveyor system
controls provide real time productivity reporting, thereby providing our management team with the
tools to implement productivity standards. Our recently expanded fleet of pick-to-light carts also
fully integrates with our Vertical Lift Module (VLM), which is capable of stocking more than two
thousand SKUs. This combination of computer-controlled equipment provides the seamless integration
of our pick-to-light and mass storage capabilities. This unique combination of technologies
ensures high order accuracy for each and every customer order.
During 2005, we increased our distribution capacity by relocating our primary B2B facility
from Memphis, TN to a newly constructed facility in Southaven, MS, containing approximately 366,000
square feet of space. The new Southaven facility has more clear height added cubic space
utilization, state-of-the-art lighting that increases the quality and volume of light while
reducing energy costs, and certain long-term tax incentives offered by the State of Mississippi.
Southaven maintains the same proximity to all modes of transportation compared with our Memphis
facilities.
During 2006 we added an additional facility in Memphis, TN consisting more than 160,000 square
feet that is currently being retrofit for new client additions and should become operational during
the first half of 2007. This space allows for additional growth.
During 2006, we warehoused, managed and fulfilled more than $2.7 billion in client merchandise
and transactions. Much of this does not represent our revenue, but rather the revenue of our
clients’ for which we provided business process outsourcing solutions. See “Management’s Discussion
and Analysis of Financial Condition and Results of Operations.”
Based upon our clients’ needs, we are able to take advantage of a variety of shipping and
delivery options, which range from next day service to zone skipping to optimize transportation
costs. Our facilities and systems are equipped with multi-carrier functionality, allowing us to
integrate with all leading package carriers and provide a comprehensive freight and transportation
management offering. In addition, an increasingly important function that we provide for our
clients is reverse logistics management. We offer a wide array of product return services,
including issuing return authorizations, receipt of product, crediting customer accounts, and
disposition of returned product.
Our domestic clients enjoy the benefits of having their inventory assets secured by a network
of trained law enforcement professionals, who have developed and continue to operate a world-class
security network from our security headquarters in Memphis, TN and Southaven, MS. As part of our
services for one of our clients, certain of our security plans and procedures are reviewed and
approved by a U.S. federal agency. Continual validation ensures that we employ the latest in
security processes and procedures to further enhance our surveillance and detection capabilities.
Our security program continues to gain trust and confidence from our clients as we protect their
product and assets.
Facility Operations and Management. Our FOM service offering includes distribution facility
design and optimization, business process reengineering and ongoing staffing and management. Along
with our operations in Mississippi and Tennessee, we also manage an aircraft parts distribution
center in Grapevine, TX on behalf of Raytheon Aircraft Company. Our expertise in supply chain
management, logistics and customer-centric fulfillment operations extends through our management of
client-owned facilities, resulting in cost reductions, process improvements and technology-driven
efficiencies.
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Kitting and Assembly Services. Our expanded kitting and assembly services enable our clients
to reduce the time and costs associated with managing multiple suppliers, warehousing hubs, and
light manufacturing partners. As a single source provider, we provide clients with the advantage of
convenience, accountability and speed. Our comprehensive kitting and assembly services provide a
quality one-stop resource for any international channel. Our kitting and assembly services include
light assembly, specialized kitting and supplier-consigned inventory hub either in our distribution
facilities or co-located elsewhere. We also offer customized light manufacturing and Supplier
Relationship Management.
We will work with clients to re-sequence certain supply chain activities to aid in an
inventory postponement strategy. We can provide kitting and assembly services and build-to-stock
thousands of units daily to stock in a Just-in-Time (“JIT”) environment. This service, for example,
can entail the procurement of packaging materials including retail boxes, foam inserts and
anti-static bags. These raw material components would be shipped to us from domestic or overseas
manufacturers, and we will build the finished SKU units to stock for the client. This strategy
allows manufacturers to make a smaller investment in inventory while meeting changing customer
demand.
Combining our assembly services with our supplier-owned inventory hub services allows our
clients to reduce cycle times, to compress their supply chains and to consolidate their operations
and supplier management functions. We have supplier inventory management, assembly and fulfillment
services all in one place, providing greater flexibility in product line utilization, as well as
rapid response to change orders or packaging development. Our standard capabilities include:
build-to-order, build-to-stock, expedited orders, passive and active electrostatic discharge
(“ESD”) controls, product labeling, serial number generation, marking and/or capture, lot number
generation, asset tagging, bill of materials (“BOM”) or computer automated design (“CAD”)
engineering change processing, SKU-level pricing and billing, manufacturing and metrics reporting,
first article approval processes, and comprehensive quality controls.
Our kitting and assembly services also include procurement. We work directly with client
suppliers to make JIT inventory orders for each component in client packages, thereby ensuring we
receive the appropriate inventory quantities at just the right time and we then turn them around
JIT to customers.
Kitting and inventory hub services enable clients to collapse supply chains into the minimal
steps necessary to prepare product for distribution to any channel, including wholesale, mass
merchant retail, or direct to consumer. Clients no longer have to employ multiple providers or
require suppliers to consign multiple inventory caches for each channel. We offer our clients the
opportunity to consolidate operations from a channel standpoint, as well as from a geographic
perspective. Our integrated, global information systems and international locations support client
business needs worldwide.
Product Management and Inspection Services. We also operate a coupon management system and
product management program. Coupons are managed and activated by a unique serial number that ties
the coupon to the individual sales order thus eliminating fraudulent activity. Our capabilities
also extend into de-kitting and salvage operations, allowing our clients to reclaim valuable raw
materials and components from discontinued or obsolete inventory.
We operate a test and repair center where we visually inspect items for cosmetic defects.
These items are put through rigorous testing that includes: functionality, durability, accessory
inspection and packaging. Items that pass the testing are repackaged and resold with a noted
exception of “open-box” merchandise. Items that fail the inspection are disassembled and working
spare parts are saved for future use in repairs.
Information Management. We have the ability to communicate with and transfer information to
and from our clients through a wide variety of technology services, including real-time data
interfaces, file transfer methods and electronic data interchange. Our systems are designed to
capture, store and electronically forward to our clients critical information regarding customer
inquiries and orders, product shipments, inventory status (for example, levels of inventory on
hand, on backorder, on purchase order and inventory due dates to our warehouse), product returns
and other information. We maintain for our clients detailed product databases that can be
seamlessly integrated with their web sites utilizing the capabilities of the Entente Suite(SM). Our
systems are capable of providing our clients with customer inventory and order information for use
in analyzing sales and marketing trends and introducing new products. We also offer customized
reports and data analyses based upon specific client needs to assist them in their budgeting and
business decision process.
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Financial Services. Our financial services are divided into two major areas: 1) billing,
credit and collection services for B2B and B2C clients and 2) working capital solutions, where we
act as a virtual and physical financial management department to fulfill our clients’ needs.
We offer secure credit and collections services for both B2B and B2C businesses.
Specifically, for B2C clients, we offer secure credit card processing related services for orders
made via a client web site or through our customer contact center. We offer manual credit card
order review as an additional level of fraud protection. We also calculate
sales taxes, goods and services taxes or value added taxes, if applicable, for numerous taxing
authorities and on a variety of products. Using third-party leading-edge fraud protection services
and risk management systems, we can offer the highest level of security and the lowest level of
risk for client transactions.
For B2B clients, we offer full-service accounts receivable management and collection
capabilities, including the ability to generate customized computer-generated invoices in our
clients’ names. We assist clients in reducing accounts receivable and days sales outstanding, while
minimizing costs associated with maintaining an in-house collections staff. We offer electronic
credit services in the format of EDI X.12 and XML communications direct from our clients to their
vendors, suppliers and retailers.
Professional Consulting Services. As part of the tailored solution for our clients, we offer
a full team of experts specifically designated to focus on our clients’ businesses. Team members
play a consultative role, providing constructive evaluation, analysis and recommendations for the
client’s business. This team creates customized solutions and devises plans that will increase
efficiencies and produce benefits for the client when implemented.
Comprised of industry experts from top-tier consulting firms and industry market leaders, our
team of professional consultants provides client service focus and logistics and distribution
expertise. They have built solutions for Fortune 1000 and Global 2000 market leaders in a wide
range of industries, including apparel, technology, telecommunications, cosmetics, aviation,
housewares, high-value collectibles, sporting goods, pharmaceuticals and several more. Focusing on
the evolving infrastructure needs of major corporations and their business initiatives, our team
has a solid track record providing consulting services in the areas of supply chain management,
distribution and fulfillment, technology interfacing, logistics and customer support.
Clients and Marketing
Our target clients include online retailers as well as leading technology, consumer goods and
aviation brands looking to quickly and efficiently implement or enhance business initiatives, adapt
their go-to-market strategies, or introduce new products or programs, without the burden of
modifying or expanding their technology, customer care, supply chain and logistics infrastructure.
Our solutions are applicable to a multitude of industries and company types and we have provided
solutions for such companies as:
International Business Machines (“IBM”) (printer supplies in several geographic areas),
Adaptec (computer accessories), the United States Government as a sub-contractor (high-value
collectibles), CHiA’SSO (a contemporary home furnishings and decor cataloguer), Xerox (printers and
printer supplies), Nokia (cell phone accessories), Roots Canada LTD. (apparel), Hewlett-Packard
(printers and computer networking equipment), Flavia (a beverage division of Mars), Raytheon
Aircraft Company (FOM and time-definite logistics supporting parts distribution), The Smithsonian
Business Ventures (a collectibles cataloger), Fathead (a consumer goods manufacturer), Riverbed
Technologies (a wide-area data services provider) and LEGO Brand Retail (a toy manufacturer)
amongst many others.
We target potential clients through an extensive integrated marketing program that is
comprised of a variety of direct marketing techniques, trade event participation, search engine
marketing, public relations and a sophisticated outbound tele-sales lead generation model. We have
also developed an intricate messaging matrix that defines our various business process outsourcing
solutions and products, the vehicles we utilize to deliver marketing communication on these
solutions/products and the target audience segments that display a demand for these
solutions/products. This messaging matrix allows us to deploy highly targeted solution messages to
selected key vertical industry segments where we feel that we are able to provide significant
service differentiation and value. We
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also pursue strategic marketing alliances with consulting
firms, software manufacturers and other logistics providers to increase market awareness and
generate referrals and customer leads.
Because of the highly complex nature of the solutions we provide, our clients demand
significant competence and experience from a variety of different business disciplines during the
sales cycle. As such, we utilize a selected member of our senior executive team to lead the design
and proposal development of each potential new client we choose to pursue. The senior executive is
supported by a select group of highly experienced individuals from our professional services group
with specific industry knowledge or experience to the solutions development process. We employ a
team of highly trained implementation managers whose responsibilities include the oversight and
supervision of client projects and maintaining high levels of client satisfaction during the
transition process between the various stages of the sales cycle and steady state operations.
Competition
We face competition from many different sources depending upon the type and range of services
requested by a potential client. Many other companies offer one or more of the same services we
provide on an individual basis. Our competitors include vertical outsourcers, which are companies
that offer a single function solution, such as call centers, public warehouses or credit card
processors. We occasionally compete with transportation logistics providers, known in the industry
as 3PL’s and 4PL’s (third or fourth party 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 various services similar to our solution
offerings.
In many instances, we compete with the in-house operations of our potential clients
themselves. Occasionally, the operations departments of potential clients often believe that they
can perform the same services we do, at similar quality levels and costs, 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.
Although many of our competitors offer one or more of our services, we believe our primary
competitive advantage is our ability to offer a wide array of customized services that cover a
broad spectrum of business processes, including web-site design and hosting, kitting and assembly,
order processing and shipment, credit card payment processing and customer service, thereby
eliminating any need for our clients to coordinate these services from many different providers. We
believe we can differentiate ourselves by offering our clients a very broad range of business
process services that address, in many cases, the entire value chain, from demand to delivery.
We also compete on the basis of many other important additional factors, including:
| • | operating performance and reliability; |
| • | ease of implementation and integration; | ||
| • | experience of the people required to successfully and efficiently design and implement solutions; | ||
| • | experience operating similar solutions dynamically, | ||
| • | leading edge technology capabilities; | ||
| • | global reach; and | ||
| • | price. |
We believe that we can compete favorably with respect to many of these factors. However, the
market for our services is competitive and still evolving, and we may not be able to compete
successfully against current and future competitors.
MASTER DISTRIBUTOR SEGMENT
Our Supplies Distributors subsidiaries act as a master distributor of product for IBM and
certain other clients. In this capacity, we purchase and resell for our own account IBM and other
manufacturers’ inventory.
Through Supplies Distributors, we can create and implement client inventory solutions, which
may enable manufacturers to remove inventory and receivables from their balance sheets through the
use of third party financing. We have years of experience in dealing with the issues related to
inventory ownership, secure inventory
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management, replenishment and product distribution. We can
offer prospective clients a management solution for the entire customer relationship, including
ownership of inventory and receivables. Through CIP, we utilize technology resources to time the
replenishment purchase of inventory with the simultaneous sale of product to the end user. All
interfaces are done electronically and almost all processes regarding the financial transactions
are automated, creating significant supply chain advantages.
We are experienced in the complex legal, accounting and governmental control issues that can
be hurdles in the successful implementation of working capital financing programs. Our knowledge
and experience help clients achieve supply chain benefits while reducing inventory-carrying costs.
Substantial benefits and improvement to a company’s balance sheet can be achieved through these
working capital solutions.
While we recognize product revenue as a result of our inventory ownership through these
relationships, operationally this segment is virtually the same as our Business Process Outsourcing
Segment. See the preceding discussion for an overview of that segment.
ONLINE DISCOUNT RETAILER SEGMENT
Through eCOST.com, we operate a leading multi-category online discount retailer of high
quality new, close-out and recertified brand-name merchandise. We
currently offer approximately 75,000 products in several primary merchandise categories, including computer hardware and
software, home electronics, digital imaging, watches and jewelry and cellular/wireless.
Additionally, we offer several other categories of products and services, consumer and small
business customers through what we believe is a unique and convenient buying experience, offering
two shopping formats: every day low price and our proprietary Bargain CountdownTM. This
combination of shopping formats helps attract value-conscious customers to our eCOST.com website
who are looking for high quality products at low prices. Additionally, we offer a fee-based
membership program to develop customer loyalty by providing subscribers exclusive access to
preferential offers. We also provide rapid response customer service utilizing a strategically
located distribution center and third-party fulfillment providers, as well as customer support from
online and on-call sales representatives. We offer suppliers an efficient sales channel for
merchandise in all stages of the product life cycle. We carry products from leading manufacturers
such as Apple, Canon, Citizen, Denon, Hewlett-Packard, Nikon, Onkyo, Seiko and Toshiba and have
access to a broad and deep selection of merchandise, including new and deeply discounted close-out
and recertified merchandise.
Our Strengths
We have developed a differentiated business model, which provides our customers and vendors
with numerous benefits. We provide consumers and businesses with quick and convenient access to
high quality, new, close-out and recertified brand-name merchandise at discount prices similar to a
traditional discount retailer without the stocking limitations and store location constraints. We
believe we are unlike many online retailers because we market multiple merchandise categories and
product types, serve both small businesses and consumers and offer two ways to purchase products:
every day low price and our proprietary Bargain Countdown TM .
We offer the following key benefits to customers shopping on our website:
| • | Broad and deep product selection. We sell high quality products across a broad selection of merchandise categories. Most of the products offered on our website are from well-known, brand-name manufacturers. We currently offer approximately 75,000 different products in several categories. Our product offerings are updated continually to reflect new product trends, keeping our merchandise selection relevant for our customers so they continue to visit our website. | ||
| • | Compelling price-to-value proposition. As part of our strategy to appeal to the high frequency value-oriented shopper, we offer low prices on new products and deeper discounts on our assortment of close-out and recertified merchandise. We employ aggressive promotional strategies to provide incentives for our customers to purchase merchandise on our website and build customer loyalty. We also offer a fee-based membership program to reward customer loyalty by providing exclusive access to preferential offers to subscribers. |
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| • | Two shopping formats on our website. We appeal to a broad customer base by offering two shopping formats designed to attract frequent visits to our website: every day low price and our proprietary Bargain Countdown TM . For the shopper who wants new and recently released products from leading manufacturers, we offer discounted merchandise in an every day low price format. For the bargain shopper interested in close-out and recertified merchandise, we market products using our Bargain Countdown TM format which features time- and quantity-limited offers of selected merchandise that are more deeply discounted. | ||
| • | Rapid response order fulfillment. We ship substantially all of our customer orders from inventory at our distribution facility located near the FedEx main hub in Memphis, Tennessee. Substantially all orders in stock at the Memphis facility placed before 4:00 p.m. Eastern Time ship the same day and can be delivered at the customer’s request by 10:30 a.m. the next day for most domestic locations. We also utilize virtual warehouse technology to access merchandise that is not in stock at our distribution facility. | ||
| • | Responsive customer service and positive shopping experience. We believe that our customer service differentiates the buying experience for our customers. Our experienced team of inbound sales representatives and customer service representatives assist our consumer customers by telephone and e-mail. We also have relationship managers who are assigned to many of our small business customers to service their needs and increase future sales opportunities. Our website contains helpful features such as in-depth product information, inventory levels and order status. In addition, we continually monitor website traffic and order activity and periodically update our website to enhance the shopping experience for our customers. | ||
| • | Appealing features for small business customers. We offer our small business customers dedicated relationship managers to provide personalized service to their unique business needs. |
We provide manufacturers and other vendors with a convenient channel to sell both large and small
quantities of new, close-out and recertified inventory. We offer manufacturers and vendors the
following key benefits:
| • | Single point of distribution. Manufacturers and other vendors often use separate channels to sell new, recertified and close-out products because most retailers offer products in only one stage of the product life cycle. Through our two shopping formats, we offer manufacturers and other vendors the flexibility to use eCOST.com to sell products in a brand sensitive manner in any stage of the product life cycle. For example, our Bargain Countdown TM capabilities allow our vendors to liquidate smaller, residual quantities of merchandise without disappointing customers due to the limited availability of such products. | ||
| • | Efficient distribution and sales channel. Our centralized distribution capability reduces vendor costs in shipping product to us. Our ability to rapidly sell inventory is a benefit to those vendors that offer us protection against price erosion. Our centralized product management and feedback to vendors on product sell-through and inventory position allow vendors to efficiently monitor product movement and placement, eliminating the need for frequent visits by vendor representatives to physical retail locations. | ||
| • | Customized manufacturer stores. With our in-house design and merchandising team, we provide manufacturers the opportunity to showcase their full assortment of products and accessories by establishing virtual stores on our website that are specific to individual manufacturers. We believe this allows manufacturers to maximize sales and branding of their products. We promote these manufacturer stores to our customer base through our integrated marketing strategy, including targeted e-mails highlighting a specific manufacturer and its products and directing customers to that manufacturer store on our website. | ||
| • | Speed to market for newly released products. We respond rapidly to new product releases from manufacturers through our ability to quickly post and market new products on our website and satisfy immediate customer demand through our rapid response order fulfillment capabilities. |
Our Customers
We focus on consumers and business customers. We believe our consumer customers are savvy,
online shoppers, who are brand and price conscious, and interested in new technology. Our business
customers include
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small businesses that we believe are currently underserved by other
multi-category online retailers. While our business customer relationship managers focus on sales
to small businesses, they also service businesses of all types and sizes. We offer small business
customers superior and personalized customer service and new and current, close-out and recertified
merchandise at competitive prices.
Our Website
Our website is comprehensive, easy to use and provides an exciting shopping experience that
encourages customer loyalty and repeat visits. We strive to add hundreds of new products to our
online product mix weekly. Our website features high-quality product images, detailed product
information and manufacturer specifications, as well as highlights of best-selling products and
suggested accessories. We continually incorporate new technologies to improve the ease of use of
our website.
Currently, the products available on the every day low price portion of our website are
organized into several primary product categories: computer hardware and software, home
electronics, digital imaging, watches and jewelry, housewares, DVD movies, video games and
cellular/wireless. Additionally, we offer several other categories of products and services through
various affiliate relationships. We also offer the same products, if they meet certain criteria, on
the proprietary Bargain CountdownTM section of our website. In addition to
being able to use keyword searches to locate specific products on our website, customers can browse
or search the products available on the every day low price portion of our website by navigating
the subcategories contained in our primary product categories and our featured manufacturer product
showcases. Products that fall within more than one subcategory on our website are often posted on
more than one web page, which we believe increases the visibility of the products and assists the
customer in finding desired merchandise.
Every day low price. Our multi-category merchandise assortment is available in an every day
low price retail format. Products are organized by subcategory under each major category tab. Each
major category includes informative and shopper-friendly “showcases” organized by manufacturer, new
technology, best sellers, seasonal gift guides, and new products. This shopping format features
discounted new products and recently released products from leading manufacturers.
Bargain Countdown tm. Our proprietary Bargain
Countdown TM shopping format offers close-out, recertified and highly allocated
products in limited quantities for a limited time. Bargain Countdown TM
features more than 100 different product offers daily, indicating the quantity of items remaining
for the current offer and the time remaining to purchase the product. Based on the popularity of an
offer, an animated graphic icon will appear to alert the customer of the item’s current sales
velocity. After the offer has expired, the product is removed from Bargain Countdown TM and may no longer be available at the previously deeply discounted price. Our Bargain
Countdown TM shopping format encourages repeat visits to our website due to the
rapidly changing mix of merchandise, animated graphics, the unique collection of close-out deals
and the search for bargains. We also have theme-based Bargain Countdown TM tabs
throughout the year, including Holiday Countdown, Watches and Jewelry Countdown, Game of the Year
Countdown. Our Clearance Countdown tab is primarily used to liquidate overstocked and excess
inventory across all product categories. Our Bargain Countdown Platinum Club format is a version of
Bargain Countdown TM and offers exclusive pricing on select merchandise to our
fee-based members.
Other key features of our website include: advanced search, online order status retrieval,
online payment, shipping alternatives, online registration for promotions and catalogs and online
extended service agreement recommendations.
As a commitment to our small business customers, they have access to our business customer
relationship management team, the ability to set up a customized corporate extranet site with
custom pricing and product catalogs, up to net 30-day credit terms for qualified customers,
software licensing, computer system configurations, and leasing alternatives.
Our Merchandise
We strive to offer our customers an expansive selection of varied types of merchandise and
currently offer approximately 75,000 products in several primary merchandise
categories. While our product offerings
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change on a regular basis due to product availability and
customer demand, we continually offer a wide variety of merchandise.
Computer hardware and software. Our computer hardware and software product category contains
subcategories for computer systems, computer hardware and computer software. In these subcategories
customers can find products such as desktop, notebook and handheld computers; servers; personal
digital assistants; various hardware including CD and DVD drives and burners, flat screen monitors,
color laser printers, scanners and networking equipment and business, education and entertainment
software.
Home electronics. Our home electronics product category contains subcategories for camcorders,
DVD players, audio systems, speakers, big screen and plasma televisions, VCR and digital video
recorders, portables and accessories. Within these subcategories, customers can find products such
as video cameras in popular formats like DVD players; surround sound audio systems; subwoofers,
center channel and bookshelf speakers; LCD, plasma and
projection screen televisions; digital video recorders that pause, rewind and replay live
television; digital music players and a variety of accessories such as cables, remote controls and
headphones.
Digital imaging. Our digital imaging product category contains products including digital
still cameras; video cameras and camcorders in MiniDV format; drawing tablets for digital photo
editing; digital photo and image editing software and photo printers.
Watches and jewelry. Our watches and jewelry product category offers customers the ability to
shop in subcategories dedicated to watches, jewelry and pens. Within these subcategories, customers
can find brand name men’s and women’s watches; gold, silver, platinum and diamond jewelry such as
rings, necklaces, pendants, earrings and bracelets and fountain and ballpoint pens.
Housewares. Our housewares product category is dedicated to household appliances, kitchenware,
personal care appliances, home decor and luggage. Within this portion of our website consumers can
find products such as traditional household appliances including blenders, toasters and vacuum
cleaners; professional quality cookware and gourmet kitchen appliances such as coffee grinders.
DVD movies. Our DVD movies product category offers consumers an array of new release and
classic DVDs in a wide range of genres, including action and adventure; animated; comedy;
documentary; drama; family; horror; music video and concerts; musicals and performing arts; mystery
and suspense; sci-fi and fantasy; sports and fitness and television.
Video games. Our video game product category includes hardware and software products based on
popular gaming platforms. Within subcategories dedicated to Sony PlayStation, Microsoft Xbox,
Nintendo GameCube and PC gaming, customers can find hardware products and accessories, as well as
action and adventure, role playing, simulation, sports, strategy and other types of video games.
Cellular/Wireless. Within our cellular/wireless category, we offer customers select cellular
phones and service and a variety of cellular/wireless accessories including batteries, headsets,
vehicle adaptors and battery chargers. For the cellular phones and service portion of this
category, we have an arrangement with a third party cellular service provider under which we
receive commissions for service plans and phones purchased by linking through our eCOST.com
website.
We continually evaluate expanding into additional categories in order to attract new customers
and offer a broader variety of merchandise to our existing customers. Categories currently under
consideration include books, music, sporting goods/health and fitness and luggage. We also plan to
increase our depth in our current categories by adding new subcategories, brands and products and
continuing to develop and increase the number of affiliate categories.
Sales and Marketing
We currently focus our advertising efforts on efficient and effective marketing campaigns
aimed at acquiring new customers, encouraging repeat purchases and establishing the eCOST.com
brand. Our online prospecting
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activities may include cost-per-click arrangements that include
displaying our products within various price comparison sites and search engines such as CNET,
PriceGrabber, Shopping.com and Google, strategic online banner advertising, affinity e-mail
programs and participation in various online affiliate marketing programs. From time to time we
test other prospecting vehicles including radio and magazine advertising. We send our current
customers targeted e-mails focused on new product and category launches, special promotions, and
product-related add-on and accessory offers, as well as cooperative manufacturer branding
campaigns. We also mail an eCOST.com branded catalog to selected customers.
We intend to continue to develop our small business customer base. We seek to provide
personalized service for these customers and build deeper relationships, which will lead to a
growing share of the customer’s overall purchases. We believe small business customers respond
favorably to a one-to-one relationship model with personalized, well-trained, relationship
managers. By contacting existing business customers on a systematic basis, we believe we have the
opportunity to increase overall sales to those customers. We also offer our business
customers multiple payment options including leasing and up to net 30-day credit terms for
qualified customers. High volume customers may also qualify for special volume pricing.
Vendors
We purchase products for resale both directly from manufacturers and indirectly through
distributors and other sources, all of whom we consider our vendors. We provide vendors with a
convenient channel to sell both large and small quantities of new, closeout and recertified
inventory. We offer significant advantages for vendors, including a single point of distribution,
efficient channel relationships, customized manufacturer stores and speedy release of their newest
merchandise. Our vendors provide us with brand name new and current products, close-out models and
manufacturer recertified products. We also have arrangements with third-party providers through
which we receive commissions for products in certain categories, such as cellular phones and
service, as well as other marketing and promotional services generated through our eCOST.com
website.
We offer products on our website from more than 1,000 third-party vendors. In general, we
agree to offer products on our website and the manufacturers agree to provide us with information
about their products and honor our customer service policies. We have established direct vendor
relationships with many key suppliers and intend to continue to seek direct relationships with
vendors and suppliers.
Competition
The market for our products is intensely competitive, rapidly evolving and has relatively low
barriers to entry. New competitors can launch new websites at relatively low cost. We believe that
competition in our market is based predominantly on:
| • | price; | ||
| • | product selection, quality and availability; | ||
| • | shopping convenience; | ||
| • | customer service; and | ||
| • | brand recognition. |
We currently or potentially compete with a variety of companies that can be divided into
several broad categories:
| • | other multi-category online retailers and liquidation e-tailers; | ||
| • | online discount retailers of computer and consumer electronics merchandise such as Buy.com, NewEgg and TigerDirect; | ||
| • | consumer electronics and office supply superstores such as Best Buy, Circuit City, CompUSA, Office Depot, OfficeMax and Staples; and | ||
| • | manufacturers such as Apple, Dell, Gateway, Hewlett-Packard and IBM, who sell directly to customers. |
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Our largest manufacturers have sold, and continue to intensify their efforts to sell, their
products directly to customers. To the extent additional manufacturers adopt this selling format or
this trend becomes more prevalent, it could adversely affect our sales growth and profitability.
Intellectual Property
We rely on a combination of laws and contractual restrictions with our employees, customers,
suppliers, affiliates and others to establish and protect our proprietary rights. Despite these
precautions, it is possible that third parties may copy or otherwise obtain and use our
intellectual property, including our domain names, without authorization. Although we regularly
assert our intellectual property rights when we learn that they are being infringed, these claims
can be time-consuming and may require litigation and/or administrative proceedings to be
successful. We have five trademarks and/or service marks that we consider to be material to the
successful operation of our business: eCOST®, eCOST.com®, eCOST.com Your Online Discount
Superstore!™, Bargain Countdown® and Bargain Countdown Platinum Club™. We currently use all of
these marks in connection with telephone, mail order, catalog, and online retail services. We have
registrations in the United States for eCOST®, eCOST.com® and
Bargain Countdown® for online retail order services. We have pending United States applications for
eCOST™, eCOST.com™, eCOST.com Your Online Discount Superstore!™ and Bargain Countdown Platinum
Club™. We have registrations in Canada and in the United Kingdom for eCOST®, eCOST.com®, and
Bargain Countdown®. We own an additional registration in the United Kingdom for eCOST.com Your
Online Discount Superstore!®. Additionally, we own two pending applications in Canada for Bargain
Countdown Platinum Club™, and eCOST.com Your Online Discount Superstore!™. In the event that our
applications are not granted, we may not be able to obtain protection for our trademarks and/or
service marks with the Trademark Offices in the United States and in Canada. We would still have
common law rights in and to our marks based on use of the marks in these respective territories.
We have filed an application with the U.S. Patent and Trademark Office seeking patent
protection for our proprietary Bargain Countdown® technology. We cannot provide any assurance that
a patent will be issued from this patent application. In addition, effective patent and trademark
protection may not be available or may not be sought by us in every country in which our products
and services are made available online, including the United States.
From time to time, we may be subject to legal proceedings and claims in the ordinary course of
our business, including claims of alleged infringement of the patents, trademarks and other
intellectual property rights of third parties by our company. Third parties have asserted, and may
in the future assert, that our business or the technologies we use infringe their intellectual
property rights. We may be subject to intellectual property legal proceedings and claims in the
ordinary course of our business. We cannot predict whether third parties will assert additional
claims of infringement against us in the future, or whether any future claims will prevent us from
offering popular products or operating our business as planned.
ALL BUSINESS SEGMENTS
Technology
We maintain advanced management information systems and have automated key business functions
using online, real-time or batch systems. These systems enable us to provide information concerning
sales, inventory status, customer payments and other operations that are essential for us and our
clients to efficiently manage electronic commerce and supply chain business programs. Our systems
are designed to scale rapidly to handle the transaction processing demands of our clients and our
growth.
We employ technology from a selected group of partners, some of whom are also our clients. For
example, we deploy IBM e-servers and network printers in appropriate models to run web site
functions as well as order management and distribution functions. We utilize Avaya Communication
for telephone switch and call center management functions and to interact with customers via voice,
e-mail or chat. Avaya Communication technology also allows us to share web pages between customers
and our service representatives. We have the ability to transmit and receive voice, data and video
simultaneously on a single network connection to a customer to more effectively serve that customer
for our client. Clients’ interest in using this technology stems from its ability to allow shoppers
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to consult with known experts in a way that the customer chooses prior to purchasing. Our
sophisticated computer-telephony integration has been accomplished by combining systems software
from IBM and Avaya Communication together with our own application development. We use AT&T for our
private enterprise network and long distance carrier. We use Oracle’s J.D. Edwards as the software
provider for the primary ERP applications that we use in our operational areas and financial areas.
We use Ecometry as the software provider for the primary multi-channel direct marketing application
we deploy for our catalog and direct marketing clients. We use Dematic/Rapistan Materials Handling
Automation for our automated order selection, automated conveyor and “pick-to-light” (inventory
retrieval) systems, and Symbol Technologies/Telxon for our warehouse radio frequency applications.
Our Warehouse Management System (“WMS”) and Distribution Requirements Planning (“DRP”) system have
been developed in-house to meet the varied unique requirements of our vertical markets. Both the
WMS and DRP are tightly integrated to both the North American and European deployments of our J.D.
Edwards’ system.
Many internal infrastructures are not sufficient to support the explosive growth in
e-business, e-marketplaces, supply chain compression, distribution channel realignment and the
corresponding demand for real-time information necessary for strategic decision-making and product
fulfillment. To address this need, we have created the Entente Suite(SM), which is a comprehensive
suite of technology services, with supporting software and hardware
infrastructure, that enables companies with little or no e-commerce infrastructure to speed
their time to market and minimize resource investment and risk, and allows all companies involved
to improve the efficiency of their supply chain. The Entente Suite(SM) is comprised of five
distinct service offerings — EntenteWeb®, EntenteDirect®, EntenteMessage® and, and EntenteReport®
and EntentePartnerConnect™ — that can stand alone or be combined for a fully customized
e-commerce solution depending on the level of direct involvement a company wants to maintain in
their e-commerce initiative.
The components of the Entente Suite(SM) provide the open platform service infrastructure that
allows us to create complete e-commerce solutions. Using the various services of the Entente
Suite(SM), we can assist our clients in easily integrating their web sites or ERP systems to our
systems for real-time transaction processing without regard for their hardware platform or
operating system. This high-level of systems integration allows our clients to automatically
process orders, customer data and other e-commerce information. We also can track information sent
to us by the client as it moves through our systems in the same manner a carrier would track a
package throughout the delivery process. Our systems enable us to track, at a detailed level,
information received, transmission timing, any errors or special processing required and
information sent back to the client. The transactional and management information contained within
our systems is made available to the client quickly and easily through the Entente Suite(SM).
The Entente Suite(SM) serves as a transparent interface to our back-office productivity
applications including our customized J.D. Edwards order management and fulfillment application and
our Ecometry multi-channel direct marketing application that runs on IBM’s e-Server xSeries
servers. It also is designed to integrate with marketplace technologies offered by major
marketplace software companies. We utilize Gentran Integration Suite™ (“GIS”) as our technology
platform for Enterprise Application Integration with our clients and client’s trading partners.
With GIS, we have greatly increased our ability to quickly design and deploy customized B2B
e-commerce solutions for our clients by utilizing a robust business process modeling tool and a
highly scalable operating infrastructure. This platform facilitates the efficient and secure
exchange of electronic business transactions/documents in a wide variety of formats (i.e. XML, X.12
EDI, delimited text, IDOCS, RosettaNet) and communication protocols (i.e. FTP/SFTP, AS2/HTTP/HTTPS,
AS1 SMTP).
We have invested in advanced telecommunications, computer telephony, electronic mail and
messaging, automated fax technology, IVR technology, barcode scanning, wireless technology, fiber
optic network communications and automated inventory management systems. We have also developed and
utilize telecommunications technology that provides for automatic customer call recognition and
customer profile recall for inbound customer service representatives.
The primary responsibility of our systems development team of IT professionals is directed at
implementing custom solutions for new clients and maintaining existing client relationships. Our
development team can also produce proprietary systems infrastructure to expand our capabilities in
circumstances where we cannot purchase standard solutions from commercial providers. We also
utilize temporary resources when needed for additional capacity.
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Our information technology operations and infrastructure are built on the premise of
reliability and scalability. We maintain diesel generators and un-interruptible power supply
equipment to provide constant availability to computer rooms, call centers and warehouses. Multiple
Internet service providers and redundant web servers provide for a high degree of availability to
web sites that interface with our systems. Capacity planning and upgrading is performed regularly
to allow for quick implementation of new clients and avoid time-consuming infrastructure upgrades
that could slow growth rates. We also have a Disaster Recovery Plan that provides geographically
separated and comparably equipped data centers, in the event of a disastrous situations and be able
to recover in a reasonable and effective manner.
Strategy
We continue to maintain our simple but effective strategy statement to drive our actions for
the year, QGP. This acronym stands for Quality, Growth and Profit. We believe that if we can
achieve outstanding performance on these three basic elements, they will provide for a stable
foundation for our future. As the evolution of our business model continues, we will remain focused
on these three fundamentals:
Quality: To exceed our client’s service level requirements and enhance the value of their
“brand” while providing their customers a positive, memorable and efficient experience.
Growth: To increase our revenue and gross profit from its current levels. To aggressively
market simplified product messages to drive new clients and revenue and profit growth. To become a
larger company and create career and additional employment opportunities. Embrace strategic
partnering to accentuate strengths and minimize weaknesses.
Profit: To generate positive cash flow and continue to strive for consistent profitable
results. To increase the value of our company for all of its stakeholders while rewarding our team
members with challenging, fun and memorable life experiences.
In alignment with these strategies, we completed a merger with eCOST on February 1, 2006. We
believe the merger will provide substantial strategic benefits by combining eCOST’s supplier
relationships, customer base and e-commerce platform with our advanced technology and operational
infrastructure thereby providing our combined company with the enhanced ability to expand its
market share in the fast growing web commerce market.
The successful balance of the execution of these fundamental strategies over the next year is
targeted to result in the formation of a solid strategic and financial foundation and provide us a
sustainable and profitable business model for the future.
See “Risk Factors” for a complete discussion of risk factors related to our ability to achieve
our objectives and fulfill our business strategies.
Employees
As
of December 31, 2006, we had approximately 1,200 employees, of
which approximately 1,100 were located in
the United States. We have never suffered an interruption of business as a result of a labor
dispute. We consider our relationship with our employees to be good. In the U.S. and Canada, we are
not a party to any collective bargaining agreements and while our European subsidiaries are not a
party to a collective-bargaining agreement, they are required to comply with the rules mentioned in
collective bargaining agreements agreed upon by representatives of their industry (logistics) and
unions.
Our success in recruiting, hiring and training large numbers of skilled employees and
obtaining large numbers of hourly employees during peak periods for distribution and call center
operations is critical to our ability to provide high quality distribution and support services.
Call center representatives and distribution personnel receive feedback on their performance on a
regular basis and, as appropriate, are recognized for superior performance or given additional
training. Generally, our clients provide specific product training for our customer service
representatives and, in certain instances, on-site client personnel to provide specific technical
support. To maintain
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good employee relations and to minimize employee turnover, we offer
competitive pay, hire primarily full-time employees who are eligible to receive a full range of
employee benefits, and provide employees with clear, visible career paths.
The Company’s Compensation Committee recently adopted a management bonus plan pursuant to our
2005 Employee Stock and Incentive Plan. Under the terms of the bonus plan, cash bonuses, if any,
will be awarded to the Chief Executive Officer and other executive officers, officers and senior
management based on, and subject to, the achievement of the following performance goal. The
performance goal shall be for us to exceed, on a quarterly basis, the corresponding projected
quarterly net income contained in our annual budget (or, in case of a budgeted net loss, to reduce
the net loss below the budgeted net loss) (the “Over Budget Amount”). The Over Budget Amount will
be determined by the Committee on a quarter-by-quarter basis.
The total bonus amount for each quarter shall be equal to the sum of (i) an amount to be
determined by the Committee for such quarter, but not to exceed the lesser of (x) $250,000 or (y)
the Over Budget Amount and (ii) if and to the extent the Over Budget Amount exceeds $250,000, ten
percent (10%) of such excess.
Following the end of each quarter, the Committee will grant cash bonuses in an aggregate
amount to be determined by it, but not to exceed the total bonus amount for such immediately
preceding quarter, to the Chief Executive Officer and other executive officers, officers and senior management based on the
Committee’s determination of the relative contribution of each such person.
Internet Access to Reports
We
maintain an Internet website, www.pfsweb.com. Our annual reports on Form 10-K, quarterly
reports on Form 10-Q, and current reports on Form 8-K (and amendments, if any, to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934) are
made available, free of charge, through the investor relations section of this website as soon as
reasonably practicable after we electronically file such material, or furnish it to the Securities
and Exchange Commission. The information on this website is not incorporated in this report. We
also maintain an Internet website for our online discount retailer, www.ecost.com.
Government Regulation
We are subject to federal, state, local and foreign consumer protection laws, including laws
protecting the privacy of our customers’ personally identifiable information and other non-public
information and regulations prohibiting unfair and deceptive trade practices. Furthermore, the
growth and demand for online commerce has and may continue to result in more stringent consumer
protection laws that impose additional compliance burdens and greater penalties on online
companies. Moreover, there is a trend toward regulations requiring companies to provide consumers
with greater information regarding, and greater control over, how their personal data is used, and
requiring notification where unauthorized access to such data occurs. For example, California law
currently requires us to notify each of our California customers who is affected by any data
security breach in which an unauthorized person, such as a computer hacker, obtains such customer’s
social security number, driver’s license number or California Identification Card number, account
number, credit or debit card number, in combination with any required security code, access code,
or password that would permit access to a customer’s account. In addition, several jurisdictions,
including foreign countries, have adopted privacy-related laws that restrict or prohibit
unsolicited email promotions, commonly known as “spam,” and that impose significant monetary and
other penalties for violations. One such law, the “CAN-SPAM” Act of 2003, became effective in the
United States on January 1, 2004 and imposes complex, burdensome and often ambiguous requirements
in connection with our sending commercial email to our customers and potential customers. Moreover,
in an effort to comply with these laws, Internet service providers may increasingly block
legitimate marketing emails. These consumer protection laws may become more stringent in the future
and could result in substantial compliance costs and could interfere with the conduct of our
business.
We collect sales or other similar taxes for shipments of goods in certain states. One or more
local, state or foreign jurisdictions may seek to impose sales tax collection obligations on us and
other out-of-state companies that engage in online commerce. If sales tax obligations are
successfully imposed upon us by a state or other jurisdiction, we could be exposed to substantial
tax liabilities for past sales and fines and penalties for failure to collect sales taxes
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and we could suffer decreased sales in that state or jurisdiction as the effective cost of purchasing
goods from us increases for those residing in that state or jurisdiction.
In many states, there is currently great uncertainty whether or how existing laws governing
issues such as property ownership, sales and other taxes, libel and personal privacy apply to the
Internet and commercial online services. These issues may take years to resolve. For example, tax
authorities in a number of states, as well as a Congressional advisory commission, are currently
reviewing the appropriate tax treatment of companies engaged in online commerce, and new state tax
regulations may subject us to additional state sales and income taxes. New legislation or
regulation, the application of laws and regulations from jurisdictions whose laws do not currently
apply to our business or the application of existing laws and regulations to the Internet and
commercial online services could result in significant additional taxes or regulatory restrictions
on our business. These taxes could have an adverse effect on our cash flows and results of
operations. Furthermore, there is a possibility that we may be subject to significant fines or
other payments for any past failures to comply with these requirements.
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.
Risks Related to All Our Business Segments
Certain of our historical financial information may not be representative of our future results.
The financial information for the periods prior to October 1, 2002 included in this Form 10-K
reflect our then agreements with IBM and Supplies Distributors, as a master distributor of certain
IBM products and our then 49% owned subsidiary. Under this agreement, Supplies Distributors owned
and distributed the IBM product and we provided transaction management and fulfillment services to
Supplies Distributors. Under this agreement, we did not own the IBM product and our revenue was
service fee revenue (based on product sales volume or other transaction based pricing) and not
product revenue.
In October 2002, we acquired the remaining 51% ownership interest in Supplies Distributors and
we now consolidate 100% of Supplies Distributors’ financial position and results of operations into
our consolidated financial statements. Upon consolidation, effective October 1, 2002, we own the
IBM product and record product revenue as the product is sold to IBM customers.
In addition, effective February 1, 2006, we now consolidate eCOST.com’s financial position and
results of our operations into our consolidated financial statements.
As a result of reflecting revenue earned under the master distributor agreements as product
revenue in certain historical periods and as service fee revenue in others, as well as our
acquisition of eCOST, our historical results of operations may not be indicative of our future
operating or financial performance.
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.
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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 is 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 that 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 December 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 $70.6 million. Certain of the credit facilities have maturity dates in calendar
year 2008 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 December 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 eCOST’s $7.5 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.
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 22,000
square foot distribution center in Markham, Canada, near Eastern Toronto, both of which currently
have excess capacity. We recently opened a 6,500 square foot facility in the Philippines to provide
call center and customer service functions. 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:
| • | changing regulatory requirements; | ||
| • | legal uncertainty regarding foreign laws, tariffs and other trade barriers; | ||
| • | political instability; |
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| • | potentially adverse tax consequences; | ||
| • | foreign currency fluctuations; and | ||
| • | cultural differences. |
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. 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 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.
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 were not required to comply with Section 404
as of December 31, 2006. We are currently subject to the management assessment portion of Section
404 for the year ending December 31, 2007, but we are not subject to the requirement to obtain a
report by our independent auditors opining on these assessments. Under current law, we will be
subject to the independent auditor requirement for the year ending December 31, 2008. 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.
Delivery of our and our clients’ products could be delayed or disrupted by factors beyond our
control, and we could lose customers and clients as a result.
We rely upon third party carriers for timely delivery of our and our clients’ product
shipments. As a result, we
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are subject to carrier disruptions and increased costs due to factors
that are beyond our control, including employee strikes, inclement weather and increased fuel
costs. Any failure to deliver products to our and our clients’ customers in a timely and accurate
manner may damage our reputation and brand and could cause us to lose customers and clients. We
cannot be sure that our relationships with third party carriers will continue on terms favorable to
us, if at all. If our relationship with any of these third party carriers is terminated or impaired
or if any of these third parties is unable to deliver products, we would be required to use
alternative carriers for the shipment of our and our clients’ products to customers. We may be
unable to engage alternative carriers on a timely basis or on favorable terms, if at all. Potential
adverse consequences include:
| • | reduced visibility of order status and package tracking; | ||
| • | delays in order processing and product delivery; | ||
| • | increased cost of delivery, resulting in reduced margins; and | ||
| • | reduced shipment quality, which may result in damaged products and customer dissatisfaction. |
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 client’s behalf could increase our
expenses.
We are subject to a dispute with a municipal authority, which, if not resolved in our favor, may
materially adversely affect our results of operations.
We receive municipal tax abatements in certain locations. During 2004 we received notice from
a municipal authority that we did not satisfy certain criteria necessary to maintain the
abatements. In December 2006 we received notice that the municipal authority planned to make an
adjustment to our tax abatement. We plan to dispute the adjustment, but if the dispute is not
resolved favorably, additional taxes of approximately $1.5 million could be assessed against us
through December 31, 2006.
Risks Related to Our PFS and Supplies Distributors Operating Segments
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 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
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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 business is subject to the risk of customer and supplier concentration.
For the year ended December 31, 2006 and 2005, a prime contractor (for whom we are a
subcontractor) to a U.S. government agency (for whom we are a subcontractor), a consumer products
company and Xerox Corporation represented approximately 23%, 19% and 12%, respectively, and
approximately 27%, 16% 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 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.
A substantial portion of our Supplies Distributors product revenue was generated by sales of
product purchased under master distributor agreements with the Printing System Division of IBM and
is dependent on IBM’s business and the continuing market for IBM products. In January 2007, IBM and
Ricoh announced the planned formation of a joint venture company based on IBM’s Printing Systems Division.
If finalized, upon closing of the agreement, Ricoh will initially acquire 51% of the joint venture, which will be
called InfoPrint Solutions Company, and will progressively acquire the remaining 49% over the next
three years. The newly formed joint venture company is expected to eventually become a fully owned
subsidiary of Ricoh. No assurance can be given that InfoPrint Solutions Company will continue the
master distributor agreements with Supplies Distributors. A termination of this relationship or a
decline in customer demand for these products will have a material adverse effect on Supplies
Distributors’ business.
Sales by Supplies Distributors to one customer accounted for approximately 11% of Supplies
Distributors’ total product revenue for the year ended December 31, 2006. Sales to three customers accounted for
approximately 37% of Supplies Distributors’ product revenues for the year ended December 31, 2005.
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 Supplies Distributors’ business.
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 master distributor 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 client’s 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
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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.
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
client’s decision to purchase our services is discretionary, involves a significant commitment of
the client’s 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.
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 client’s products could be slowed or
stopped.
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.
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 our 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 Merger with eCOST
We may fail to realize the anticipated synergies, cost savings, growth opportunities and other
benefits expected from the merger.
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,
there can be no assurance that we will realize any of these anticipated benefits. The combination
of our businesses may not result in combined financial performance that is better than what our
company would have achieved independently if the merger had not occurred.
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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
company’s services or purchase the combined company’s products due to uncertainty about the
combined company’s 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.
eCOST may be liable to 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 eCOST’s legal counsel. Such opinion represented such legal counsel’s 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 will be liable to PC Mall
for any resulting tax-related liabilities.
Risks Related to eCOST, our Online Discount Retailer Segment
We may not be able to achieve or maintain profitability.
We have incurred continuing operating losses and may not be able to achieve or maintain
profitability on a quarterly or annual basis. Our ability to achieve or maintain profitability
depends on a number of factors, including our ability to:
| • | increase sales; | ||
| • | maintain and expand vendor relationships; | ||
| • | obtain additional and increase existing trade credit with key suppliers; | ||
| • | generate sufficient gross profit; and | ||
| • | control costs and generate the expected synergies applicable to the merger. |
We need additional financing and may not be able to obtain additional financing on favorable terms
or at all, which could increase our costs and limit our ability to grow.
We need to obtain additional financing and there can be no assurance that we will be able to
obtain additional financing on commercially reasonable terms or at all. Our failure to obtain
additional financing or our inability to obtain financing on acceptable terms will materially
adversely affect our ability to achieve profitability and grow our business.
Our operating results are difficult to predict.
Our 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 we cannot control. We operate 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 our operating results are not necessarily a good indication of our future
performance. Some of the factors that could cause our operating results to fluctuate include:
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| • | price competition that results in lower sales volumes, lower profit margins, or net losses; | ||
| • | our ability to prevent credit card fraud and reduce chargeback activity; | ||
| • | the amount, timing and impact of advertising and marketing costs; | ||
| • | our ability to successfully implement new technologies or software systems; | ||
| • | our ability to obtain sufficient financing; | ||
| • | changes in the number of visitors to the out website or our inability to convert those visitors into customers; | ||
| • | technical difficulties, including system or Internet failures; | ||
| • | fluctuations in the demand for our products or overstocking or under-stocking of products; | ||
| • | fluctuations in revenues and shipping costs, particularly during the holiday season; | ||
| • | economic conditions generally or economic conditions specific to the Internet, online commerce, the retail industry or the mail order industry; | ||
| • | changes in the mix of products that we sell; and | ||
| • | fluctuations in levels of inventory theft, damage or obsolescence. |
The failure to improve our financial and operating performance may result in a failure to comply
with our financial covenants.
In the event we are unable to increase our revenue and/or gross profit from our present levels
and do not achieve a sufficient level of operating efficiencies, we may fail to comply with one or
more of the financial covenants required under our 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 parent guaranty.
If we fail to accurately predict our inventory risk, our margins may decline as a result of
write-downs of our inventory due to lower prices obtained for older or obsolete products.
Some of the products we sell on our website are characterized by rapid technological change,
obsolescence and price erosion (for example, computer hardware, software and consumer electronics),
and because we 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 our
revenues and impact profitability.
We make allowances for product returns based on historical return rates. We are responsible
for returns of certain products ordered through our website from our distribution center as well as
products that are shipped to our customers directly from our vendors. If our actual product returns
significantly exceed our allowances for returns, especially as we expand into new product
categories, our revenues and profitability could decrease. In addition, because our allowances are
based on historical return rates, the introduction of new merchandise categories, new products,
changes in our 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, increased credit card chargeback activity and fewer repeat
customers.
Our ability to offer a broad selection of products at competitive prices is dependent on our
ability to maintain existing and build new relationships with manufacturers and vendors. We do not
have long-term agreements with our manufacturers or vendors and some of our manufacturers and
vendors compete directly with us.
We purchase products for resale both directly from manufacturers and indirectly through
distributors and other sources, all of whom we consider our vendors. We have historically offered
products on our website from more than 1,000 third-party manufacturers. We do not have any
long-term agreements with any of these vendors. Any agreements with vendors governing our purchase
of products are generally terminable by either party upon 30 days’ notice or less. In general, we
agree to offer products on our website and the vendors agree to provide us with information about
their products and honor our customer service policies. If we do not maintain relationships with
vendors on acceptable terms, including favorable product pricing and vendor consideration, we 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 our website. In addition, some vendors may decide
not to offer particular
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products for sale on the Internet, and others may avoid offering their new
products to retailers like us who offer a mix of close-out and recertified products in addition to
new products. From time to time, vendors may terminate our right to sell some or all of our
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 our 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 us and other resellers.
In particular, our business is dependent on sales of Hewlett Packard (HP) and HP-related
products, which represented approximately 33% of net sales in 2006, 28% in 2005 and 27% in 2004. If
our ability to purchase direct from HP is terminated or restricted, or if the demand for HP and
HP-related products declines, our business will be materially adversely affected.
We are dependent on the success of our advertising and marketing efforts, which are costly and may
not achieve desired results, and on our ability to attract customers on cost-effective terms.
Our revenues depend on our ability to advertise and market our 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 our ability to advertise and market our business without impacting our
profitability. If our advertising and marketing efforts prove ineffective or do not produce a
sufficient level of sales to cover their costs, or if we decrease our advertising or marketing
activities due to increased costs, restrictions enacted by regulatory agencies or for any other
reason, our revenues and profit margins may decrease. Our success depends on our ability to attract
customers on cost-effective terms. We have relationships with online services, search engines,
shopping engines, directories and other websites and e-commerce businesses through which we provide
advertising banners and other links that direct customers to our website. We expect to rely on
these relationships as significant sources of traffic to our website and to generate new customers.
If we are unable to develop or maintain these relationships on acceptable terms, our ability to
attract new customers on a cost-effective basis could be harmed. In addition, certain of our
existing online marketing agreements require us to pay fixed placement fees or fees for directing
visits to our eCOST website, neither of which may convert into sales.
Because we experience seasonal fluctuations in our revenues, our quarterly results may fluctuate.
Our 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 our revenues
occur during the first and fourth fiscal quarters. We believe that our historical revenue growth
makes it difficult to predict the effect of seasonality on our future revenues and results of
operations. In anticipation of increased sales activity during the first and fourth quarter, we
incur 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 our profitability. If we were to experience lower than expected sales during its
first or fourth quarter, for any reason, it would decrease our profitability.
Our business may be harmed by fraudulent activities on our website.
We have received in the past, and anticipate that we will receive in the future,
communications from customers due to purported fraudulent activities on our eCOST website. Negative
publicity generated as a result of fraudulent conduct by third parties could damage our reputation
and diminish the value of our brand name. Fraudulent activities on our eCOST website could also
subject us to losses. We expect to continue to receive requests from customers for reimbursement
due to purportedly fraudulent activities or threats of legal action if no reimbursement is made.
If we do not successfully expand our eCOST website and processing systems to accommodate higher
levels of traffic and changing customer demands, we could lose customers and our revenues could
decline.
To remain competitive, we must continue to enhance and improve the functionality and features
of our website. If we fail to upgrade our website in a timely manner to accommodate higher volumes
of traffic, our
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website performance could suffer and we 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, our existing eCOST website and systems may become obsolete or unattractive.
Developing our eCOST website and other systems entails significant technical and business risks. We
may face material delays in introducing new services, products and enhancements. If this happens,
customers may forgo the use of our eCOST website and use those of our competitors. We may use new
technologies ineffectively, or we may fail to adapt our website, transaction processing systems and
computer network to meet customer requirements or emerging industry standards.
If we fail to successfully expand our merchandise categories and product offerings in a
cost-effective and timely manner, our reputation and the value of our new and existing brands could
be harmed, customer demand for our products could decline and our profit margins could decrease.
We have generated the substantial majority of our revenues during the past five years from the
sale of computer hardware, software and accessories and consumer electronics products. We launched
several new product categories, including digital imaging, watches and jewelry, housewares, DVD
movies, video games and cellular/wireless. While our merchandising platform has been incorporated
into and tested in the online computer and consumer electronics retail markets, we cannot predict
with certainty whether it can be successfully applied to other product categories. In addition,
expansion of our business strategy into new product categories may require us to incur significant
marketing expenses, develop relationships with new vendors and comply with new regulations. We 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 our ability to expand into new product categories include our
ability to:
| • | establish or increase awareness of new brands and product categories; | ||
| • | acquire, attract and retain customers at a reasonable cost; | ||
| • | achieve and maintain a critical mass of customers and orders across all product categories; | ||
| • | attract a sufficient number of new customers to whom new product categories are targeted; | ||
| • | successfully market new product offerings to existing customers; | ||
| • | maintain or improve gross margins and fulfillment costs; | ||
| • | attract and retain vendors to provide an expanded line of products to customers on terms that are acceptable; and | ||
| • | manage inventory in new product categories. |
We cannot be certain that we will be able to successfully address any or all of these
challenges in a manner that will enable us to expand our business into new product categories in a
cost-effective or timely manner. If our new categories of products or services are not received
favorably, or if our suppliers fail to meet our customers’ expectations, our results of operations
would suffer and our reputation and the value of the applicable new brand and other brands could be
damaged. The lack of market acceptance of our new product categories or inability to generate
satisfactory revenues from any expanded product categories to offset our cost could harm our
business.
Credit card fraud could materially adversely affect our business.
We do not currently carry insurance against the risk of credit card fraud, so the failure to
adequately control fraudulent credit card transactions could reduce our revenues and gross margin.
We may 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, we may be liable for fraudulent credit card transactions because we did not obtain a
cardholder’s signature. If we are unable to detect or control credit card fraud, or if credit card
companies require more burdensome terms, refuse to accept credit card charges or assess financial
penalties, our business could be materially adversely affected.
If we are unable to provide satisfactory customer service, we could lose customers.
Our ability to provide satisfactory levels of customer service depends, to a large degree, on
the efficient and uninterrupted operation of our customer service operations. Any material
disruption or slowdown in our order
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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 we are unable to
continually provide adequate staffing and training for our customer service operations, our
reputation could be seriously harmed and we could lose customers. Because our success depends in
large part on keeping our customers satisfied, any failure to provide high levels of customer
service would likely impair our reputation and decrease our revenues.
We may not be able to compete successfully against existing or future competitors.
The market for online sales of the products we offer is intensely competitive and rapidly
evolving. We principally compete with a variety of online retailers, specialty retailers and other
businesses that offer products similar to or the same as our products. Increased competition is
likely to result in price reductions, reduced revenue and gross margins and loss of market share.
We expect 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 our product vendors have sold, and continue to intensify their efforts to sell, their
products directly to customers. We currently or potentially compete with a variety of businesses,
including:
| • | other multi-category online retailers and liquidation e-tailers; | ||
| • | online discount retailers of computer and consumer electronics merchandise such as Buy.com, NewEgg and TigerDirect; | ||
| • | consumer electronics and office supply superstores such as Best Buy, Circuit City, CompUSA, Office Depot, OfficeMax and Staples; and | ||
| • | manufacturers such as Apple, Dell, Gateway, Hewlett-Packard and IBM, that sell directly to customers. |
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 we do. 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 our 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 we are able to.
If the protection of our trademarks and proprietary rights is inadequate, our eCOST brand and
reputation could be impaired and we could lose customers.
We have five trademarks and/or service marks that we consider to be material to the successful
operation of our business: eCOST®, eCOST.com®, eCOST.com Your Online Discount Superstore!™, Bargain
Countdown® and Bargain Countdown Platinum Club™. We currently use all of these marks in connection
with telephone, mail order, catalog, and online retail services. We also have several additional
pending trademark applications. We rely on trademark and copyright law, trade secret protection and
confidentiality agreements with our employees, consultants, suppliers and others to protect our
proprietary rights. Our applications may not be granted, and we may not be able to secure
significant protection for our service marks or trademarks. Our competitors or others could adopt
trademarks or service marks similar to our marks, or try to prevent us from using our marks,
thereby impeding our ability to build brand identity and possibly leading to customer confusion.
Any claim by another party against us for customer confusion caused by use of our trademarks or
service marks, or our failure to obtain registrations for our marks, could negatively affect our
competitive position and could cause us to lose customers.
We have also filed an application with the U.S. Patent and Trademark Office for patent
protection for our proprietary Bargain Countdown(TM) technology. We may not be granted a patent for
this technology and may not be able to enforce our patent rights if our competitors or others use
infringing technology. If this occurs, our 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 we will sell our products and offer our services. In addition,
the relationship between regulations governing domain names and laws protecting trademarks and
similar proprietary rights is unclear.
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Therefore, we may be unable to prevent third parties from
acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our
trademarks and other proprietary rights. If we are unable to protect or preserve the value of our
trademarks, copyrights, trade secrets or other proprietary rights for any reason, our competitive
position could be negatively affected and we could lose customers.
We also rely on technologies that we license from related and third parties. These licenses
may not continue to be available to us on commercially reasonable terms, or at all, in the future.
As a result, we may be required to develop or obtain substitute technology of lower quality or at
greater cost, which could negatively affect our competitive position, cause us to lose customers
and decrease our profitability.
If third parties claim we are infringing their intellectual property rights, we could incur
significant litigation costs, be required to pay damages, or change our business or incur licensing
expenses.
Third parties have asserted, and may in the future assert, that our business or the
technologies we use infringe on their intellectual property rights. As a result, we may be subject
to intellectual property legal proceedings and claims in the ordinary course of business. We cannot
predict whether third parties will assert claims of infringement in the future or whether any
future claims will prevent us from offering popular products or services. If we are found to
infringe, we 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 us or against those who license technology to us, we
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. If a third
party successfully asserts an infringement claim against us and we are enjoined or required to pay
monetary damages or royalties or we are unable to develop suitable non-infringing alternatives or
license the infringed or similar technology on reasonable terms on a timely basis, our business,
results of operations and financial condition could be materially harmed.
On July 12, 2004, we 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, we received a follow-up letter from MercExchange specifying which of eCOST’s
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 we are 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. Based on our investigation of this matter to date, we
believe that our current eCOST operations do not infringe any valid claims of the patents
identified by MercExchange in these letters.
We may be liable for misappropriation of our 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 our network security or otherwise
misappropriate its customers’ personal information or credit card information, or if we give third
parties or our employees improper access to customers’ personal information or credit card
information, we 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 our
profitability. In such circumstances, we 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
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they may continue to bring such actions. We 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.
We rely 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 we use to protect customer transaction data. If any such
compromise of security were to occur, it could subject us to liability, damage our reputation and
diminish the value of our brand-name. A party who is able to circumvent the security measures could
misappropriate proprietary information or cause interruptions in operations. We may be required to
expend significant capital and other resources to protect against such security breaches or to
alleviate problems caused by such breaches. Our security measures are designed to prevent security
breaches, but our failure to prevent such security breaches could subject us to liability, damage
our reputation and diminish the value of our brand-name.
Moreover, for the convenience of our customers, we provide 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 company’s customers being tricked into providing their credit card
numbers or account information to someone pretending to be the online company’s 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.
We may be subject to product liability claims that could be costly and time consuming.
We sell products manufactured and distributed by third parties, some of which may be
defective. If any product that we sell were to cause physical injury or damage to property, the
injured party or parties could bring claims against us as the retailer of the product. Our
insurance coverage may not be adequate to cover every claim that could be asserted. If a successful
claim were brought against us in excess of its insurance coverage, it could expose us to
significant liability. Even unsuccessful claims could result in the expenditure of funds and
management time and could decrease profitability.
If,
eCOST is unable to generate projected cash flows, it could trigger future impairment charges related to eCOST’s intangible assets.
The valuation of intangible assets related to eCOST is dependent upon, among other things, eCOST’s ability to generate projected cash flows for its business. In the event eCOST is unable
to meet such projections, we may be required under current accounting rules to record an impairment charge in
connection with the write-down of such intangibles.
Risks Related to Our eCOST Online Retailer Operating Segment’s Industry
Additional sales and use taxes could be imposed on past or future sales of our products or other
products sold on our eCOST website, which could adversely affect our revenues and profitability.
In accordance with current industry practice and our interpretation of applicable law, we
collect and remit sales taxes only with respect to physical shipments of goods into states where we
have a physical presence. If any state or other jurisdiction successfully challenges this practice and imposes sales and use taxes on
orders on which we do not collect and remit sales taxes, we 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, we could be required to collect
sales and use taxes in states where we do not have a physical presence. Future changes in the
operation of our 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 our revenues and profitability.
Existing or future government regulation could expose us to liabilities and costly changes in our
business operations, and could reduce customer demand for our products.
We are 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
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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 us to
liabilities and costly changes in our business operations, and could reduce customer demand. The
growth and demand for online commerce has and may continue to result in more 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 our
eCOST Internet business or our marketing efforts.
We are subject to increasing regulation relating to privacy and the use of personal user
information. For example, we are 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 Children’s 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 we do
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 our 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 us to fines,
penalties and damages, as well as harm to our reputation, which could decrease our revenues and
profitability.
Risks Related to Our Stock
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 stock price could decline if a significant number of shares become available for sale.
As of December 31, 2006, we had issued and outstanding 601,190 warrants to purchase common
stock (having a weighted average exercise price of $2.29 per share). In addition, as of December
31, 2006, we have an aggregate of 5,900,478 stock options outstanding to employees, directors and
others with a weighted average exercise price of $1.27 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.
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Our common stock could be delisted from the Nasdaq Capital Market which would cause us to
become ineligible to use Form S-3 for the registration of the resale of our securities held by
certain of our security holders.
Historically, the price of our common stock has traded below $1.00 per share. If the price of
our common stock declines below $1.00 per share for 30 consecutive trading days, we may fail to
meet Nasdaq’s maintenance criteria, which may result in the delisting of our common stock from the
Nasdaq Capital Market.
In the event of such delisting, trading, if any, in our common stock may then continue to be
conducted in the non-Nasdaq over-the-counter market in what are commonly referred to as the
electronic bulletin board and the ''pink sheets.’’ As a result, an investor may find it more
difficult to dispose of or obtain accurate quotations as to the market value of our common stock.
In addition, we would be subject to a Rule promulgated by the SEC that, if we fail to meet criteria
set forth in such Rule, imposes various practice requirements on broker-dealers who sell securities
governed by the Rule to persons other than established customers and accredited investors. For
these types of transactions, the broker-dealer must make a special suitability determination for
the purchaser and have received the purchaser’s written consent to the transactions prior to the
sale. Consequently, the Rule may have a material adverse effect on the ability of broker-dealers to
sell our securities, which may materially affect the ability of stockholders to sell our securities
in the secondary market.
A delisting from the Nasdaq Capital Market will also make us ineligible to use Form S-3 to
register the sale of shares of our common stock or to register the resale of our securities held by
certain of our security holders with the SEC, thereby making it more difficult and expensive for us
to register our common stock or other securities and raise additional capital. We are a party to
certain registration rights agreements, which require us to maintain the effectiveness of
registration statements relating to the resale of shares of common stock issuable upon the exercise
of outstanding warrants. If we are ineligible to use Form S-3, we will need to file new
registration statements on some other permitted Form and maintaining the effectiveness of such
registration statements may be more difficult, expensive and time-consuming.
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, 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 director’s 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.
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Item 2. Properties
Our general corporate headquarters and the corporate headquarters of our PFS service fee and
Supplies Distributors businesses are located in Plano, Texas, a Dallas suburb. Our eCOST corporate
headquarters is located in El Segundo, California.
In the U.S.,
we operate two distribution facilities in Memphis, Tennessee, which includes
aggregated floor and mezzanine space of more than 800,000 square feet. We also operate
approximately 1 million square feet of distribution facilities in Southaven, Mississippi. Both of
these complexes are located approximately five miles from the Memphis International Airport, where
both Federal Express and United Parcel Service operate large hub facilities. We also manage a
200,000 square foot distribution facility in Grapevine, Texas.
We operate a 150,000 square foot distribution center in Liege, Belgium, which contains
advanced distribution systems and equipment. We also operate a 22,000 square foot distribution
center in Markham, Canada, near Eastern Toronto. We operate customer service centers in Memphis,
Tennessee; Plano, Texas; and Liege, Belgium. Our call center technology permits the automatic
routing of calls to available customer service representatives in several of our call centers.
We recently opened a 6,500 square foot facility in the Philippines to provide call center and
customer service functions.
Except for the Grapevine, Texas facility, which we manage on our client’s behalf, all of our
facilities are leased and the material lease agreements contain one or more renewal options.
Item 3. Legal Proceedings
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 Daisytek’s 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 intend to vigorously defend the action.
On August 24, 2006, a lawsuit was filed in the Chancery Court of Davidson County, Tennessee,
by ClientLogic Corp. alleging, among other things, that the Company breached its obligations under
a Confidentiality and Nondisclosure Agreement. The complaint sought injunctive relief and damages
in an unspecified amount. In January 2007 the lawsuit was voluntarily dismissed without prejudice.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Our common stock is listed and currently trades on the NASDAQ Capital Market under the symbol
“PFSW.” The following table sets forth for the period indicated the high and low sale price for the
common stock as reported by NASDAQ:
| Price | ||||||||
| High | Low | |||||||
Year Ended December 31, 2006 |
||||||||
First Quarter |
$ | 1.80 | $ | 1.20 | ||||
Second Quarter |
$ | 1.31 | $ | 0.92 | ||||
Third Quarter |
$ | 1.03 | $ | 0.67 | ||||
Fourth Quarter |
$ | 1.34 | $ | 0.61 | ||||
Year Ended December 31, 2005 |
||||||||
First Quarter |
$ | 3.75 | $ | 2.19 | ||||
Second Quarter |
$ | 2.67 | $ | 1.66 | ||||
Third Quarter |
$ | 2.85 | $ | 1.53 | ||||
Fourth Quarter |
$ | 1.77 | $ | 1.05 | ||||
As of March 30, 2007, there were approximately 8,700 shareholders of which approximately 169
were record holders of the common stock.
We have never declared or paid cash dividends on our common stock and do not anticipate the
payment of cash dividends on our common stock in the foreseeable future. We are also restricted
from paying dividends under our debt agreements, without the prior approval of our lenders. We
currently intend to retain all earnings to finance the further development of our business. The
payment of any future cash dividends will be at the discretion of our Board of Directors and will
depend upon, among other things, future earnings, operations, capital requirements, the general
financial condition of the Company and general business conditions and the approval of our lenders.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations —
Liquidity and Capital Resources.”
Item 6. Selected Consolidated Financial Data
Historical Presentation
The selected consolidated historical statement of operations data for the years ended December
31, 2006, 2005 and 2004, and the selected consolidated balance sheet data as of December 31, 2006
and 2005 have been derived from our audited consolidated financial statements, and should be read
in conjunction with those statements and notes, which are included in this Form 10-K. The selected
consolidated statement of operations data for the years ended December 31, 2003 and 2002 and the
selected consolidated balance sheet data as of December 31, 2004, 2003 and 2002 have been derived
from our audited consolidated financial statements, and should be read in conjunction with those
statements, which are not included in this Form 10-K.
The financial information presented prior to October 1, 2002 reflect our agreements with IBM
and Supplies Distributors as a master distributor of certain IBM products and our then 49% owned
subsidiary. Under these agreements, Supplies Distributors owned and distributed the IBM product
and we provided transaction management and fulfillment services to the master distributors. Under
these agreements, we did not own the IBM product and our revenue was service fee revenue (based on
product sales volume or other transaction based pricing) and not product revenue.
In October 2002, we acquired the remaining 51% ownership interest in Supplies Distributors and
we now consolidate 100% of Supplies Distributors financial position and results of operations into
our consolidated financial statements. Upon consolidation, effective October 1, 2002, we own the
IBM product and record product revenue as the product is sold to IBM customers.
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As a result of consolidating Supplies Distributors’ financial position and results of
operations, our total revenues arising under our new IBM agreements have increased, as compared to
the total revenues arising under the prior IBM agreements. However, our gross profit margin as a
percent of product revenue under the new IBM agreements is lower as compared to our gross profit
margin as a percent of net service fee revenue under the prior IBM service fee agreements.
The selected consolidated financial data should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” “Risks Related to Our
Business — Certain of our historical financial information may not be representative of our future
results,” and the consolidated financial statements and notes thereto that are included elsewhere
in this Form 10-K.
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Historical Selected Condensed Consolidated Financial Data
(In thousands, except per share data)
(In thousands, except per share data)
| Year Ended | ||||||||||||||||||||
| December 31, | ||||||||||||||||||||
| 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||
Condensed Consolidated Statements of
Operations Data: |
||||||||||||||||||||
Revenues: |
||||||||||||||||||||
Product revenue, net |
$ | 333,311 | $ | 252,902 | $ | 267,470 | $ | 249,230 | $ | 57,492 | ||||||||||
Service fee revenue |
67,056 | 60,783 | 42,076 | 33,771 | 35,825 | |||||||||||||||
Pass-through revenue |
22,886 | 17,972 | 12,119 | 3,435 | 3,692 | |||||||||||||||
Total revenues |
423,253 | 331,657 | 321,665 | 286,436 | 97,009 | |||||||||||||||
Costs of revenues: |
||||||||||||||||||||
Cost of product revenue |
311,417 | 235,584 | 251,968 | 235,317 | 54,343 | |||||||||||||||
Cost of service fee revenue |
49,274 | 45,597 | 28,067 | 23,159 | 22,660 | |||||||||||||||
Cost of pass-through revenue |
22,886 | 17,972 | 12,119 | 3,435 | 3,692 | |||||||||||||||
Total costs of revenues |
383,577 | 299,153 | 292,154 | 261,911 | 80,695 | |||||||||||||||
Gross profit |
39,676 | 32,504 | 29,511 | 24,525 | 16,314 | |||||||||||||||
Percent of revenues |
9.4 | % | 9.8 | % | 9.2 | % | 8.6 | % | 16.8 | % | ||||||||||
Selling, general and
administrative expenses |
44,290 | 30,505 | 27,077 | 25,693 | 27,906 | |||||||||||||||
Severance and other termination costs |
— | — | — | — | 1,213 | |||||||||||||||
Stock-based compensation |
899 | 16 | 14 | 6 | 28 | |||||||||||||||
Merger integration expenses |
1,495 | — | — | — | — | |||||||||||||||
Amortization of identifiable intangibles |
749 | — | — | — | — | |||||||||||||||
Goodwill impairment |
3,507 | — | — | — | — | |||||||||||||||
Total operating expenses |
50,940 | 30,521 | 27,091 | 25,699 | 29,147 | |||||||||||||||
Income (loss) from operations |
(11,264 | ) | 1,983 | 2,420 | (1,174 | ) | (12,833 | ) | ||||||||||||
Percent of revenues |
(2.7 | )% | 0.6 | % | 0.8 | % | (0.4 | )% | (13.2 | )% | ||||||||||
Equity in earnings of affiliate |
— | — | — | — | 1,163 | |||||||||||||||
Interest expense (income), net |
2,112 | 1,729 | 1,460 | 2,000 | (161 | ) | ||||||||||||||
Income (loss) before income taxes and
extraordinary item |
(13,376 | ) | 254 | 960 | (3,174 | ) | (11,509 | ) | ||||||||||||
Income tax expense |
1,154 | 1,001 | 734 | 572 | 94 | |||||||||||||||
Income (loss) before extraordinary item |
(14,530 | ) | (747 | ) | 226 | (3,746 | ) | (11,603 | ) | |||||||||||
Extraordinary item — gain on purchase of
51% share of Supplies Distributors |
— | — | — | — | 203 | |||||||||||||||
Net income (loss) |
$ | (14,530 | ) | $ | (747 | ) | $ | 226 | $ | (3,746 | ) | $ | (11,400 | ) | ||||||
Per share data: |
||||||||||||||||||||
Net income (loss) per share: |
||||||||||||||||||||
Basic |
$ | (0.34 | ) | $ | (0.03 | ) | $ | 0.01 | $ | (0.20 | ) | $ | (0.63 | ) | ||||||
Diluted |
$ | (0.34 | ) | $ | (0.03 | ) | $ | 0.01 | $ | (0.20 | ) | $ | (0.63 | ) | ||||||
Weighted average number of shares
outstanding: |
||||||||||||||||||||
Basic |
42,762 | 22,394 | 21,332 | 19,011 | 18,229 | |||||||||||||||
Diluted |
42,762 | 22,394 | 23,468 | 19,011 | 18,229 | |||||||||||||||
| As of December 31, | ||||||||||||||||||||
| 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||
Consolidated Balance Sheet Data: |
||||||||||||||||||||
Working capital |
$ | 20,703 | $ | 23,359 | $ | 22,608 | $ | 21,407 | $ | 16,045 | ||||||||||
Total assets |
164,152 | 131,726 | 130,327 | 108,359 | 107,222 | |||||||||||||||
Long-term obligations |
7,604 | 8,102 | 8,749 | 3,760 | 4,514 | |||||||||||||||
Shareholders’ equity |
48,840 | 29,934 | 29,926 | 28,417 | 26,470 | |||||||||||||||
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
We believe the following discussion and analysis provides information that is relevant to an
assessment and understanding of our consolidated results of operations and financial condition. The
discussion and analysis should be read in conjunction with the consolidated financial statements
and related notes thereto appearing elsewhere in this Form 10-K. This Management’s Discussion and
Analysis will help you understand:
| • | The impact of forward looking statements; | ||
| • | Key transactions that we completed in 2006; | ||
| • | Our financial structure, including our historical financial presentation; | ||
| • | Our results of operations for the last three years; | ||
| • | Our relationship with our subsidiaries Supplies Distributors and eCOST; | ||
| • | Our liquidity and capital resources; | ||
| • | The impact of seasonality, inflation and recently issued accounting standards on our financial statements; and | ||
| • | Our critical accounting policies and estimates. |
Forward-Looking Information
We have made forward-looking statements in this Report on Form 10-K. 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 the Risk Factors set forth above or elsewhere in this
Report on Form 10-K, 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 e-commerce, outsourcing, government regulation both foreign and domestic and the market for our services; | ||
| • | whether we can continue and manage growth; | ||
| • | 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; | ||
| • | foreign currency risks and other risks of operating in foreign countries; | ||
| • | potential litigation; | ||
| • | potential delisting; | ||
| • | our dependency on key personnel; | ||
| • | the impact of new accounting standards, and changes in existing 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; | ||
| • | our ability to successfully achieve the anticipated benefits of the eCOST merger; |
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| • | eCOST’s potential indemnification obligations to its former parent; | ||
| • | eCOST’s ability to maintain existing and build new relationships with manufacturers and vendors and the success of its advertising and marketing efforts; and | ||
| • | eCOST’s ability to increase its sales revenue and sales margin and improve operating efficiencies. | ||
| • | eCOST’s ability to generate a client and projected cash flows sufficient to cover the values of its intangible assets. |
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. There may be additional risks that we do not currently view as material or that are not
presently known. In evaluating these statements, you should consider various factors, including the
risks set forth in the section entitled “Risk Factors.”
Key Transactions in 2006
For 2006, we highlight the following key transactions:
| • | We completed the implementation of many new contracts signed in the latter portion of 2005. These newly implemented contracts contributed $6.4 million in new service fee revenues during 2006. | ||
| • | We added relationships with both new and existing clients with estimated fully implemented full year annual service fees of approximately $10 to $12 million based on current client projections. Service fee revenues invoiced from these new relationships in 2006 were approximately $4.7 million. We also recognized approximately $1.3 million of service fee revenue in 2006 from special projects with new and existing clients. | ||
| • | We occupied a new 164,000 square foot distribution facility in Memphis, Tennessee and a new 22,000 facility in Markham, Canada, near Eastern Toronto. | ||
| • | We completed a merger with eCOST in February 2006 and substantially completed all of the related integration related activities. | ||
| • | We continued our efforts to improve profitability with the continued expansion of our operations to the Philippines. | ||
| • | We completed a $5.0 million private placement of our common stock, generating approximately $4.8 million in net proceeds. |
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 recertified brand-name merchandise. We derive our revenues from
three business segments: business process outsourcing, a master distributor and a discount online
retailer.
First, in our business process outsourcing business segment 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.
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.
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In this business process outsourcing 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
and are included in pass-through revenue.
In 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 $87 million of
available financing.
Our 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 recertified brand-name
merchandise. Our product line currently offers approximately 75,000 products in several
primary merchandise categories, primarily including computer hardware and software, home
electronics, digital imaging, watches and jewelry, housewares, DVD movies, video games and
cellular/wireless.
Growth is a key element to us achieving our future goals, including achieving and maintaining
sustainable profitability. Growth in our business process outsourcing segment is driven by two
main elements: new client relationships and organic growth from existing clients. We focus our
sales efforts on larger contracts with brand-name companies within two primary target markets,
which, by nature, require a longer duration to close but also often prove to be higher quality and
longer duration engagements. Our 2006 results include approximately $3.3 million of new revenue,
including certain incremental projects, which we estimate is approximately 25% of the approximately
$10 to $12 million we believe will ultimately be the fully operational annual fee revenue under new
client relationships entered into in 2006.
Growth within our product revenue business is primarily driven by our ability to attract new
master distributor arrangements with IBM or other manufacturers and the sales and marketing efforts
of the manufacturers and third party sales partners.
Growth within our web-commerce product revenue model is primarily driven by our ability to
increase eCOST’s sales and expand its product line.
We continue to monitor and control our costs to focus on profitability. While we are targeting
our new service fee contracts to yield increased 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) operating expenses.
Cost of product revenues —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 vendors to cover price protection and
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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. Vendor marketing programs, such as co-op advertising,
also reduce cost of product revenue.
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.
Operating expenses — consist primarily of selling, general and administrative (“SG&A”)
expenses such as compensation and related expenses for sales and marketing staff, advertising,
online 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.
As a result of the acquisition of eCOST in February 2006, and the subsequent valuation of
intangible assets acquired in the acquisition, it was determined that the carrying value of the
intangibles exceeded their fair value thereby requiring that we write-off the excess net book value
of approximately $3.5 million.
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.
| • | Each of our primary operating subsidiaries has one or more asset-based working capital financing agreements with various lenders. | ||
| • | 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. | ||
| • | In 2004 we received proceeds of $5.0 million of taxable revenue bonds to finance capital additions to our new facility in Southaven, MS. | ||
| • | In June 2006, we completed another private placement of 5.0 million shares of our common stock to certain investors that provided net proceeds of $4.8 million. |
Historical Financial Presentation
As a result of our merger with eCOST.com in February 2006, we believe our historical financial
statements may not provide a meaningful comparison to our current and future financial performance.
Results of Operations
The following table sets forth certain historical financial information from our condensed
consolidated statements of operations expressed as a percent of net revenues.
| Year Ended December 31 | ||||||||||||
| 2006 | 2005 | 2004 | ||||||||||
Product revenue, net |
78.7 | % | 76.3 | % | 83.1 | % | ||||||
Service fee revenue |
15.9 | 18.3 | 13.1 | |||||||||
Pass-through revenue |
5.4 | 5.4 | 3.8 | |||||||||
Total revenues |
100.0 | 100.0 | 100.0 | |||||||||
Cost of product revenue (as % of product
revenue) |
93.4 | 93.2 | 94.2 | |||||||||
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| Year Ended December 31 | ||||||||||||
| 2006 | 2005 | 2004 | ||||||||||
Cost of service fee revenue (as % of
service fee
revenue) |
73.5 | 75.0 | 66.7 | |||||||||
Cost of pass-through revenue (as % of
pass-through revenue) |
100.0 | 100.0 | 100.0 | |||||||||
Total costs of revenues |
90.6 | 90.2 | 90.8 | |||||||||
Gross profit |
9.3 | 9.8 | 9.2 | |||||||||
Operating expenses |
12.0 | 9.2 | 8.4 | |||||||||
Income (loss) from operations |
(2.7 | ) | 0.6 | 0.8 | ||||||||
Interest expense, net |
0.4 | 0.5 | 0.5 | |||||||||
Income (loss) before income taxes |
(3.1 | ) | 0.1 | 0.3 | ||||||||
Income tax expense |
0.4 | 0.3 | 0.2 | |||||||||
Net income (loss) |
(3.5 | )% | (0.2 | )% | 0.1 | % | ||||||
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Product Revenue. Product revenue was $333.3 million for the year ended December 31, 2006, as
compared to $252.9 million for the year ended December 31, 2005, an increase of $80.4 million, or
31.8%. Excluding the $88.3 million of product revenue of eCOST following its acquisition in
February 2006, product revenue decreased $7.9 million, or 3.1%, primarily due to lower volumes and
reduced vendor promotional activity. We currently expect our 2007 annual product revenue (excluding
eCOST) to remain relatively consistent with 2006 and we expect our
eCOST product revenues to grow.
Service Fee Revenue. Service fee revenue was $67.1 million for the year ended December 31,
2006 as compared to $60.8 million for the year ended December 31, 2005, an increase of $6.3 million
or 10.3%. Service fee revenue includes increased service fees generated from incremental projects
with certain client relationships. The change in service fee revenue is shown below ($ millions):
Year ended December 31, 2005 |
$ | 60.8 | ||
New service contract relationships, including certain
incremental projects under new contracts |
4.7 | |||
Change in existing client service fees from organic
growth and certain incremental projects with
existing clients |
6.7 | |||
Terminated clients not included in 2006 revenue |
(5.1 | ) | ||
Year ended December 31, 2006 |
$ | 67.1 | ||
Service
fee revenue for the year ended December 31, 2006 included
approximately $2.9 million
of fees earned from client contracts terminated during 2006.
Cost
of Product Revenue. Cost of product revenue was $311.4 million for the year ended
December 31, 2006, as compared to $235.6 million for the year ended December 31, 2005, an increase
of $75.8 million or 32.2%. Excluding the $84.1 million of cost of product revenue of eCOST
following its acquisition in February 2006, cost of product revenue decreased $8.2 million or 3.5%.
Cost of product revenue, excluding eCOST, decreased primarily as the result of decreased sales
volumes of certain products. Cost of product revenue, as a percent of product revenue, excluding
the impact of eCOST, was 92.8% during the year ended December 31, 2006 and 93.2% during the year
ended December 31, 2005. The resulting gross profit margin was 7.2% for the year ended December 31,
2006 and 6.8% for the year ended December 31, 2005. The gross
profit margin for the 2006 and 2005 periods
include certain incremental inventory cost reductions. eCOST’s cost of product revenue, as a
percentage of product revenue was 95.2% during the year ended December 31, 2006, following its
acquisition in February 2006. The resulting gross margin for
eCOST was 4.8% during the same
period, which is lower than expected primarily due to unusually high levels of credit card
chargeback activity that resulted in approximately $1.7 million of higher than normal credit card
chargebacks, an increased provision for excess and obsolete inventory, and the impact of a $0.4
million loss applicable to a sales transaction to a former eCOST customer.
Cost of Service Fee Revenue. Cost of service fee revenue was $49.3 million for the year ended
December 31, 2006, as compared to $45.6 million during the year ended December 31, 2005, an
increase of $3.7 million or 8.1%. The resulting service fee gross profit was $17.8 million, or
26.5% of service fee revenue, during the year
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ended December 31, 2006 as compared to $15.2 million,
or 25.0% of service fee revenue, for the year ended December 31, 2005. Our gross profit as a
percent of service fees increased in the year ended December 31, 2006 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.
Operating
Expenses. Operating expenses were $50.9 million for the year ended December 31,
2006, or 12.0% of total net revenues, as compared to $30.5 million, or 9.2% of total net revenues,
for the year ended December 31, 2005. Excluding the $20.4 million of operating expenses of eCOST
following its acquisition in February 2006, operating expenses were $30.6 million, or 9.1% of total
net revenues, during the current period. As we have essentially completed the integration of eCOST
into our infrastructure, we have begun to realize certain operating savings through the reduction
of certain eCOST overhead expenses, changes in corporate infrastructure and a reduction in
integration related costs. Operating expenses in the year ended December 31, 2006 included $0.9
million of costs applicable to stock-based compensation, which were zero in the prior year. In
addition, the 2005 period included certain personnel related costs and certain incremental costs
incurred to relocate certain of our operations from Memphis, TN to a new facility in Southaven, MS,
which did not recur in 2006. While we do not expect the same level of 2006 merger integration expenses to recur
in 2007, we do anticipate incremental operating expenses for certain of our facilities and
additional expenses in preparation of complying with the Section 404 requirements of the
Sarbanes-Oxley Act of 2002.
Operating expenses also include a goodwill impairment resulting from our annual analysis
pursuant to Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible
Assets. Under this analysis, we determined that the carrying value of goodwill exceeded the fair
value, which resulted in a $3.5 million non-cash write-off of goodwill during the fourth quarter of
2006.
Interest Expense, net. Net interest expense was $2.1 million and $1.7 million for the years
ended December 31, 2006 and 2005, respectively. The increase was
primarily related to the increase in interest rates.
Income Taxes. For the year ended December 31, 2006 and 2005, we recorded a tax provision of
$1.2 million and $1.0 million, respectively, 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 December 31, 2006 and 2005, which are primarily related to
our net operating loss carryforwards, and certain foreign deferred tax assets. We did not record an
income tax benefit for our PFSweb Canadian pre-tax losses in the current or prior periods. We
expect that we will continue to record an income tax provision associated with Supplies
Distributors’ Canadian and European results of operations.
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Product Revenue, Net. Product revenue was $252.9 million for the year ended December 31,
2005, as compared to $267.5 million for the year ended December 31, 2004, a decrease of $14.6
million or 5.4%. The decrease in annual product revenue resulted primarily from a decrease in
hardware sales volume and increased efficiency of certain products offset by certain product price
increases.
Service Fee Revenue. Service fee revenue was $60.8 million for the year ended December 31,
2005 as compared to $42.1 million for the year ended December 31, 2004, an increase of $18.7
million or 44.5%. Service fee revenue for the period included increased service fees generated
from incremental projects with certain client relationships. The change in service fee revenue is
shown below ($ millions):
Year ended December 31, 2004 |
$ | 42.1 | ||
New service contract relationships, including certain
incremental projects under new contracts |
15.2 | |||
Change in existing client service fees from organic
growth and certain incremental projects with
existing clients |
4.7 | |||
Terminated clients not included in 2005 revenue |
(1.2 | ) | ||
Year ended December 31, 2005 |
$ | 60.8 | ||
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Service fee revenue for the year ended December 31, 2005 included approximately $2.4 million
of fees earned from client contracts terminated during 2005.
Cost of Product Revenue. Cost of product revenue was $235.6 million for the year ended
December 31, 2005, as compared to $252.0 million for the year ended December 31, 2004, a decrease
of $16.4 million or 6.5%. Cost of product revenue as a percent of product revenue was 93.2% during
the year ended December 31, 2005 and 94.2% during the year ended December 31, 2004. The resulting gross profit margin was 6.8% and 5.8%
for the year ended December 31, 2005 and 2004, respectively. The decrease in annual cost of product
revenue from the prior year resulted primarily from certain incremental inventory cost reductions
and the result of decreased sales volumes of certain products. In addition, 2004 included higher
provisions for excess and obsolete inventory of $1.2 million compared to 2005.
Cost of Service Fee Revenue. Cost of service fee revenue was $45.6 million for the year ended
December 31, 2005, as compared to $28.1 million during the year ended December 31, 2004, an
increase of $17.5 million or 62.5%. The resulting service fee gross profit was $15.2 million or
25.0% of service fee revenue, during the year ended December 31, 2005 as compared to $14.0 million,
or 33.3% of service fee revenue for the year ended December 31, 2004. Our gross profit as a percent
of service fee revenue decreased in the current period primarily due to lower gross margins on
certain new contracts partially due to higher costs incurred during the implementation and initial
operating periods of these new contracts. The 2004 results also reflects the higher gross margin
benefit related to certain project revenue that did not occur at a similar level in 2005.
Operating Expenses. Operating expenses were $30.5 million for the year ended December 31, 2005
or 9.2% of total net revenues, as compared to $27.1 million, or 8.4% of total revenues, for the
year ended December 31, 2004. SG&A expenses increased from the prior year primarily due to
approximately $1.4 million of incremental costs incurred in 2005 to relocate certain of our
operations from Memphis, Tennessee to a new facility in Southaven, Mississippi, the legal fees
related to the Daisytek lawsuit filed in May 2005 (see Part I. Item 3. Legal Proceedings),
incremental sales and marketing expenses and certain personnel related costs.
Income Taxes. For the years ended December 31, 2005 and 2004, we recorded a tax provision of
$1.0 million and $0.7 million, respectively, primarily associated with Supplies Distributors’
Canadian and European operations. We did not record an income tax benefit for our PFSweb Canadian
pre-tax losses in the current or prior periods.
Supplies Distributors and its Subsidiaries
Supplies Distributors and its subsidiaries act as master distributors of various IBM and other
products and, pursuant to a transaction management services agreement between us and Supplies
Distributors, we provide transaction management and fulfillment services to Supplies Distributors
and its subsidiaries. In addition to our equity investment in Supplies Distributors, we have also
provided Supplies Distributors with a subordinated loan that, as of December 31, 2006, had an
outstanding balance of $6.5 million.
Supplies Distributors has paid us dividends of $3.9 million, $1.0 million, and $0.8 million in
2006, 2005 and 2004, respectively. Pursuant to the terms of its amended credit agreements,
Supplies Distributors is currently restricted from paying further cash dividends without the prior
approval of its lenders. In addition, no distribution may be made if, after giving effect thereto,
the net worth of Supplies Distributors would be less than $1.0 million.
eCOST and its Subsidiaries
eCOST is a multi-category online discount retailer of new, “close-out” and recertified
brand-name merchandise, selling products primarily to customers in the United States. As of
December 31, 2006, we have advanced $10.6 million to eCOST to support their operations.
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Liquidity and Capital Resources
Net
cash provided by operating activities was $2.5 million for the year ended December 31,
2006 and primarily consisted of a decrease in inventories of
$2.9 million, a decrease in accounts receivable
of $1.7 million and a decrease in restricted cash of
$0.8 million. These sources of cash were offset by a
$2.6 million decrease in accounts payable, accrued expenses and
other liabilities and a decrease in net income, as adjusted for
non-cash items of $0.2 million.
Net cash provided by operating activities was $0.8 million for the year ended December 31,
2005 and primarily resulted from increases in income, as adjusted for non-cash items, of $5.4
million and accounts payable, accrued expenses and other liabilities
of $2.5 million, partially
offset by increases in accounts receivable of $4.5 million, prepaid expenses, other receivables and
other assets of $1.8 million and an increase in inventories of $0.8 million.
Net cash used in investing activities was $4.4 million for the year ended December 31, 2006
and consisted primarily of capital expenditures of $4.0 million and cash paid to acquire eCOST, net
of cash acquired, of $1.3 million, partially offset by a decrease in restricted cash of $0.9
million.
Net cash used in investing activities for the year ended December 31, 2005 totaled $2.8
million, resulting from capital expenditures of $3.9 million offset by a decrease in restricted
cash of $1.1 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 $6 million to $9 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 achieve the revenue necessary to support such investments.
Net cash provided by financing activities was $3.3 million for the year ended December 31,
2006 primarily representing $4.9 million of net proceeds on issuance of common stock pursuant to a
private placement transaction and $1.0 million of net proceeds on debt partially offset by payments
on capital leases of $1.5 million and an increase in restricted
cash of $1.1 million.
Net cash provided by financing activities was approximately $2.1 million for the year ended
December 31, 2005, primarily representing $1.2 million of proceeds from debt and $2.1 million of
proceeds from the issuance of common stock pursuant to our employee stock purchase and stock option
programs and warrant exercises partially offset by $1.2 million of payments on our capital lease
obligations.
Our liquidity has been negatively impacted as a result of the merger with eCOST. During 2005
and 2006, eCOST experienced a significant net usage of cash primarily due to losses incurred. As a
result, during the process of transitioning and integrating the eCOST operations, we have had to
support eCOST’s cash needs to help it achieve a stabilized operational position. The amount of
further cash needed to support eCOST operations will depend upon the financing available as well as
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 million to $5 million, dependent upon sales volumes, as compared
to pre-merger levels. These savings 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. As we have essentially completed the
integration of eCOST into our infrastructure, we have begun to
realize the benefits of many of these expected cost savings.
Additionally we expect improvements in eCOST profitability in 2007 and
beyond as a result of planned efforts to increase sales, improve
product mix and improved operational efficiencies.
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During
the year ended December 31, 2006, our working capital decreased
to $20.7 million from
$23.4 million at December 31, 2005 primarily as a result of the use of cash related to the
integration activities of eCOST into the PFS infrastructure as well as cash used to support eCOST
operating losses. A portion of these cash outflows were offset by the net proceeds from the sale
of our common stock in a private placement transaction. 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 own 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.
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 December
31, 2006 (in millions):
| Payments Due By Period | ||||||||||||||||||||
| Less than | 1 - 3 | 3 - 5 | More than | |||||||||||||||||
| Total | 1 Year | Years | Years | 5 Years | ||||||||||||||||
Contractual Obligations |
||||||||||||||||||||
Debt and vendor financing |
$ | 66,868 | $ | 62,178 | $ | 2,166 | $ | 1,720 | $ | 804 | ||||||||||
Capital lease obligations |
4,886 | 2,879 | 1,673 | 334 | — | |||||||||||||||
Operating leases |
26,665 | 8,620 | 11,390 | 5,980 | 675 | |||||||||||||||
Total |
$ | 98,419 | $ | 73,677 | $ | 15,229 | $ | 8,034 | $ | 1,479 | ||||||||||
In support of certain debt instruments and leases, as of December 31, 2006 and 2005, we
had $0.2 million and $0.7 million, respectively, of cash restricted as collateral for a letter of
credit, which expires in 2007. As of December 31, 2006 and 2005, we had $2.5 million and $1.6
million, respectively, of cash restricted for payment of capital expenditures or repayment 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 these facilities include both
financial and non-financial covenants, and also include cross default provisions applicable to
other credit facilities and agreements. These covenants include minimum levels of net worth for the
individual borrower subsidiaries and restrictions on the ability of the borrower subsidiaries to
advance funds to other borrower subsidiaries. As a result, it is possible for one or more of these
borrower subsidiaries to fail to meet their respective covenants even if another borrower
subsidiary otherwise has available excess funds which, if not restricted, could be used to cure the
default. To the extent we fail to comply with our debt covenants, including the monthly financial
covenant requirements and our required level of stockholders’ 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 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 our 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 December
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.
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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 $16.5 million) with IBM Credit and IBM Belgium,
respectively. These agreements expire in March 2008.
Supplies Distributors also has a loan and security agreement with Wachovia Bank, N.A.
(“Wachovia”) to provide financing for up to $25 million of eligible accounts receivables in the
United States and Canada. The Wachovia facility expires on the earlier of March 29, 2009 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 $9.9
million) of eligible accounts receivables through March 2008.
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, investments 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 $6.0 million, maintain restricted cash of less than $5.0 million and
are restricted with regard to transactions with related parties, 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 PFS subsidiary has entered into a Loan and Security Agreement with Comerica Bank
(“Comerica”), which provides for up to $10.0 million of eligible accounts receivable financing
through April 2008, provided a $1.5 million term loan due in equal monthly installments through
December 2007, and provided for 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 PFS’ ability to increase the subordinated
loan to Supplies Distributors to no more than $8.0 million and advance no more than $8.5 million to
eCOST without Comerica’s approval. The agreement is secured by all of the assets of PFS, as well as
a guarantee of PFSweb.
eCOST currently has an asset-based line of credit facility of up to $7.5 million with Wachovia
Capital Finance Corporation (Western), which is collateralized by substantially all of eCOST’s
assets and expires in May 2009. 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. As of December 31, 2006, eCOST had $1.6 million of letters of
credit outstanding and $0.9 million of available credit under this facility. The credit facility
restricts eCOST’s 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,
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pledge assets, make changes to capital stock ownership structure, as
well as a minimum tangible net worth of $0, as defined. PFSweb has guaranteed all current and
future obligations of eCOST under this line of credit.
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, (the “Common Stock”). In addition to the Common Stock, the investors
received certain warrants to purchase shares of Common Stock at a specified exercise price. As a
result of the merger with eCOST and the private placement of our common stock in June 2006
(discussed below), the exercise price of the outstanding warrants has been adjusted to $2.31 per
share and the number of warrants has been adjusted to 564,980. In addition, in connection with the
merger of 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 April 2008
at which time, if not renewed or replaced, will result in a draw on the undrawn face amount
thereof.
In June 2006, 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
5.0 million shares of our common stock, par value $.001 per share, at $1.00 per share, resulting in
gross proceeds of $5.0 million. After deducting expenses, the net proceeds were approximately $4.8
million. We have advanced the net proceeds to eCOST to support their operating requirements.
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 December 31, 2006, we were in compliance with all debt covenants.
Through our merger with eCOST, we have aligned the core strengths of each company, to leverage
our operational infrastructure and technology expertise with eCOST’s customer base and supplier
relationships. We are targeting to achieve $4 to $5 million in annual cost savings, dependent upon
sales volumes, as compared to pre-merger levels. These savings are expected to result from, among
other things, reductions in the following costs:
| • | Certain redundant administrative and public company activities; | ||
| • | Excess capacity and other related facility expenses; | ||
| • | Technology, telecommunications and operational costs; and | ||
| • | Overall outbound freight costs due to additional freight options. |
As we have essentially completed the integration of eCOST into our infrastructure, we are
beginning to realize 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 non-electronic goods; | ||
| • | Develop higher margin non-product and service categories; | ||
| • | Expand international sales, particularly in Europe and Canada, where we maintain a presence; and | ||
| • | Utilize our stronger financial platform to enhance eCOST’s working capital resources to expand access to exclusive products and deals. |
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
2007 and will require funding to support its operations.
eCOST has historically incurred significant operating losses and used cash to fund its
operations. As a result, we have been required to invest cash to fund eCOST’s operations, which we
may not be able to continue to do without approval from our lenders. The amount of further cash
needed to support eCOST operations depends upon the financing available under its credit line as
well as eCOST’s ability to improve its financial results. Through March 28, 2007, we have advanced
$10.6 million to eCOST to fund eCOST’s cash flow requirements and have lender approval to advance
an additional $2.6 million, with certain restrictions, if needed. In the event we need to invest
further cash to eCOST, we may be required to seek approval from our lenders to provide such funds.
We can provide no assurance that we will receive such approval from our lenders or any terms or
conditions required by our lenders to obtain such approval. In addition, PFSweb has provided a
guaranty of eCOST’s bank line of credit and certain eCOST’s vendor trade payables.
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 municipal authority that we did not satisfy certain criteria necessary to maintain the
abatements. In December 2006 we received notice that the municipal authority planned to make an
adjustment to our tax abatement. We plan to dispute the adjustment, but if the dispute is not
resolved favorably, additional taxes of approximately $1.5 million could be assessed against us
through December 31, 2006. We have not accrued for the additional taxes 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 Daisytek’s 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 intends to vigorously defend the action. Through December 31,
2006, we have incurred outstanding legal costs of approximately $0.3 million, which have not been
paid as we expect such costs to be covered by insurance.
On August 24, 2006, a lawsuit was filed in the Chancery Court of Davidson County, Tennessee,
by ClientLogic Corp. alleging, among other things, that we breached our obligations under a
Confidentiality and Nondisclosure Agreement. The complaint sought injunctive relief and damages in
an unspecified amount. In January 2007 the lawsuit was voluntarily dismissed without prejudice.
On July 12, 2004, we received correspondence from MercExchange LLC alleging infringement of
MercExchange’s U.S. patents relating to e-commerce and offering to license its patent portfolio to
eCOST. On July 15, 2004, we received a follow-up letter from MercExchange specifying which of its
technologies MercExchange believed infringed 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 we are 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 our
investigation of
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this matter to date, we believe that our current eCOST 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 our business,
financial position, results of operations or cash flows.
Inventory Management
We manage our inventories held for sale by maintaining sufficient quantities of product to
achieve high order fill rates while at the same time maximizing inventory turnover rates. Inventory
balances will fluctuate as we add new product lines. To reduce the risk of loss due to supplier
price reductions, our master distributor agreement, as well as certain vendor agreement in our
eCOST business, provide for price protection under which we receive credits if the supplier lowers
prices on previously purchased inventory.
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 its lowest in the
quarter ended March 31. We anticipate that our Supplies Distributors product revenue will be
highest during the quarter ended December 31. Our eCOST 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 our eCOST revenues occur during the first and fourth fiscal
quarters. We believe that our historical revenue growth makes it difficult to predict the effect of
seasonality on our future revenues and results of operations
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.
Impact of Recently Issued Accounting Standards
In June 2006, the Financial Accounting Standards Board (FASB) issued Financial Interpretation
48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 (FIN
48). FIN 48 defines the threshold for recognizing the benefits of tax return positions in the
financial statements as “more-likely-than-not” to be sustained by the taxing authority. The
recently issued literature also provides guidance on the derecognition, measurement and
classification of income tax uncertainties, along with any related interest and penalties. FIN 48
also includes guidance concerning accounting for income tax uncertainties in interim periods and
increases the level of disclosures associated with any recorded income tax uncertainties. The
interpretation is effective for fiscal years beginning after December 15, 2006. Any differences
between the amounts recognized in the statements of financial position prior to the adoption of FIN
48 and the amounts reported after adoption will be accounted for as a cumulative-effect adjustment
recorded to the beginning balance of retained earnings. We do not expect the adoption of FIN 48 to
have a material impact to our consolidated financial statements.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in conformity with accounting
principles generally accepted in the U.S. These accounting principles require us to make estimates
and assumptions that affect the reported amounts of assets and liabilities at the date of our
financial statements and the reported amounts of revenues and expenses during the reporting period.
While we do not believe the reported amounts would be materially different, application of these
policies involves the exercise of judgment and the use of assumptions as to future uncertainties
and, as a result, actual results could differ from these estimates. If there is a significant
unfavorable change to current conditions, it would likely result in a material adverse impact to
our business, operating results and financial condition. We evaluate our estimates and assumptions
on an ongoing basis. We
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base our estimates on experience and on various other assumptions that we
believe to be reasonable under the circumstances. All of our significant accounting policies are
disclosed in the notes to our consolidated financial statements.
We have defined a critical accounting estimate as one that is both important to the portrayal
of our financial condition and results of operations and requires us to make difficult, subjective
or complex judgments or estimates about matters that are uncertain. During the past three fiscal
years, we have not made any material changes in accounting methodology used to establish the
critical accounting estimates discussed below, unless otherwise noted. All of our significant
accounting policies are disclosed in the notes to our consolidated financial statements. The
following represent certain critical accounting policies that require us to exercise our business
judgment or make significant estimates. In addition, there are other items within our consolidated
financial statements that require estimation but are not deemed critical as defined above.
Product Revenue Recognition
We adhere to the revised guidelines and principles of sales recognition described in Staff
Accounting Bulletin No. 104, Revenue Recognition, issued as a revision to Staff Accounting Bulletin
No. 101, Revenue Recognition. While the wording of SAB 104 has revised the original SAB 101, the
revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104.
Under SAB 104, sales are recognized when the title and risk of loss are passed to the customer,
there is persuasive evidence of an arrangement for the sale, delivery has occurred and/or services
have been rendered, the sales price is fixed or determinable and collectibility is reasonably
assured. Under these guidelines, we recognize a majority of our sales, including revenue from
product sales and gross outbound shipping and handling charges, upon receipt of the product by the
customer. For all product sales shipped directly from suppliers to customers, we are the primary
obligor in the transaction, and we take title to the products sold upon shipment, bear credit risk,
and bear inventory risk for returned products that are not successfully returned to suppliers;
therefore, we recognize these revenues at gross sales amounts.
Sales are reported net of estimated returns and allowances, credit card fraud and chargebacks,
all of which are estimated based upon recent historical information such as return and redemption rates, and
fraud and chargeback experience. Management also considers any other current information and
trends in making estimates. If actual sales returns, allowances, discounts and credit card fraud
and chargebacks are greater than estimated by management, additional expense may be incurred.
Cost of Service Fee Revenue
Our service fee revenues primarily relate to our distribution services and order
management/customer care services. Distribution services relate primarily to inventory management,
product receiving, warehousing and fulfillment (i.e., picking, packing and shipping). Order
management/customer care services relate primarily to taking customer orders for our client’s
products via various channels such as telephone call-center, electronic or facsimile. These
services also entail addressing customer questions related to orders, as well as
cross-selling/up-selling activities.
Our cost of service fee revenue represents the cost to provide the services described above,
primarily compensation and related expenses and other fixed and variable expenses directly related
to providing the services. These include certain occupancy and information technology costs and
depreciation and amortization expenses. Certain of these costs are allocated from general and
administrative expenses. For these allocations, we estimate the amount of direct expenses based on
a client-specific number of transactions processed. We believe our allocation methodology is
reasonable, however a change in assumptions would result in a different gross profit in our
statement of operations, yet no change to the resulting net income or loss.
Allowance for Doubtful Accounts
The determination of the collectibility of amounts due from our customers requires us to use
estimates and make judgments regarding future events and trends, including monitoring our
customers’ payment history and current credit worthiness to determine that collectibility is
reasonably assured, as well as consideration of the
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overall business climate in which our clients
and customers operate. Inherently, these uncertainties require us to make frequent judgments and
estimates regarding our clients and customers’ ability to pay amounts due us to determine the
appropriate amount of valuation allowances required for doubtful accounts. Provisions for doubtful
accounts are recorded when it becomes evident that the client or customer will not make the
required payments at either contractual due dates or in the future.
With our online discount retail business, we also maintain an allowance for uncollectible
vendor receivables, which arise from vendor rebate programs, price protections and other
promotions. We determine the sufficiency of the vendor receivable allowance based upon various
factors, including payment history. Amounts received from vendors may vary from amounts recorded
because of potential non-compliance with certain elements of vendor programs. If our estimated
allowances for uncollectible accounts or vendor receivables subsequently prove insufficient,
additional allowance maybe required.
Allowances for doubtful accounts totaled $2.3 million and $0.5 million at December 31, 2006
and 2005, respectively. We believe that our allowances for doubtful accounts are adequate to cover
anticipated losses under current conditions; however, uncertainties regarding changes in the
financial condition of our clients and customers, either adverse or positive, could impact the
amount and timing of any additional provisions for doubtful accounts that may be required.
Inventory Reserves
Inventories (merchandise, held for resale, all of which are finished goods) are stated at the
lower of weighted average cost or market. Supplies Distributors and its subsidiaries assume
responsibility for slow-moving inventory under certain master distributor agreements, subject to
certain termination rights, but have the right to return product rendered obsolete by engineering
changes, as defined. eCOST assumes responsibility for slow-moving inventory but has limited rights
to return product based on specific inventory agreements. We review 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. This requires
us to record provisions and maintain reserves for excess or obsolete inventory. To determine these
reserve amounts, we regularly review inventory quantities on hand and compare them to estimates of
future product demand and market conditions. These estimates and forecasts inherently include uncertainties and require us to make judgments
regarding potential outcomes. At December 31, 2006 and 2005, our allowance for slow moving
inventory totaled $3.0 million and $1.5 million, respectively. We believe that our reserves are
adequate to cover anticipated losses under current conditions. Significant or unanticipated changes
to our estimates and forecasts, either adverse or positive, could impact the amount and timing of
any additional provisions for excess or obsolete inventory that may be required.
Income Taxes
The liability method is used for determining our income taxes, under which current and
deferred tax liabilities and assets are recorded in accordance with enacted tax laws and rates.
Under this method, the amounts of deferred tax liabilities and assets at the end of each period are
determined using the tax rate expected to be in effect when taxes are actually paid or recovered.
Valuation allowances are established to reduce deferred tax assets when it is more likely than not
that some portion or all of the deferred tax assets will not be realized. In determining the need
for valuation allowances, we have considered and made judgments and estimates regarding estimated
future taxable income. These estimates and judgments include some degree of uncertainty and changes
in these estimates and assumptions could require us to adjust the valuation allowances for our
deferred tax assets. The ultimate realization of the certain of our deferred tax assets depends on
the generation of sufficient taxable income in the applicable taxing jurisdictions. Although we
believe our estimates and judgments are reasonable, actual results may differ, which could be
material.
As we operate in multiple countries, we are subject to the jurisdiction of multiple domestic
and foreign tax authorities. Determination of taxable income in any jurisdiction requires the
interpretation of the related tax laws and regulations and the use of estimates and assumptions
regarding significant future events such as the amount, timing and character of deductions,
permissible revenue recognition methods under the tax law and the sources and character of income
and tax credits. Changes in tax laws, regulations, foreign currency exchange restrictions or our
level of operations or profitability in each taxing jurisdiction could have an impact on the amount
of income taxes that we provide during any given year.
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Long-Lived Assets
Long-lived assets include property, intangible assets, goodwill and certain other assets. We
make judgments and estimates in conjunction with the carrying value of these assets, including
amounts to be capitalized, depreciation and amortization methods and useful lives. Additionally, we
review long-lived assets for impairment periodically, but at a minimum annually, or whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. We record impairment losses in the period in which we determine that the carrying
amount is not recoverable. Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to future net cash flows expected to be generated by the asset.
This may require us to make judgments regarding long-term forecasts of our future revenues and
costs related to the assets subject to review. During the fourth quarter of 2006, we determined
that the carrying value of the goodwill resulting from our acquisition of eCOST was impaired, which
resulting in a $3.5 million non-cash write-off of goodwill.
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Item 7a. Quantitative and Qualitative Disclosure about Market Risk
We are exposed to various market risks including interest rates on our 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 $70.6 million at December 31, 2006. A 100 basis point movement
in interest rates would result in approximately $0.3 million annualized increase or decrease in
interest expense based on the outstanding balance of these agreements at December 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.
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Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENT SCHEDULES
| Page | ||
PFSweb, Inc. and Subsidiaries |
||
| 61 | ||
| 62 | ||
| 63 | ||
| 64 | ||
| 65 | ||
| 66 | ||
Supplementary Data |
||
| 96 | ||
| 99 | ||
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
PFSweb, Inc.:
PFSweb, Inc.:
We have audited the accompanying consolidated balance sheets of PFSweb, Inc. and subsidiaries as of
December 31, 2006 and 2005, and the related consolidated statements of operations, shareholders’
equity and comprehensive income (loss) and cash flows for each of the years in the three-year
period ended December 31, 2006. In connection with our audits of the consolidated financial
statements, we also have audited the accompanying financial statement schedules as of December 31,
2006 and 2005, and for each of the years in the three-year period ended December 31, 2006. These
consolidated financial statements and financial statement schedules are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of PFSweb, Inc. and subsidiaries as of December 31, 2006
and 2005, and the results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2006, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules as of December 31,
2006 and 2005, and for each of the years in the three-year period ended December 31, 2006, when
considered in relation to the basic financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, during 2006, the Company adopted
Statement of Financial Accounting Standards No. 123R, Share-Based Payment.
KPMG LLP
Dallas, Texas
April 2, 2007
April 2, 2007
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PFSWEB, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(In thousands, except share data)
| December 31, | December 31, | |||||||
| 2006 | 2005 | |||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 15,066 | $ | 13,683 | ||||
Restricted cash |
2,653 | 2,077 | ||||||
Accounts
receivable, net of allowance for doubtful accounts of $2,352
and $484 at December 31, 2006 and 2005, respectively |
48,717 | 44,556 | ||||||
Inventories, net of reserves of $2,987 and $1,539 at December 31, 2006 and 2005, respectively |
47,670 | 43,654 | ||||||
Other receivables |
10,774 | 9,866 | ||||||
Prepaid expenses and other current assets |
3,531 | 3,213 | ||||||
Total current assets |
128,411 | 117,049 | ||||||
PROPERTY AND EQUIPMENT, net |
12,884 | 13,040 | ||||||
RESTRICTED CASH |
— | 150 | ||||||
IDENTIFIABLE INTANGIBLES, net |
6,647 | — | ||||||
GOODWILL |
15,362 | — | ||||||
OTHER ASSETS |
848 | 1,487 | ||||||
Total assets |
$ | 164,152 | $ | 131,726 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
CURRENT LIABILITIES: |
||||||||
Current portion of long-term debt and capital lease obligations |
$ | 23,802 | $ | 21,626 | ||||
Trade accounts payable |
61,972 | 60,053 | ||||||
Accrued expenses |
21,934 | 12,011 | ||||||
Total current liabilities |
107,708 | 93,690 | ||||||
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current
portion |
6,076 | 6,289 | ||||||
OTHER LIABILITIES |
1,528 | 1,813 | ||||||
COMMITMENTS AND CONTINGENCIES |
||||||||
SHAREHOLDERS’ EQUITY: |
||||||||
Preferred stock, $1.00 par value; 1,000,000 shares authorized; none issued and outstanding |
— | — | ||||||
Common
stock, $0.001 par value; 75,000,000 shares authorized;
46,553,752 and 22,613,314 shares issued at December 31, 2006 and 2005, respectively;
and 46,467,452 and 22,527,014 outstanding at December 31, 2006 and 2005, respectively |
47 | 23 | ||||||
Additional paid-in capital |
91,302 | 58,736 | ||||||
Accumulated deficit |
(44,354 | ) | (29,824 | ) | ||||
Accumulated other comprehensive income |
1,930 | 1,084 | ||||||
Treasury stock at cost, 86,300 shares |
(85 | ) | (85 | ) | ||||
Total shareholders’ equity |
48,840 | 29,934 | ||||||
Total liabilities and shareholders’ equity |
$ | 164,152 | $ | 131,726 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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PFSWEB, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31
(In thousands, except per share data)
FOR THE YEARS ENDED DECEMBER 31
(In thousands, except per share data)
| 2006 | 2005 | 2004 | ||||||||||
REVENUES: |
||||||||||||
Product revenue, net |
$ | 333,311 | $ | 252,902 | $ | 267,470 | ||||||
Service fee revenue |
67,056 | 60,783 | 42,076 | |||||||||
Pass-through revenue |
22,886 | 17,972 | 12,119 | |||||||||
Total revenues |
423,253 | 331,657 | 321,665 | |||||||||
COSTS OF REVENUES: |
||||||||||||
Cost of product revenue |
311,417 | 235,584 | 251,968 | |||||||||
Cost of service fee revenue |
49,274 | 45,597 | 28,067 | |||||||||
Cost of pass-through revenue |
22,886 | 17,972 | 12,119 | |||||||||
Total costs of revenues |
383,577 | 299,153 | 292,154 | |||||||||
Gross profit |
39,676 | 32,504 | 29,511 | |||||||||
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES |
44,290 | 30,505 | 27,077 | |||||||||
STOCK-BASED COMPENSATION EXPENSE |
899 | 16 | 14 | |||||||||
MERGER INTEGRATION EXPENSES |
1,495 | — | — | |||||||||
AMORTIZATION OF IDENTIFIABLE INTANGIBLES |
749 | — | — | |||||||||
GOODWILL IMPAIRMENT |
3,507 | — | — | |||||||||
Total operating expenses |
50,940 | 30,521 | 27,091 | |||||||||
Income (loss) from operations |
(11,264 | ) | 1,983 | 2,420 | ||||||||
INTEREST EXPENSE |
2,748 | 1,824 | 1,590 | |||||||||
INTEREST INCOME |
(636 | ) | (95 | ) | (130 | ) | ||||||
Income (loss) before income taxes |
(13,376 | ) | 254 | 960 | ||||||||
INCOME TAX EXPENSE |
1,154 | 1,001 | 734 | |||||||||
NET INCOME (LOSS) |
$ | (14,530 | ) | $ | (747 | ) | $ | 226 | ||||
EARNINGS (LOSS) PER SHARE: |
||||||||||||
Basic |
$ | (0.34 | ) | $ | (0.03 | ) | $ | 0.01 | ||||
Diluted |
$ | (0.34 | ) | $ | (0.03 | ) | $ | 0.01 | ||||
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: |
||||||||||||
Basic |
42,762 | 22,394 | 21,332 | |||||||||
Diluted |
42,762 | 22,394 | 23,468 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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PFSWEB, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME (LOSS)
(In thousands, except share data)
COMPREHENSIVE INCOME (LOSS)
(In thousands, except share data)
| Accumulated | ||||||||||||||||||||||||||||||||||||
| Additional | Other | Total | Comprehensive | |||||||||||||||||||||||||||||||||
| Common Stock | Paid-In | Accumulated | Comprehensive | Treasury Stock | Shareholders’ | Income | ||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Income (Loss) | Shares | Amount | Equity | (Loss) | ||||||||||||||||||||||||||||
Balance, December 31, 2003 |
21,247,941 | $ | 21 | $ | 56,156 | $ | (29,303 | ) | $ | 1,628 | 86,300 | $ | (85 | ) | $ | 28,417 | ||||||||||||||||||||
Net income |
— | — | — | 226 | — | — | — | 226 | $ | 226 | ||||||||||||||||||||||||||
Stock-based compensation
expense |
— | — | 14 | — | — | — | — | 14 | ||||||||||||||||||||||||||||
Employee stock purchase plan |
226,381 | 1 | 316 | — | — | — | — | 317 | ||||||||||||||||||||||||||||
Proceeds from exercised options |
191,263 | — | 159 | — | — | — | — | 159 | ||||||||||||||||||||||||||||
Other comprehensive income—
foreign currency translation
adjustment |
— | — | — | — | 793 | — | — | 793 | 793 | |||||||||||||||||||||||||||
Comprehensive income |
$ | 1,019 | ||||||||||||||||||||||||||||||||||
Balance, December 31, 2004 |
21,665,585 | $ | 22 | $ | 56,645 | $ | (29,077 | ) | $ | 2,421 | 86,300 | $ | (85 | ) | $ | 29,926 | ||||||||||||||||||||
Net loss |
— | — | — | (747 | ) | — | — | — | (747 | ) | $ | (747 | ) | |||||||||||||||||||||||
Stock-based compensation
expense |
— | — | 16 | — | — | — | — | 16 | ||||||||||||||||||||||||||||
Employee stock purchase plan |
401,270 | — | 613 | — | — | — | — | 613 | ||||||||||||||||||||||||||||
Proceeds from exercised options |
151,774 | — | 181 | — | — | — | — | 181 | ||||||||||||||||||||||||||||
Warrants exercised |
394,685 | 1 | 1,281 | — | — | — | — | 1,282 | ||||||||||||||||||||||||||||
Other comprehensive loss—
foreign currency translation
adjustment |
— | — | — | — | (1,337 | ) | — | — | (1,337 | ) | (1,337 | ) | ||||||||||||||||||||||||
Comprehensive loss |
$ | (2,084 | ) | |||||||||||||||||||||||||||||||||
Balance, December 31, 2005 |
22,613,314 | $ | 23 | $ | 58,736 | $ | (29,824 | ) | $ | 1,084 | 86,300 | $ | (85 | ) | $ | 29,934 | ||||||||||||||||||||
Net loss |
— | — | — | (14,530 | ) | — | — | — | (14,530 | ) | $ | (14,530 | ) | |||||||||||||||||||||||
Stock-based compensation
expense |
— | — | 899 | — | — | — | — | 899 | ||||||||||||||||||||||||||||
Employee stock purchase plan |
54,431 | — | 52 | — | — | — | — | 52 | ||||||||||||||||||||||||||||
Proceeds from exercised options |
27,875 | — | 16 | — | — | — | — | 16 | ||||||||||||||||||||||||||||
Issuance of common stock |
5,000,000 | 5 | 4,839 | — | — | — | — | 4,844 | ||||||||||||||||||||||||||||
Shares issued for eCOST
acquisition |
18,858,132 | 19 | 26,760 | — | — | — | — | 26,779 | ||||||||||||||||||||||||||||
Other comprehensive income—
foreign currency
translation adjustment |
— | — | — | — | 846 | — | — | 846 | 846 | |||||||||||||||||||||||||||
Comprehensive loss |
$ | (13,684 | ) | |||||||||||||||||||||||||||||||||
Balance, December 31, 2006 |
46,553,752 | $ | 47 | $ | 91,302 | $ | (44,354 | ) | $ | 1,930 | 86,300 | $ | (85 | ) | $ | 48,840 | ||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
(In thousands)
FOR THE YEARS ENDED DECEMBER 31
(In thousands)
| 2006 | 2005 | 2004 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Net income (loss) |
$ | (14,530 | ) | $ | (747 | ) | $ | 226 | ||||
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |
||||||||||||
Depreciation and amortization |
7,476 | 6,112 | 4,643 | |||||||||
Goodwill impairment |
3,507 | — | — | |||||||||
Loss on disposition of assets |
144 | — | — | |||||||||
Provision for doubtful accounts |
960 | 25 | 289 | |||||||||
Provision for excess and obsolete inventory |
1,495 | — | 1,204 | |||||||||
Deferred income taxes |
(148 | ) | (8 | ) | (81 | ) | ||||||
Stock-based compensation expense |
899 | 16 | 14 | |||||||||
Changes in operating assets and liabilities: |
||||||||||||
Restricted cash |
845 | — | — | |||||||||
Accounts receivables |
1,673 | (4,490 | ) | (9,838 | ) | |||||||
Inventories, net |
2,856 | (825 | ) | (318 | ) | |||||||
Prepaid expenses, other receivables and other assets |
(66 | ) | (1,837 | ) | (5,825 | ) | ||||||
Accounts payable, accrued expenses and other liabilities |
(2,627 | ) | 2,510 | 15,149 | ||||||||
Net cash provided by operating activities |
2,484 | 756 | 5,463 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||
Purchases of property and equipment |
(3,978 | ) | (3,918 | ) | (7,698 | ) | ||||||
Payment for purchase of eCOST, net of cash acquired |
(1,299 | ) | — | — | ||||||||
Decrease (increase) in restricted cash |
893 | 1,143 | (1,071 | ) | ||||||||
Net cash used in investing activities |
(4,384 | ) | (2,775 | ) | (8,769 | ) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
Net proceeds from issuance of common stock |
4,912 | 2,076 | 475 | |||||||||
Decrease (increase) in restricted cash |
(1,109 | ) | 50 | (359 | ) | |||||||
Payments on capital lease obligations |
(1,504 | ) | (1,199 | ) | (1,134 | ) | ||||||
Proceeds from debt, net |
1,028 | 1,188 | 3,266 | |||||||||
Net cash provided by financing activities |
3,328 | 2,115 | 2,248 | |||||||||
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS |
(45 | ) | (5 | ) | (93 | ) | ||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
1,383 | 91 | (1,151 | ) | ||||||||
CASH AND CASH EQUIVALENTS, beginning of period |
13,683 | 13,592 | 14,743 | |||||||||
CASH AND CASH EQUIVALENTS, end of period |
$ | 15,066 | $ | 13,683 | $ | 13,592 | ||||||
SUPPLEMENTAL CASH FLOW INFORMATION |
||||||||||||
Non-cash investing and financing activities: |
||||||||||||
Property and equipment acquired under capital leases |
$ | 2,304 | $ | 1,125 | $ | 1,330 | ||||||
Shares issued to acquire eCOST |
$ | 26,778 | $ | — | $ | — | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
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PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Overview
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 its subsidiaries 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, PFSweb and International Business Machines Corporation (“IBM”) have
entered into master distributor agreements whereby Supplies Distributors acts as a master
distributor of various products, primarily IBM product. Pursuant to transaction management services
agreements between PFSweb and Supplies Distributors, PFSweb provides transaction management and
fulfillment services to Supplies Distributors.
Supplies Distributors has obtained certain financing (see Notes 3 and 4) that allows it to
fund the working capital requirements for the sale of primarily IBM products. Pursuant to the
transaction management services agreements, PFSweb provides to Supplies Distributors such services
as managed web hosting and maintenance, procurement support, web-enabled customer contact center
services, customer relationship management, financial services including billing and collection
services, information management, and international distribution services. Additionally, IBM and
Supplies Distributors have outsourced the product demand generation to a third party. Supplies
Distributors sells its products in the United States, Canada and Europe.
All of the agreements between PFSweb and Supplies Distributors were made in the context of a
related party relationship and were negotiated in the overall context of PFSweb’s and Supplies
Distributors’ arrangement with IBM. Although management generally believes that the terms of these
agreements are consistent with fair market values, there can be no assurance that the prices
charged to or by each company under these arrangements are not higher or lower than the prices that
may be charged by, or to, unaffiliated third parties for similar services.
eCOST Overview
eCOST is a multi-category online discount retailer of new, “close-out” and recertified
brand-name merchandise, selling products primarily to customers in the United States. eCOST offers
products in several merchandise categories, including computer hardware and software, home
electronics, digital imaging, watches and jewelry, housewares, DVD movies, video games and
cellular/wireless. eCOST carries products from leading manufacturers such as Apple, Canon,
Citizen, Denon, Hewlett-Packard, Nikon, Onkyo, Seiko and Toshiba.
The Company’s liquidity has been negatively impacted as a result of the merger with eCOST.
During 2006 eCOST experienced a significant net usage of cash primarily due to losses incurred. As
a result, during the process of transitioning and integrating eCOST’s operations, the Company has
had to support eCOST’s cash needs to help it achieve a stabilized operational position. The amount
of further cash needed to support eCOST operations will depend upon the financing available as well
as eCOST’s ability to improve its financial results.
In the event eCOST is unable to increase its revenue and/or gross profit from its present
levels, it may fail to
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PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
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 demand for payment under the Company parent guaranty. Any acceleration of the
repayment of the credit facilities would have a material adverse impact on the Company’s financial
condition and results of operations and no assurance can be given that the Company would have the
financial ability to repay all of such obligations.
Management
currently believes eCOST will meet the Company’s expectations
related to annual savings and overall profitability. Nevertheless,
due to the absence of any long-term commitments related solely to
eCOST, if eCOST does not meet these expectations, the Company
anticipates that it would be able to terminate eCOST’s short-term facility leases, liquidate remaining inventory through the
website and reduce certain personnel related costs as needed to
satisfy eCOST’s obligations and minimize any impact on the Company’s financial condition.
The Company expects improvement in eCOST’s profitability in 2007 and beyond as a result of planned efforts to increase sales and improve product
mix. In addition, the Company currently expects that eCOST, as part of a combined company, should achieve annual
cost savings, as compared to 2006 and pre-merger levels, as a result of essentially completing the integration of eCOST into the Company’s
infrastructure. 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.
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, the Company 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 therein. As a result of the merger, effective February 1, 2006, the
Company began consolidating 100% of eCOST’s financial position and results of operations into the
Company’s 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):
| Year Ended | ||||||||
| 2006 | 2005 | |||||||
Net revenues |
$ | 436,187 | $ | 506,448 | ||||
Net loss |
(16,120 | ) | (14,452 | ) | ||||
Basic and diluted loss per share |
(0.38 | ) | (0.35 | ) | ||||
The unaudited pro forma information combines the historical unaudited consolidated statements
of the Company’s operations and eCOST’s operations for the years ended December 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 expense recognized by eCOST in the year ended
December 31, 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
Company’s consolidated financial statements since the date of acquisition. For purposes
of computing the purchase price, the value of the 18.9 million shares of the Company’s common stock
issued was $1.42 per common share, based on the average closing price of the Company’s 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 estimated fair
value of the assets acquired and liabilities assumed as of February 1, 2006 (in thousands):
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PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Cash and restricted cash |
$ | 1,053 | ||
Accounts receivable, net |
5,723 | |||
Inventories |
6,893 | |||
Identifiable intangibles |
7,380 | |||
Property and equipment |
479 | |||
Other assets |
323 | |||
Total assets acquired |
21,851 | |||
Trade accounts payable |
8,248 | |||
Accrued expenses |
3,560 | |||
Other liabilities |
834 | |||
Total liabilities assumed |
12,642 | |||
Net assets acquired |
9,209 | |||
Estimated purchase price |
28,078 | |||
Goodwill acquired |
$ | 18,869 | ||
Purchase price for eCOST is as follows (in thousands):
Number of shares of common stock issued |
18,858 | |||
Multiplied by the Company’s stock price |
$ | 1.42 | ||
Share consideration |
$ | 26,778 | ||
Transaction costs |
1,300 | |||
Purchase price |
$ | 28,078 | ||
The above purchase price has been allocated based on estimates of the fair values of
assets acquired and liabilities assumed.
The excess of the purchase price over the fair value of the net assets acquired and
liabilities assumed was allocated to goodwill and is included in the eCOST reportable segment.
Total goodwill of $18.9 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.
There are no residual values for any of the intangible assets subject to amortization acquired
during the eCOST acquisition. Definite lived intangible assets acquired in the eCOST acquisition
consist of (in thousands):
| Estimated | ||||||||||||||||
| Fair Value at | Accumulated | Net Carrying | Useful Life | |||||||||||||
| Acquisition | Amortization | Value | from Acquisition | |||||||||||||
Trademark name |
$ | 4,635 | $ | (425 | ) | $ | 4,210 | 10 years | ||||||||
Customer relationships |
2,745 | (324 | ) | 2,421 | 8 years | |||||||||||
Total definite lived intangible assets |
$ | 7,380 | $ | (749 | ) | $ | 6,631 | |||||||||
Amortization expense for intangible assets is estimated to be approximately $0.8 million
annually for each year in the period ending December 31, 2011.
During the Company’s annual analysis of the carrying value of intangible assets, pursuant to
Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets, the
Company determined that the carrying value of goodwill exceeded the fair value, which resulted in a
$3.5 million non-cash write-off of goodwill during the fourth quarter of 2006.
The Company determined fair value using a combination of the discounted cash flow, market multiple and market capitalization valuation methods.
2. Significant Accounting Policies
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PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Principles of Consolidation
All intercompany accounts and transactions have been eliminated in consolidation.
Investment in Affiliates
Priority Fulfillment Services, Inc. (“PFS”), a wholly-owned subsidiary of PFSweb, has loaned
Supplies Distributors monies in the form of a Subordinated Demand Note (the “Subordinated Note”).
Under the terms of certain of the Company’s debt facilities, the outstanding balance of the
Subordinated Note cannot be increased to more than $8.0 million or decreased to lower than $6.0
million without prior approval of the Company’s lenders (see Notes 3 and 4). As of December 31,
2006 and 2005, the outstanding balance of the Subordinated Note, which is eliminated upon the
consolidation of Supplies Distributors’ financial position, was $6.5 million and $7.0 million,
respectively.
PFS has also loaned eCOST monies under certain terms of the Company’s debt facilities, which
requires outstanding balances of the eCOST loan not to be less than $2.0 million without prior
approval of eCOST’s lender or increased above $8.5 million without the approval of PFS’ lender.
The outstanding loan balance owed to PFS is $5.9 million as of December 31, 2006. PFSweb has also
loaned eCOST $4.7 million as of December 31, 2006.
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 Company’s 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 and Cost Recognition
Depending on the terms of the customer arrangement, Supplies Distributors recognizes product
revenue and product cost either upon the shipment of product to customers or when the customer
receives the product. Supplies Distributors permits its customers to return product for credit
against other purchases, which include returns for defective products (that Supplies Distributors
then returns to the manufacturer) and incorrect shipments. Supplies Distributors provides a reserve
for estimated returns and allowances and offers terms to its customers that it believes are
standard for its industry.
Freight costs billed to customers are reflected as components of product revenues. Freight
costs incurred are recorded as a component of cost of goods sold.
Under the master distributor agreements (see Note 6), Supplies Distributors bills IBM for
reimbursements of certain expenses, including: pass through customer marketing programs, including
rebates and coop funds; certain freight costs; 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. Supplies Distributors records a receivable for
these reimbursable amounts as they are incurred with a corresponding reduction in either inventory
or cost of product revenue. Supplies Distributors also reflects pass through customer marketing
programs as a reduction of product revenue and cost of product revenue.
eCOST recognizes product revenue, net of estimated returns, promotional discounts, credit card
fraud and chargebacks, 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 credit card
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
upon placing an order, and to a lesser extent, grants
credit to business customers on normal credit terms. eCOST permits its customers to return
defective product for credit against other purchases.
For product sales shipped directly from eCOST’s 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. eCOST’s 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.
The Company’s service fee revenues primarily relate to its (1) distribution services, (2)
order management/customer care services and (3) the reimbursement of out-of-pocket and third-party
expenses. The Company typically charges its service fee revenue on a cost-plus basis, a percent of
shipped revenue basis or a per transaction basis, such as a per item basis for fulfillment services
or a per minute basis for web-enabled customer contact center services. Additional fees are billed
for other services.
Distribution services relate primarily to inventory management, product receiving, warehousing
and fulfillment (i.e., picking, packing and shipping) and facilities and operations management.
Service fee revenue for these activities is recognized as earned, which is either (i) on a per
transaction basis or (ii) at the time of product fulfillment, which occurs at the completion of the
distribution services.
Order management/customer care services relate primarily to taking customer orders for the
Company’s clients’ products via various channels such as telephone call-center, electronic or
facsimile. These services also entail addressing customer questions related to orders, as well as
cross-selling/up-selling activities. Service fee revenue for this activity is recognized as the
services are rendered. Fees charged to the client are on a per transaction basis based on either
(i) a pre-determined fee per order or fee per telephone minutes incurred, (ii) a per dedicated
agent fee, or (iii) are included in the product fulfillment service fees that are recognized on
product shipment.
The Company’s billings for reimbursement of out-of-pocket expenses, including travel and
certain third-party vendor expenses such as shipping and handling costs and telecommunication
charges are included in pass-through revenue. The related reimbursable costs are reflected as cost
of pass-through revenue.
The Company’s cost of service fee revenue, representing the cost to provide the services
described above, is recognized as incurred. Cost of service fee revenue also includes certain costs
associated with technology collaboration and ongoing technology support that include maintenance,
web hosting and other ongoing programming activities. These activities are primarily performed to
support the distribution and order management/customer care services and are recognized as
incurred.
The Company recognizes revenue and records trade accounts receivables, pursuant to the methods
described above, when collectibility is reasonably assured. Collectibility is evaluated in the
aggregate and on an individual customer basis taking into consideration payment due date,
historical payment trends, current financial position, results of independent credit evaluations
and payment terms.
The Company primarily performs its services under one to three-year contracts that can
generally be terminated by either party. In conjunction with these long-term contracts, the Company
sometimes receives start-up fees to cover its implementation costs, including certain technology
infrastructure and development costs. The Company defers the fees received, and the related costs,
and amortizes them over the life of the contract. The amortization of deferred revenue is included
as a component of service fee revenue. The amortization of deferred implementation costs is
included as a cost of service fee revenue. To the extent implementation costs for non-technology
infrastructure and development exceed the fees received, the excess costs are expensed as incurred.
The following summarizes the deferred implementation revenues and costs, excluding technology and
development costs that are included in property and equipment (in thousands):
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
| December 31, | December 31, | |||||||
| 2006 | 2005 | |||||||
Deferred implementation revenues |
||||||||
Current |
$ | 2,046 | $ | 1,547 | ||||
Non-current |
832 | 862 | ||||||
| $ | 2,878 | $ | 2,409 | |||||
Deferred implementation costs |
||||||||
Current |
$ | 1,077 | $ | 950 | ||||
Non-current |
271 | 579 | ||||||
| $ | 1,348 | $ | 1,529 | |||||
Current and non-current deferred implementation costs, excluding technology and
development costs, are a component of prepaid expenses and other assets, respectively. Current and
non-current deferred implementation revenues, which may precede the timing of when the related
implementation costs are incurred and thus deferred, are a component of accrued expenses and other
liabilities, respectively.
Concentration of Business and Credit Risk
The Company’s service fee revenue is generated under contractual service fee relationships
with multiple client relationships. There was one customer that exceeded 10% of consolidated
revenue during the years ended December 31, 2006, 2005 and 2004. A summary of the customer and
client concentrations is as follows:
| December 31, | December 31, | December 31, | ||||||||||
| 2006 | 2005 | 2004 | ||||||||||
Product Revenue (as a percentage of Product Revenue): |
||||||||||||
Customer 1 |
11 | % | 14 | % | 9 | % | ||||||
Customer 2 |
9 | % | 12 | % | 12 | % | ||||||
Customer 3 |
8 | % | 11 | % | 11 | % | ||||||
Service Fee Revenue (as a percentage of Service Fee Revenue): |
||||||||||||
Client 1 |
23 | % | 27 | % | 42 | % | ||||||
Client 2 |
12 | % | 12 | % | 15 | % | ||||||
Client 3 |
19 | % | 16 | % | — | |||||||
Consolidated Revenue: |
||||||||||||
Customer/Client 1 |
9 | % | 10 | % | 7 | % | ||||||
Customer/Client 2 |
7 | % | 7 | % | 18 | % | ||||||
Accounts Receivable: |
||||||||||||
1 Customer/Client |
13 | % | 12 | % | 18 | % | ||||||
PFSweb has provided certain collateralized guarantees of its subsidiaries’ financings and
credit arrangements. These subsidiaries’ ability to obtain financing 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 Company’s 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.
A
substantial portion of Supplies Distributors’ product revenue was generated by sales of product
purchased under master distributor agreements with the Printing System Division of IBM and is
dependent on IBM’s business and the continuing market for IBM products. In January 2007. IBM and
Ricoh announced the planned formation of a joint
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
venture company based on IBM’s Printing Systems Division.
If finalized, upon closing of the agreement, Ricoh will initially acquire 51% of the joint venture, which will be
called InfoPrint Solutions Company, and will progressively acquire the remaining 49% over the next
three years. The newly formed joint venture company is expected to eventually become a fully owned
subsidiary of Ricoh.
eCOST’s 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.
Cash and Cash Equivalents
Cash equivalents are defined as short-term highly liquid investments with original maturities
of three months or less.
Restricted Cash
Restricted cash includes the following items (in thousands):
| December 31, | December 31, | |||||||
| 2006 | 2005 | |||||||
Current: |
||||||||
Letters of credit security |
$ | 150 | $ | 525 | ||||
Customer remittances |
2,457 | 1,139 | ||||||
Bond financing |
46 | 413 | ||||||
Total current |
2,653 | 2,077 | ||||||
Long term: |
||||||||
Letters of credit security |
— | 150 | ||||||
Total restricted cash |
$ | 2,653 | $ | 2,227 | ||||
The Company has cash restricted as collateral for letters of credit that secure certain
debt and lease obligations (see Notes 4 and 9). The letters of credit currently expire during 2007.
In conjunction with certain of its financing agreements, Supplies Distributors has granted to
its lenders a security interest in certain customer remittances received in specified bank accounts
(see Note 4). At December 31, 2006 and 2005, these bank accounts held $2.2 million and $1.1
million, respectively, which was restricted and can only be used to reduce the outstanding debt.
In conjunction with certain of its financing agreements, eCOST has granted to its lender a
security interest in certain customer remittances received in specified bank accounts (see Note 4).
At December 31, 2006 these bank accounts held $0.2 million, which was restricted and can only be
used to reduce the outstanding debt.
Other Receivables and Liabilities
Other receivables include $10.6 million and $9.8 million as of December 31, 2006 and 2005,
respectively, primarily for amounts due from IBM for costs incurred by the Company under the master
distributor agreements (see Note 6).
Inventories
Inventories (all of which are finished goods) are stated at the lower of weighted average cost
or market. The Company establishes inventory reserves based 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.
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 (see Note 6). 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
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.
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.
Property and Equipment
The components of property and equipment as of December 31, 2006 and 2005 are as follows (in
thousands):
| December 31, | December 31, | |||||||||||
| 2006 | 2005 | Depreciable Life | ||||||||||
Furniture and fixtures |
$ | 19,668 | $ | 17,399 | 2-10 years | |||||||
Purchased and capitalized software costs |
12,276 | 10,473 | 1-7 years | |||||||||
Computer equipment |
10,050 | 8,611 | 2-3 years | |||||||||
Leasehold improvements |
6,501 | 5,879 | 1-9 years | |||||||||
Other, primarily construction-in-progress |
354 | 150 | 3-7 years | |||||||||
| 48,849 | 42,512 | |||||||||||
Less-accumulated depreciation and
Amortization |
(35,965 | ) | (29,472 | ) | ||||||||
Property and equipment, net |
$ | 12,884 | $ | 13,040 | ||||||||
Property and equipment are stated at cost and are depreciated using the straight-line
method over the estimated useful lives of the respective assets. Leasehold improvements are
amortized over the shorter of the useful life of the related asset or the remaining lease term.
The
Company’s property held under capital leases amount to approximately $3.7 million and $3.3
million, net of accumulated amortization of approximately $10.0 million and $8.3 million, at
December 31, 2006 and 2005, respectively.
Long-Lived Assets
The company reviews long-lived assets for impairment periodically, but at a minimum annually,
or whenever events or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Long-lived assets include property, intangible assets, goodwill and certain
other assets. Recoverability of assets is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured as the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Fair value would be determined using
appraisals, discounted cash flow analysis or similar valuation techniques. We make judgments and
estimates in conjunction with the carrying value of these assets, including amounts to be
capitalized, depreciation and amortization methods and useful lives. We record impairment losses in
the period in which we determine that the carrying amount is not recoverable. This may require us
to make judgments regarding long-term forecasts of our future revenues and costs related to the
assets subject to review.
Foreign Currency Translation and Transactions
For the Company’s Canadian and European operations, the local currency is the functional
currency. All assets and liabilities are translated at exchange rates in effect at the end of the
period, and income and expense items are translated at the average exchange rates for the period.
The Company includes currency gains and losses on short-term intercompany advances in the
determination
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
of net income. Currency gains and losses, including transaction gains and losses and
those on short-term intercompany advances, included in net income or loss were a net gain of
approximately $0.3 million, net loss of $0.3 million and a net gain of $0.3 million for the years
ended December 31, 2006, 2005 and 2004, respectively. The Company will continue to report gains or
losses on intercompany foreign currency transactions that are of a long-term investment nature as a
separate component of shareholders’ equity.
Stock-Based Compensation
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
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 following table shows the pro forma effect on the Company’s net income (loss) and income
(loss) per share as if compensation cost had been recognized for stock-based employee compensation
plans based on their fair value at the date of the grant. The pro forma effect of stock-based employee compensation plans on
the Company’s net income (loss) for the years prior to the Company’s adoption of FAS 123R may not
be representative of the pro forma effect for future years due to the impact of vesting and
potential future awards.
| Year Ended | Year Ended | |||||||
| December 31, | December 31, | |||||||
| 2005 | 2004 | |||||||
| (In thousands, except per share amounts) | ||||||||
Net income (loss) as reported |
$ | (747 | ) | $ | 226 | |||
Add: Stock-based non-employee compensation expense included in reported net income (loss) |
16 | 14 | ||||||
Deduct: total stock-based employee and non-employee compensation expense determined
under fair value based method |
(1,002 | ) | (841 | ) | ||||
Pro forma net loss, applicable to common stock for basic and diluted computations |
$ | (1,733 | ) | $ | (601 | ) | ||
Income (loss) per common share – as reported |
||||||||
Basic and diluted |
$ | (0.03 | ) | $ | 0.01 | |||
Loss per common share – pro forma |
||||||||
Basic and diluted |
$ | (0.08 | ) | $ | (0.03 | ) | ||
Impact of Recently Issued Accounting Standards
In June 2006, the Financial Accounting Standards Board (FASB) issued Financial Interpretation
48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (FIN
48). FIN 48 defines the threshold for recognizing the benefits of tax return positions in the
financial statements as “more-likely-than-not” to be sustained by the taxing authority. The
recently issued literature also provides guidance on the derecognition, measurement and
classification of income tax uncertainties, along with any related interest and penalties. FIN 48
also includes guidance concerning accounting for income tax uncertainties in interim periods and
increases the level of disclosures associated with any recorded income tax uncertainties. The
interpretation is effective for fiscal years beginning after December 15, 2006. Any differences
between the amounts recognized in the statements of financial position prior to the adoption of FIN
48 and the amounts reported after adoption will be accounted for as a cumulative-effect adjustment
recorded to the beginning balance of retained earnings. The Company does not expect the adoption
of FIN 48 to have a material impact on its consolidated financial statements.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date. Valuation allowances are established when necessary to reduce deferred tax assets
to the amount more likely than not to be realized.
Self Insurance
The Company is self-insured for medical insurance benefits up to certain stop-loss limits.
Such costs are accrued based on known claims and an estimate of incurred, but not reported (“IBNR”)
claims. IBNR claims are estimated using historical lag information and other data provided by
claims administrators.
Fair Value of Financial Instruments
The carrying value of the Company’s financial instruments, which include cash and cash
equivalents, accounts receivable, accounts payable and debt and capital lease obligations,
approximate their fair values based on short terms to maturity or current market prices and
interest rates.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity (net assets) of a business
enterprise during a period from transactions and other events and circumstances from non-owner
sources. Comprehensive income (loss) consists of net income (loss) and foreign currency translation
adjustments.
Net Income (Loss) Per Common Share
Basic and diluted net income (loss) per share is computed by dividing net income (loss)
available to common shareholders by the weighted-average number of common shares outstanding for
the reporting period. Stock options not included in the calculation of diluted net income (loss)
per share for the years ended December 31, 2006, 2005 and 2004, were 5.9 million, 5.4 million, and
0.7 million, respectively, as the effect would be anti-dilutive. Warrants not included in the
calculation of diluted net income (loss) per share for the years ended December 31, 2006, 2005 and
2004, were 0.6 million, 0.4 million and 0.9 million, respectively, as the effect would be
anti-dilutive. For the calculation of diluted net income per share for the year ended 2004,
weighted average shares outstanding are increased by approximately 2.1 million shares, reflecting
the dilutive effect of stock options.
Cash Paid During Year
The Company made payments for interest of approximately $2.8 million, $2.4 million and $2.2
million and income taxes of approximately $0.5 million, $0.7 million and $0.6 million during the
years ended December 31, 2006, 2005, and 2004, respectively (see Notes 3, 4 and 8).
3. Vendor Financing
Outstanding obligations under vendor financing arrangements consist of the following (in
thousands):
| December 31, | December 31, | |||||||
| 2006 | 2005 | |||||||
Inventory and working capital financing agreements: |
||||||||
United States |
$ | 28,037 | $ | 30,092 | ||||
Europe |
12,713 | 12,071 | ||||||
Total |
$ | 40,750 | $ | 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
products in the United States, providing financing for eligible IBM inventory
and for certain other receivables up to $30.5 million through its expiration in March 2007. As of
December 31, 2006, Supplies Distributors had $2.3 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 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% (8.75% as of December 31, 2006). At
December 31, 2005, the interest was accrued at prime rate plus 1% (8.25% as of December 31, 2005).
The facility also includes a monthly service fee.
On March 28, 2007, Supplies Distributors entered into an amended credit facility with IBM
Credit LLC, which extends the termination date through March 2008 and reduces the minimum
Subordinated Note balance to $6.0 million. The Company has classified the outstanding amounts
under this 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 $16.5 million) in financing for purchasing IBM inventory and for certain other
receivables through its expiration in March 2007. As of December 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% and 2.0% as of December 31, 2006 and 2005,
respectively (5.1% and 4.1% as of December 31, 2006 and 2005, respectively). 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.
On March 28, 2007, Supplies Distributors’ European subsidiaries entered into an amended credit
facility with IBM Belgium, which extends the termination date through March 2008, reduces the
minimum Subordinated Note balance to $6.0 million. The Company has classified the outstanding
amounts under this facility as accounts payable in the consolidated balance sheets.
4. Debt and Capital Lease Obligations:
Outstanding obligations under debt and capital lease obligations consist of the following (in
thousands):
| December 31, | December 31, | |||||||
| 2006 | 2005 | |||||||
Loan and security agreements, United States: |
||||||||
Supplies Distributors |
$ | 12,102 | $ | 11,673 | ||||
PFSweb |
6,985 | 6,640 | ||||||
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| December 31, | December 31, | |||||||
| 2006 | 2005 | |||||||
Credit facility — eCOST |
— | — | ||||||
Factoring agreement, Europe |
1,039 | 576 | ||||||
Taxable revenue bonds |
4,500 | 5,000 | ||||||
Master lease agreements |
4,742 | 3,713 | ||||||
Other |
510 | 313 | ||||||
Total |
29,878 | 27,915 | ||||||
Less current portion of long-term debt |
23,802 | 21,626 | ||||||
Long-term debt, less current portion |
$ | 6,076 | $ | 6,289 | ||||
Loan and Security Agreement – Supplies Distributors
Supplies Distributors has a loan and security agreement with Wachovia Bank, N.A. (“Wachovia”)
to provide financing for up to $25 million of eligible accounts receivable in the United States and
Canada. As of December 31, 2006, Supplies Distributors had $0.2 million of available credit under
this agreement. The Wachovia facility expires on the earlier of March 29, 2007 or the date on which
the parties to the IBM master distributor agreement (see Note 6) no longer operate under the terms
of such agreement and/or IBM no longer supplies products pursuant to such agreement. Borrowings
under the Wachovia 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
December 31, 2006 was 7.6% for $6.0 million of outstanding borrowings and 8.2% for $6.1 million of
outstanding borrowings. This agreement contains cross default provisions, various restrictions upon
the ability of 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 Wachovia pursuant to
which a security interest was granted to Wachovia for all U.S. and Canadian customer remittances
received in specified bank accounts. At December 31, 2006 and December 31, 2005, these bank
accounts held $2.2 million and $1.0 million, respectively, which was restricted for payment to
Wachovia.
On March 28, 2007, Supplies Distributors entered into an amended loan and security agreement
with Wachovia, which extends the termination date through March 2009, reduces the minimum
Subordinate Note balance to $5.5 million and reduces the Eurodollar loan interest rate to LIBOR
plus 1.75% from LIBOR plus 2.25%.
Loan and Security Agreement – PFSweb
PFS 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 April 2008, a Term Loan of $1.5 million due in monthly
installments through December 2007 and $2.5 million of equipment financing (“Equipment Advances”)
through June 15, 2008. Outstanding Working Capital Advances, $5.2 million as of December 31, 2006,
accrue interest at prime rate plus 1% (9.25% as of December 31, 2006). Outstanding Equipment
Advances, ($0.4 million as of December 31, 2006) and the Term Loan ($1.4 million outstanding as of
December 31, 2006) accrue interest at prime rate plus 1.5% (9.75% as of December 31, 2006). As of
December 31, 2006, PFS had $1.9 million of available credit under the Working Capital Advance
portion of this facility and no funds available under the Equipment Advance or Term Loan portions
of this facility. In January 2007, the Company repaid the $5.2 million of Working Capital Advances
outstanding as of December 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 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, a minimum earnings before interest and taxes, plus depreciation,
amortization and non-cash compensation accruals, if any, as defined, and a minimum
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
liquidity ratio,
as defined. The Comerica Agreement restricts the amount of the subordinated note receivable from
Supplies Distributors to a maximum of $8 million. Comerica has provided approval for PFS to advance
$6.5 million in cash to fund the cash flow requirements of eCOST. As of December 31, 2006, PFS has
advanced $5.9 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.
On
April 2, 2007, PFS entered into an amended agreement with Comerica, which increases the
maximum Working Capital Advance balance to $10.0 million,
eliminates the minimum cash balance
requirement and provides the approval for PFS to advance an additional $2.0 million to eCOST, with
certain restrictions, if needed.
Credit Facility – eCOST
eCOST has an asset-based line of credit facility that provides for borrowings of up to $7.5
million from Wachovia Capital Finance Corporation (Western), through May 2009, which is
collateralized by substantially all of eCOST’s 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% (8.75% as of
December 31, 2006), depending on eCOST’s financial results. As of December 31, 2006, eCOST had
$1.6 million of letters of credit outstanding and $0.9 million of available credit under this
facility. In connection with the line of credit, eCOST entered into a cash management arrangement
whereby eCOST’s operating amounts are swept and used to repay outstanding amounts under the line of
credit. The credit facility restricts eCOST’s 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 changes to capital stock ownership structure, and
requires a minimum tangible net worth of $0, 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 $9.9
million) of eligible accounts receivables through March 2008. As of December 31, 2006, Supplies
Distributors’ European subsidiary had approximately 3.5 million euros ($4.6 million) of available
credit under this agreement. Borrowings accrue interest at Euribor plus 0.6% (4.2% at December 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 Company’s Southaven,
Mississippi distribution facility. The Bonds bear interest at a variable rate (5.4% as of December
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 April 2008 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
future principal repayments of $800,000
in each of January 2008 through 2012. PFSweb has established a sinking fund account with Comerica,
which at December 31, 2006 includes $0.04 million 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, 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 demand for
payment under the Company parent guaranty. Any acceleration of the repayment of the credit
facilities would have a material adverse impact on the Company’s financial condition and results of
operations and no assurance can be given that the Company would have the financial ability to repay
all of such obligations.
PFSweb has also provided a guarantee of the obligations of Supplies Distributors to IBM,
excluding the trade payables that are financed by IBM credit.
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 ($1.0 million and
$0.7 million as of December 31, 2006 and 2005, respectively) are secured by the related equipment
and a letter of credit (see Note 2). The outstanding financing transactions ($0.4 million and $0.2
million as of December 31, 2006 and 2005, respectively) are secured by a letter of credit (see Note
2).
The Company has two master agreements with financing companies that provide for leasing or
financing transactions of certain equipment. The amounts outstanding under these agreements as of
December 31, 2006 and 2005 were $2.1 million and $2.4 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.
Debt and Capital Lease Maturities
The Company’s aggregate maturities of debt subsequent to December 31, 2006 are as follows (in
thousands):
Fiscal year ended December 31, |
||||
2007 |
$ | 21,187 | ||
2008 |
964 | |||
2009 |
904 | |||
2010 |
800 | |||
2011 |
800 | |||
Thereafter |
800 | |||
Total |
$ | 25,455 | ||
The following is a schedule of the Company’s future minimum lease payments under the
capital leases together with the present value of the net minimum lease payments as of December 31,
2006 (in thousands):
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Fiscal year ended December 31, |
||||
2007 |
$ | 2,879 | ||
2008 |
1,079 | |||
2009 |
594 | |||
2010 |
240 | |||
Thereafter |
94 | |||
Total minimum lease payments |
$ | 4,886 | ||
Less amount representing interest at rates ranging from 5.5%
to 12.4% |
(463 | ) | ||
Present value of net minimum lease payments |
4,423 | |||
Less: Current portion |
(2,615 | ) | ||
Long-term capital lease obligations |
$ | 1,808 | ||
5. Stock and Stock Options
Preferred Stock Purchase Rights
On June 8, 2000, the Company’s Board of Directors declared a dividend distribution of one
preferred stock purchase right (a “Right”) for each share of the Company’s common stock outstanding
on July 6, 2000 and each share of common stock issued thereafter. Each Right entitles the
registered shareholders to purchase from the Company one one-thousandth of a share of preferred
stock at an exercise price of $67, subject to adjustment. The Rights are not currently exercisable,
but would become exercisable if certain events occurred relating to a person or group acquiring or
attempting to acquire 15 percent or more of the Company’s outstanding shares of common stock. The
Rights expire on July 6, 2010, unless redeemed or exchanged by the Company earlier.
Employee Stock Purchase Plan
In 2000, the Company’s shareholders approved the PFSweb Employee Stock Purchase Plan (the
“Stock Purchase Plan”) that is qualified under Section 423 of the Internal Revenue Code of 1986, to
provide employees of the Company an opportunity to acquire a proprietary interest in the Company.
The Stock Purchase Plan permits each U.S. employee who has completed ninety days of service to
elect to participate in the plan. Eligible employees may elect to contribute with after-tax dollars
up to a maximum annual contribution of $25,000. The Stock Purchase Plan originally provided for
acquisition of the Company’s common stock at a 15% discount to the lower of the beginning or end of
a calendar quarter’s market value. In 2005, the Company’s shareholders approved amendments to the
Stock Purchase Plan that increased the number of shares of common stock reserved for issuance under
the Stock Purchase Plan and effective January 1, 2006 reduced the acquisition price discount to 5%
of the market value on the date of purchase. The Company has reserved 4 million shares of its
common stock under the Stock Purchase Plan. During the years ended December 31, 2006, 2005 and
2004, the Company issued 54,431, 401,270 and 226,381 shares under the Stock Purchase Plan,
respectively. As of December 31, 2006, there were 2,171,489 shares available for further issuance
under the Stock Purchase Plan.
Private Placement Transactions
In November 2003, the Company entered into a Securities Purchase Agreement with certain
institutional investors in a private placement transaction pursuant to which the Company issued and
sold an aggregate of 1,581,944 shares of its 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, 394,685 of the one-year
warrants were exercised prior to their expiration, generating net proceeds to the Company of $1.3
million, and 131,277 of the one-year warrants expired unexercised. As a result of the merger with
eCOST and the private placement transaction in June 2006, the four-year warrants have been adjusted
such that there are now 564,980 warrants outstanding with an exercise price of $2.31 per share.
In June 2006, the Company entered into a Purchase Agreement and Registration Rights Agreement
with certain institutional investors in a private placement transaction pursuant to which the
Company issued and sold an aggregate of 5,000,000 shares of its common stock, par value $.001 per
share, at $1.00 per share, resulting in
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
gross proceeds of $5.0 million. After deducting expenses,
the net proceeds were approximately $4.8 million. The Company has advanced $4.7 million of these
proceeds to eCOST as of December 31, 2006.
Stock Options and Stock Option Plans
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
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 during the year ended December 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-based compensation charged against income was $0.9
million for the year ended December 31, 2006. As of December 31, 2006, there was $1.1 million of
total unrecognized compensation costs related to unvested stock options, which is expected to be
recognized over a weighted average period of approximately 0.9 years. Prior to the adoption of FAS
123R, the Company recorded stock-based compensation expense of $16,000 and $14,000 in the years
ended December 31, 2005 and 2004, respectively, in connection with stock options to purchase an
aggregate of 21,000 shares issued to non-employees.
As of December 31, 2006, the Company had 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 were originally
authorized for issuance (the “Stock Options Plans”) and an outstanding stock option agreement under
which 35,000 shares were originally 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 Company’s common
stock at the date of grant.
As of December 31, 2006, there were 2,398,197 shares available for future options under the
Stock Option Plans.
The following table summarizes stock option activity under the Stock Option Plans:
| Weighted | ||||||||||||||||||||
| Weighted | Average | |||||||||||||||||||
| Average | Remaining | Aggregate | ||||||||||||||||||
| Exercise | Contractual | Intrinsic | ||||||||||||||||||
| Shares | Price Per Share_ | Price | Life | Value | ||||||||||||||||
Outstanding, December 31, 2005 |
4,947,950 | $ | 0.39—$16.00 | $ | 1.30 | 6.8 | ||||||||||||||
Granted |
869,500 | $ | 0.73—$ 1.46 | $ | 1.40 | |||||||||||||||
Exercised |
(24,752 | ) | $ | 0.39—$ 0.84 | $ | 0.42 | ||||||||||||||
Canceled |
(325,250 | ) | $ | 0.39—$ 2.57 | $ | 1.75 | ||||||||||||||
Outstanding, December 31, 2006 |
5,467,448 | $ | 0.39—$16.00 | $ | 1.30 | |||||||||||||||
Exercisable, December 31, 2006 |
4,588,497 | $ | 0.39—$16.00 | $ | 1.21 | 5.7 | $ | 919,302 | ||||||||||||
Exercisable and expected to vest,
December 31, 2006 |
5,349,374 | $ | 0.39—$16.00 | $ | 1.29 | 5.1 | $ | 926,158 | ||||||||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
The weighted average fair value per share of options granted during the years ended December
31, 2006, 2005 and 2004 was $1.13, $2.07 and $1.40, respectively. The total intrinsic value of
options exercised under the Stock Option Plans was $0.02 million, $0.2 million and $0.3 million
during the years ended December 31, 2006, 2005 and 2004, respectively.
PFSweb Non-plan Options
Prior to the Company’s initial public offering, certain of the Company’s employees were
holders of stock options of the Company’s former parent company, Daisytek International Corporation
(“Daisytek”), issued under Daisytek’s stock option plans.
In connection with the completion of the Company’s 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 holder’s 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 holder’s
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.
The following table summarizes stock option activity under the Non-plan Options:
| Weighted | ||||||||||||||||||||
| Average | Aggregate | |||||||||||||||||||
| Weighted Average | Remaining | Intrinsic | ||||||||||||||||||
| Shares | Price Per Share | Exercise Price | Contractual Life | Value | ||||||||||||||||
Outstanding,
December 31, 2005 |
439,235 | $ | 0.91—$10.58 | $ | 0.95 | |||||||||||||||
Granted |
— | $ | — | $ | — | |||||||||||||||
Exercised |
(5,455 | ) | $ | 0.91 | $ | 0.91 | ||||||||||||||
Canceled |
(750 | ) | $ | 0.91 | $ | 0.91 | ||||||||||||||
Outstanding,
December 31, 2006 |
433,030 | $ | 0.91—$10.58 | $ | 0.95 | 4.9 | $ | 81,852 | ||||||||||||
Exercisable,
December 31, 2006 |
433,030 | $ | 0.91—$10.58 | $ | 0.95 | 4.9 | $ | 81,852 | ||||||||||||
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:
| Year Ended | Year Ended | Year Ended | ||||||||||
| December 31, 2006 | December 31, 2005 | December 31, 2004 | ||||||||||
Expected dividend yield |
— | — | — | |||||||||
Expected stock price volatility |
91% - 103 | % | 104% - 105 | % | 107% - 118 | % | ||||||
Risk-free interest rate |
4.5% - 5.2 | % | 3.6% - 4.6 | % | 3.9% - 4.8 | % | ||||||
Expected life of options (years) |
0.5-6 | 5-6 | 5 | |||||||||
The fair value of each share of common stock granted under the Stock Purchase Plan is
estimated on the date of grant using the Black-Scholes option-pricing model with the following
assumptions:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
| Year Ended | Year Ended | |||||||
| December 31, 2005 | December 31, 2004 | |||||||
Expected dividend yield |
— | — | ||||||
Expected stock price volatility |
102% - 107 | % | 107% - 115 | % | ||||
Risk-free interest rate |
2.3% - 4.0 | % | 0.9% - 2.2 | % | ||||
Expected life of options
(months) |
3 | 3 | ||||||
The weighted average fair value per share of common stock granted under the Stock Purchase
Plan granted during the years ended December 31, 2005 and 2004 was $0.98 and $0.74, respectively.
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 management’s best estimates, but these estimates involve inherent
uncertainties and the application of management judgment. As a result, if other assumptions had
been used, the Company’s recorded and pro forma stock-based compensation expense could have been
different. In addition, the Company is required to estimate the expected forfeiture rate and only
recognize expense for those shares expected to vest. If the Company’s actual forfeiture rate is
materially different from its estimate, the share-based compensation expense could be materially
different. The expected life of options has been computed using the simplified method as
prescribed by Staff Accounting Bulletin No. 107.
6. Master Distributor Agreements
Supplies Distributors, PFSweb and IBM have entered into master distributor agreements whereby
Supplies Distributors acts as a master distributor of various IBM products and PFSweb provides
transaction management and fulfillment services to Supplies Distributors. The master distributor
agreements expire in June 2007 and March 2008 and can be extended for additional one-year terms
upon mutual agreement by all parties. Under the master distributor agreements, IBM sells product to
Supplies Distributors and reimburses Supplies Distributors for certain freight costs, 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 other certain expenses as defined. Supplies
Distributors can return to IBM product rendered obsolete by IBM engineering changes after customer
demand ends. IBM determines when a product is obsolete. IBM and Supplies Distributors also have
verbal agreements under which IBM reimburses or collects from Supplies Distributors amounts
calculated in certain inventory cost adjustments.
Supplies Distributors passes through to customers marketing programs specified by IBM and
administers, along with a party performing product demand generation for the IBM products, such
programs according to IBM guidelines.
7. Supplies Distributors
Pursuant to an operating agreement, Supplies Distributors is restricted from making any
distributions to PFSweb
if, after giving affect thereto, Supplies Distributors’ net worth would be less than $1.0
million. At December 31, 2006, Supplies Distributors’ net worth was $9.0 million. Under the terms
of its amended credit agreements, Supplies Distributors is currently restricted from paying annual
cash dividends without the prior approval of its lenders (see Notes 3 and 4). Supplies
Distributors has paid dividends to PFSweb of $3.9 million, $1.0 million and $0.8 million in the
years ended December 31, 2006, 2005 and 2004, respectively.
8. Income Taxes
A reconciliation of the difference between the expected income tax expense at the U.S. federal
statutory corporate tax rate of 34%, and the Company’s effective tax rate is as follows (in
thousands):
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PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
| Year Ended | Year Ended | Year Ended | ||||||||||
| December 31, | December 31, | December 31, | ||||||||||
| 2006 | 2005 | 2004 | ||||||||||
Income tax provision (benefit) computed at statutory rate |
$ | (4,548 | ) | $ | 86 | $ | 326 | |||||
Impact of foreign taxation |
(17 | ) | (16 | ) | (9 | ) | ||||||
Foreign dividends received |
850 | — | — | |||||||||
Items not deductible for tax purposes |
1,704 | 337 | 60 | |||||||||
Change in valuation reserve |
3,285 | 706 | 478 | |||||||||
Other |
(120 | ) | (112 | ) | (121 | ) | ||||||
Provision for income taxes |
$ | 1,154 | $ | 1,001 | $ | 734 | ||||||
The consolidated income (loss) before income taxes, by domestic and foreign entities, is
as follows (in thousands):
| Year Ended | Year Ended | Year Ended | ||||||||||
| December 31, | December 31, | December 31, | ||||||||||
| 2006 | 2005 | 2004 | ||||||||||
Domestic |
$ | (15,035 | ) | $ | (1,211 | ) | $ | (549 | ) | |||
Foreign |
1,659 | 1,465 | 1,509 | |||||||||
Total |
$ | (13,376 | ) | $ | 254 | $ | 960 | |||||
Current and deferred income tax expense (benefit) is summarized as follows (in
thousands):
| Year Ended | Year Ended | Year Ended | ||||||||||
| December 31, | December 31, | December 31, | ||||||||||
| 2006 | 2005 | 2004 | ||||||||||
Current |
||||||||||||
Domestic |
$ | 105 | $ | 151 | $ | 74 | ||||||
State |
419 | 80 | 49 | |||||||||
Foreign |
778 | 778 | 692 | |||||||||
Total current |
1,302 | 1,009 | 815 | |||||||||
Deferred |
||||||||||||
Domestic |
— | — | — | |||||||||
State |
(59 | ) | — | — | ||||||||
Foreign |
(89 | ) | (8 | ) | (81 | ) | ||||||
Total deferred |
(148 | ) | (8 | ) | (81 | ) | ||||||
Total |
$ | 1,154 | $ | 1,001 | $ | 734 | ||||||
The components of the deferred tax asset (liability) are as follows (in thousands):
| December 31, | December 31, | |||||||
| 2006 | 2005 | |||||||
Deferred tax asset: |
||||||||
Allowance for doubtful accounts |
$ | 826 | $ | 164 | ||||
Inventory reserve |
1,143 | 641 | ||||||
Property and equipment |
1,800 | 1,140 | ||||||
Net operating loss carryforwards |
19,704 | 10,129 | ||||||
Other |
1,282 | 670 | ||||||
| 24,755 | 12,744 | |||||||
Less — Valuation reserve |
21,950 | 12,422 | ||||||
Total deferred tax asset |
2,805 | 322 | ||||||
Deferred tax liability: |
||||||||
Intangible assets |
(2,254 | ) | — | |||||
Other |
(160 | ) | (108 | ) | ||||
Total deferred tax liability |
(2,414 | ) | (108 | ) | ||||
Deferred tax asset, net |
$ | 391 | $ | 214 | ||||
Management believes that PFSweb has not established a sufficient history of earnings, on
a stand-alone basis, to support the more likely than not realization of certain deferred tax assets
in excess of existing taxable temporary differences. A valuation allowance has been provided for
these net deferred income tax assets as of December 31, 2006 and 2005. At December 31, 2006, net operating loss carryforwards relate to taxable losses
of PFSweb’s Europe subsidiary totaling approximately $10.8 million, PFSweb’s Canada subsidiary
totaling approximately $4.3 million and PFSweb’s U.S. subsidiaries totaling
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PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
approximately
$42.6
million that expire at various dates through 2021. The U.S. NOL carryforward includes $4.6 million
relating to tax benefits of stock option exercises and, if utilized, will be recorded against
additional paid-in-capital upon utilization rather than as an adjustment to income tax expense from
continuing operations. The U.S. NOL also includes approximately $21.0 million of NOL acquired
through the acquisition of eCOST in February 2006. This acquired NOL carryforward is subject to
annual limits under IRS Section 382.
9. Commitments and Contingencies
The Company leases facilities, warehouse, office, transportation and other equipment under
operating leases expiring in various years through December 31, 2012. In most cases, management
expects that, in the normal course of business, leases will be renewed or replaced by other leases.
The Company also subleases, to a third party, one of its distribution facilities in Memphis, TN through April 2007.
Minimum future annual rental payments and sublease receipts under non-cancelable operating leases
having original terms in excess of one year are as follows (in thousands):
| Operating | ||||||||
| Lease | Sub-Lease | |||||||
| Payments | Income | |||||||
Fiscal year ended December 31, |
||||||||
2007 |
$ | 8,547 | $ | 191 | ||||
2008 |
6,414 | — | ||||||
2009 |
4,970 | — | ||||||
2010 |
3,557 | — | ||||||
2011 |
2,423 | — | ||||||
Thereafter |
675 | — | ||||||
Total |
$ | 26,586 | $ | 191 | ||||
During the year ended December 31, 2005, the Company relocated certain of its operations
and entered into sublease agreements on the former facilities, which resulted in a charge of $0.4
million, which is included in selling, general and administrative expense.
Minimum
rental payments under operating leases are recognized on a
straight-line basis over the term of the lease including any periods
of free rent. Total rental expense under operating leases approximated $8.7 million, $7.3 million and $5.4
million for the years ended December 31, 2006, 2005 and 2004, respectively. Certain landlord
required deposits are secured by letters of credit (see Note 2).
The Company receives municipal tax abatements in certain locations. During 2004 the Company
received notice from a municipal authority that it did not satisfy certain criteria necessary to
maintain the abatements. In December 2006 the Company received notice that the municipal authority
planned to make an adjustment to certain tax abatements. The Company plans to dispute the
adjustment, but 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
December 31, 2006 could be approximately $1.5 million, as the Company 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 Daisytek’s 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 intends to vigorously defend the action. Through December 31,
2006, the Company has incurred outstanding legal costs of $0.3 million that have not been paid as
the Company expects such costs to be covered by insurance.
On August 24, 2006, a lawsuit was filed in the Chancery Court of Davidson County, Tennessee,
by ClientLogic Corp. alleging, among other things, that the Company breached its obligations under
a
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Confidentiality and Nondisclosure Agreement. The complaint sought injunctive relief and damages
in an unspecified amount. In January 2007 the lawsuit was voluntarily dismissed without prejudice.
On July 12, 2004, eCOST received correspondence from MercExchange LLC alleging infringement of
MercExchange’s 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
its technologies MercExchange believed infringed 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 eCOST’s 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 eCOST’s business, financial position, results of operations or cash flows.
10. Segment and Geographic 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 recertified brand-name merchandise.
| Year Ended | Year Ended | Year Ended | ||||||||||
| December 31, | December 31, | December 31, | ||||||||||
| 2006 | 2005 | 2004 | ||||||||||
Revenues (in thousands): |
||||||||||||
PFSweb |
$ | 98,946 | $ | 87,883 | $ | 62,621 | ||||||
Supplies Distributors |
244,979 | 252,902 | 267,470 | |||||||||
eCOST |
88,332 | — | — | |||||||||
Eliminations |
(9,004 | ) | (9,128 | ) | (8,426 | ) | ||||||
| $ | 423,253 | $ | 331,657 | $ | 321,665 | |||||||
Income (loss) from operations (in thousands): |
||||||||||||
PFSweb |
$ | (2,730 | ) | $ | (5,292 | ) | $ | (3,495 | ) | |||
Supplies Distributors |
7,614 | 7,275 | 5,908 | |||||||||
eCOST |
(16,148 | ) | — | — | ||||||||
Eliminations |
— | — | 7 | |||||||||
| $ | (11,264 | ) | $ | 1,983 | $ | 2,420 | ||||||
Depreciation and amortization (in thousands): |
||||||||||||
PFSweb |
$ | 6,420 | $ | 6,112 | $ | 4,636 | ||||||
Supplies Distributors |
11 | — | 14 | |||||||||
eCOST |
1,045 | — | — | |||||||||
Eliminations |
— | — | (7 | ) | ||||||||
| $ | 7,476 | $ | 6,112 | $ | 4,643 | |||||||
Capital expenditures (in thousands): |
||||||||||||
PFSweb |
$ | 3,900 | $ | 3,918 | $ | 7,698 | ||||||
Supplies Distributors |
49 | — | — | |||||||||
eCOST |
29 | — | — | |||||||||
Eliminations |
— | — | — | |||||||||
| $ | 3,978 | $ | 3,918 | $ | 7,698 | |||||||
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PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
| December 31, | December 31, | |||||||
| 2006 | 2005 | |||||||
Assets (in thousands): |
||||||||
PFSweb |
$ | 100,229 | $ | 60,337 | ||||
Supplies Distributors |
85,249 | 87,542 | ||||||
eCOST |
33,147 | — | ||||||
Eliminations |
(54,473 | ) | (16,153 | ) | ||||
| $ | 164,152 | $ | 131,726 | |||||
Geographic areas in which the Company operates include the United States, Europe
(primarily Belgium), and Canada. The following is geographic information by area. Revenues are
attributed based on the Company’s domicile.
| Year Ended | Year Ended | Year Ended | ||||||||||
| December 31, | December 31, | December 31, | ||||||||||
| 2006 | 2005 | 2004 | ||||||||||
Revenues (in thousands): |
||||||||||||
United States |
$ | 334,118 | $ | 249,461 | $ | 225,300 | ||||||
Europe |
88,656 | 89,603 | 99,979 | |||||||||
Canada |
6,937 | 8,090 | 9,834 | |||||||||
Inter-segment eliminations |
(6,458 | ) | (15,497 | ) | (13,448 | ) | ||||||
| $ | 423,253 | $ | 331,657 | $ | 321,665 | |||||||
| December 31, | December 31, | |||||||
| 2006_ | 2005 | |||||||
Long-lived assets (in thousands): |
||||||||
United States |
$ | 34,041 | $ | 12,321 | ||||
Europe |
1,643 | 2,280 | ||||||
Canada |
57 | 76 | ||||||
| $ | 35,741 | $ | 14,677 | |||||
11. Employee Savings Plan
The Company has a defined contribution employee savings plan under Section 401(k) of the
Internal Revenue Code. Substantially all full-time and part-time U.S. employees are eligible to
participate in the plan. The Company, at its discretion, may match employee contributions to the
plan and also make an additional matching contribution in the form of profit sharing in recognition
of the Company’s performance. During the years ended December 31, 2006, 2005 and 2004, the Company
contributed approximately $0.1 million during each period to match 20% of employee contributions.
12. Quarterly Results of Operations (Unaudited)
Unaudited quarterly results of operations for years ended December 31, 2006 and 2005 were as
follows (amounts in thousands except per share data):
| Year Ended December 31, 2006 | ||||||||||||||||
| 1st Qtr. | 2nd Qtr. | 3rd Qtr. | 4th Qtr. | |||||||||||||
Total revenues |
$ | 110,668 | $ | 109,304 | $ | 94,284 | $ | 108,997 | ||||||||
Total cost of revenues |
100,247 | 99,297 | 84,871 | 99,162 | ||||||||||||
Gross profit |
10,421 | 10,007 | 9,413 | 9,835 | ||||||||||||
Operating expenses |
11,361 | 12,531 | 11,944 | 15,104 | ||||||||||||
Loss from operations |
(940 | ) | (2,524 | ) | (2,531 | ) | (5,269 | ) | ||||||||
Net loss |
(1,587 | ) | (3,184 | ) | (3,309 | ) | (6,450 | ) | ||||||||
Basic and diluted net loss per share |
(0.05 | ) | (0.07 | ) | (0.07 | ) | (0.14 | ) | ||||||||
| Year Ended December 31, 2005 | ||||||||||||||||
| 1st Qtr. | 2nd Qtr. | 3rd Qtr. | 4th Qtr. | |||||||||||||
Total revenues |
$ | 81,865 | $ | 84,870 | $ | 81,492 | $ | 83,430 | ||||||||
Total cost of revenues |
74,555 | 76,849 | 72,708 | 75,041 | ||||||||||||
Gross profit |
7,310 | 8,021 | 8,784 | 8,389 | ||||||||||||
Operating expenses |
6,966 | 7,952 | 8,441 | 7,162 | ||||||||||||
Income from operations |
344 | 69 | 343 | 1,227 | ||||||||||||
Net income (loss) |
(214 | ) | (546 | ) | (453 | ) | 466 | |||||||||
Basic and diluted net income (loss) per share |
(0.01 | ) | (0.02 | ) | (0.02 | ) | 0.02 | |||||||||
87
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PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
The seasonality of the Company’s business is dependent upon the seasonality of its
clients’ business and their sale of products. Management believes that with the Company’s current
client mix and their clients’ business volumes, the Company’s service fee revenue business activity
is expected to be at its lowest in the quarter ended March 31. Supplies Distributors’ product
revenue business activity is expected to be at its highest in the quarter ended December 31.
eCOST’s 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 eCOST’s revenues
occur during the first and fourth quarters.
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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Remediation of Material Weakness in Internal Control
As reported in the Company’s 2006 June Quarterly Report, management identified the following
material weakness related to fraudulent credit card activity in the Company’s internal control over
financial reporting as of June 30, 2006, which continued to exist as of July 1, 2006. A material
weakness is a control deficiency, or combination of control deficiencies, that results in more than
a remote likelihood that a material misstatement of the annual or interim financial statements will
not be prevented or detected.
The Company acquired eCOST.com, Inc. (eCOST), a wholly owned subsidiary, on February 1, 2006.
In the June 2006 quarter, problems with eCOST’s credit card systems controls resulted in increased
fraudulent credit card activity. Further problems with eCOST’s credit card systems controls arose
during the course of a systems conversion in late June 2006 resulting in even higher fraudulent
credit card activity. These system control issues were identified and the issues and the material
control weakness were resolved in July 2006.
As of June 30, 2006, the Company’s policies and procedures did not provide for an effective
review of fraudulent credit card activity. During the quarter ending September 30, 2006, the
Company instituted controls to remediate the control deficiency. These controls include procedures
to ensure that additional substantiating documentation and support related to the validity of
credit card activity is obtained prior to order release. The Company believes this remediation
initiative is sufficient to eliminate the material weakness in internal controls over financial
reporting discussed above.
The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of
the Securities Exchange Act of 1934, or the Exchange Act. This term refers to the controls and
procedures of a company that are designed to provide reasonable assurance that information required
to be disclosed by a company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified by the Securities
and Exchange Commission. The Company’s management, including the Company’s Chief Executive Officer
and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls
and procedures as of the end of the period covered by this annual report. Based upon that
evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that
the Company’s disclosure controls and procedures were effective in all material respects as of the
end of the period covered by this annual report.
There were no changes to the Company’s internal control over financial reporting during the
Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially
affect, the Company’s internal control over financial reporting.
PART III
Item 10. Directors and Executive Officers of the Registrant
Reference is made to the information to be set forth in the section entitled “Board of
Directors” and “Committees of the Board” in the definitive proxy statement in connection with our
Annual Meeting of Stockholders (the “Proxy Statement”), which section is incorporated herein by
reference. Our Proxy Statement will be filed with the Securities and Exchange Commission not later
than 120 days after the last day of our fiscal year ended December 31, 2006.
Item 11. Executive Compensation
Information required by Part III, Item 11, will be included in the section entitled “Executive
Compensation” of our Proxy Statement relating to our annual meeting of stockholders and is
incorporated herein by reference.
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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required by Part III, Item 12, will be included in the Sections entitled “Election
of Directors” and “Security Ownership of Certain Beneficial Owners and Management” of our Proxy
Statement relating to our annual meeting of stockholders and is incorporated herein by reference.
The following table summarizes information with respect to equity compensation plans under
which equity securities of the registrant are authorized for issuance as of December 31, 2006:
| Number of securities | Weighted-average | Number of | ||||||||||
| to be issued upon | exercise price of | securities | ||||||||||
| exercise of | outstanding | remaining | ||||||||||
| outstanding options | options and | available for | ||||||||||
| Plan category (1) | and warrants | warrants | future issuance | |||||||||
Equity
compensation plans
approved by security
holders |
5,467,448 | $ | 1.30 | 2,398,197 | ||||||||
Equity compensation
plans not approved
by security holders |
433,030 | $ | 0.95 | — | ||||||||
Total |
5,900,478 | 2,398,197 | ||||||||||
| (1) | See Note 5 to the Consolidated Financial Statements for more detailed information regarding the registrant’s equity compensation plans. |
Item 13. Certain Relationship and Related Transactions
Information regarding certain of our relationships and related transactions will be included
in the section entitled “Certain Relationship and Related Transactions” of our Proxy Statement
relating to our annual meeting of stockholders and is incorporated herein by reference.
Item 14. Principal Accountant and Fees and Services
Information required by Part III, Item 14, will be included in the section entitled
“Ratification of Appointment of Independent Auditors” of our Proxy Statement relating to our annual
meeting of stockholders and is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
| (a) | The following documents are filed as part of this report: | ||
| 1. | Financial Statements | ||
| PFSweb, Inc. and Subsidiaries | |||
| Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss) Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements |
|||
| Financial Statement Schedules | |||
| Schedule I – Condensed Financial Information of Registrant Schedule II – Valuation and Qualifying Accounts |
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Table of Contents
| All other schedules are omitted because the required information is not present in amounts sufficient to require submission of the schedule or because the information required is included in the financial statements or notes thereto. | |||
| 2. | Exhibits |
| Exhibit | ||
| Number | Description of Exhibits | |
2.1 (19)
|
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 (1)
|
Amended and Restated Certificate of Incorporation of PFSweb, Inc. | |
3.1.1 (20)
|
Certificate of Amendment to Amended and Restated Certificate of Incorporation of PFSweb, Inc. | |
3.2 (1)
|
Amended and Restated Bylaws | |
4.1 (22)
|
Purchase Agreement dated as of June 1, 2006 between PFSweb, Inc. and the Purchasers named therein. | |
4.2 (22)
|
Registration Rights Agreement dated as of June 1, 2006 between PFSweb, Inc. and the Investors named therein. | |
10.1 (17)
|
PFSweb, Inc. 2005 Employee Stock and Incentive Plan. | |
10.1.1 (25)
|
PFSweb, Inc. 2007 Management Bonus Plan. | |
10.2 (17)
|
PFSweb, Inc. 2005 Employee Stock Purchase Plan. | |
10.3 (18)
|
Amendment 3 to Loan and Security Agreement. | |
10.4 (18)
|
Amendment 6 to Agreement for Inventory Financing. | |
10.5 (18)
|
Amendment 1 to First Amended and Restated Loan and Security Agreement. | |
10.6 (16)
|
Amendment 5 to Amended and Restated Platinum Plan Agreement. | |
10.7 (16)
|
Agreement for IBM Global Financing Platinum Plan Invoice Discounting Schedule. | |
10.8 (16)
|
Amendment No. 5 to Agreement for Inventory Financing. | |
10.9 (1)
|
Industrial Lease Agreement between Shelby Drive Corporation and Priority Fulfillment Services, Inc. | |
10.10 (1)
|
Lease Contract between Transports Weerts and Priority Fulfillment Services Europe B.V. | |
10.11 (2)
|
Form of Change of Control Agreement between the Company and each of its executive officers | |
10.12 (4)
|
Ninth Amendment to Lease Agreement by and between AGBRI ATRIUM. L.P., and Priority Fulfillment Services, Inc. | |
10.13 (5)
|
Agreement for Inventory Financing by and among Business Supplies Distributors Holdings, LLC, Supplies Distributors, Inc., Priority Fulfillment Services, Inc., PFSweb, Inc., Inventory Financing Partners, LLC and IBM Credit Corporation | |
10.14 (5)
|
Amended and Restated Collateralized Guaranty by and between Priority Fulfillment Services, Inc. and IBM Credit Corporation | |
10.15 (5)
|
Amended and Restated Guaranty to IBM Credit Corporation by PFSweb, Inc. | |
10.16 (5)
|
Amended and Restated Notes Payable Subordination Agreement by and between Priority Fulfillment Services, Inc., Supplies Distributors, Inc. and IBM Credit Corporation | |
10.17 (5)
|
Amended and Restated Platinum Plan Agreement (with Invoice Discounting) by and among Supplies Distributors, S.A., Business Supplies Distributors Europe B.V., PFSweb B.V., and IBM Belgium Financial Services S.A. | |
10.18 (5)
|
Amended and Restated Collateralized Guaranty between Priority Fulfillment Services, Inc. and IBM Belgium Financial Services S.A. | |
10.19 (5)
|
Amended and Restated Guaranty to IBM Belgium Financial Services S.A. by PFSweb, Inc. | |
10.20 (5)
|
Subordinated Demand Note by and between Supplies Distributors, Inc. and Priority Fulfillment Services, Inc. |
91
Table of Contents
| Exhibit | ||
| Number | Description of Exhibits | |
10.21 (5)
|
Notes Payable Subordination Agreement between Congress Financial Corporation (Southwest) and Priority Fulfillment Services, Inc. | |
10.22 (5)
|
Guarantee in favor of Congress Financial Corporation (Southwest) by Business Supplies Distributors Holdings, LLC, Priority Fulfillment Services, Inc. and PFSweb, Inc. | |
10.23 (5)
|
General Security Agreement by Priority Fulfillment Services, Inc. in favor of Congress Financial Corporation (Southwest). | |
10.24 (5)
|
Inducement Letter by Priority Fulfillment Services, Inc. and PFSweb, Inc. in favor of Congress Financial Corporation (Southwest). | |
10.25 (6)
|
Form of Executive Severance Agreement between the Company and each of its executive officers. | |
10.26 (7)
|
Amendment to Agreement for Inventory Financing by and among Business Supplies Distributors Holdings, LLC, Supplies Distributors, Inc., Priority Fulfillment Services, Inc., PFSweb, Inc., Inventory Financing Partners, LLC and IBM Credit Corporation | |
10.27 (7)
|
Amendment to Amended and Restated Platinum Plan Agreement (with Invoice Discounting) by and among Supplies Distributors, S.A., Business Supplies Distributors Europe B.V., PFSweb B.V., and IBM Belgium Financial Services S.A. | |
10.28 (7)
|
Amended and Restated Notes Payable Subordination Agreement by and between Priority Fulfillment Services, Inc., Supplies Distributors, Inc. and IBM Credit Corporation | |
10.29 (7)
|
Amendment to Factoring agreement dated March 29, 2002 between Supplies Distributors S.A. and Fortis Commercial Finance N.V. | |
10.30 (8)
|
Loan and Security Agreement by and between Comerica Bank – California (“Bank”) and Priority Fulfillment Services, Inc. (“Priority”) and Priority Fulfillment Services of Canada, Inc. (“Priority Canada”) | |
10.31 (8)
|
Unconditional Guaranty of PFSweb, Inc. to Comerica Bank – California | |
10.32 (8)
|
Security Agreement of PFSweb, Inc. to Comerica Bank – California | |
10.33 (8)
|
Intellectual Property Security Agreement between Priority Fulfillment Services, Inc. and Comerica Bank – California | |
10.34 (8)
|
Amendment 2 to Amended and Restated Platinum Plan Agreement (with Invoice Discounting) by and among Supplies Distributors, S.A., Business Supplies Distributors B.V., PFSweb B.V., and IBM Belgium Financial Services S.A. | |
10.35 (8)
|
Amendment to Agreement for Inventory Financing by and among Business Supplies Distributors Holdings, LLC, Supplies Distributors, Inc., Priority Fulfillment Services, Inc., PFSweb, Inc., and IBM Credit LLC | |
10.36 (9)
|
Amendment to factoring agreement dated April 30, 2003 between Supplies Distributors S.A. and Fortis Commercial Finance N.V. | |
10.37 (9)
|
Loan and Security Agreement by and between Congress Financial Corporation (Southwest), as Lender and Supplies Distributors, Inc., as Borrower dated March 29, 2002. | |
10.38 (9)
|
General Security Agreement – Business Supplies Distributors Holdings, LLC in favor of Congress Financial Corporation (Southwest) | |
10.39 (9)
|
Stock Pledge Agreement between Supplies Distributors, Inc. and Congress Financial Corporation (Southwest) | |
10.40 (9)
|
First Amendment to General Security Agreement by Priority Fulfillment Services, Inc. in favor of Congress Financial Corporation (Southwest) | |
10.41 (10)
|
First Amendment to Loan and Security Agreement made as of September 11, 2003 by and between Priority Fulfillment Services, Inc., Priority Fulfillment Services of Canada, Inc. and Comerica Bank. | |
10.42 (11)
|
Securities Purchase Agreement dated as of November 7, 2003 between PFSweb, Inc. and the Purchasers named therein. |
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Table of Contents
| Exhibit | ||
| Number | Description of Exhibits | |
10.43 (11)
|
Form of Four Year Warrant dated as of November 7, 2003 issued to each of the Purchasers pursuant to the Securities Purchase Agreement. | |
10.44 (12)
|
Industrial Lease Agreement between New York Life Insurance Company and Daisytek, Inc. | |
10.45 (12)
|
First Amendment to Industrial Lease Agreement between New York Life Insurance Company, Daisytek, Inc. and Priority Fulfillment Services, Inc. | |
10.46 (12)
|
Second Amendment to Industrial Lease Agreement between ProLogis North Carolina Limited Partnership and Priority Fulfillment Services, Inc. | |
10.47 (12)
|
Modification, Ratification and Extension of Lease between Shelby Drive Corporation and Priority Fulfillment Services, Inc. | |
10.48 (13)
|
Amendment to Agreement for Inventory Financing by and among Business Supplies Distributors Holdings, LLC, Supplies Distributors, Inc., Priority Fulfillment Services, Inc., PFSweb, Inc., and IBM Credit LLC | |
10.49 (13)
|
Amendment 4 to Amended and Restated Platinum Plan Agreement (with Invoice Discounting) by and among Supplies Distributors, S.A., Business Supplies Distributors B.V., PFSweb B.V., and IBM Belgium Financial Services S.A. | |
10.50 (13)
|
Third Amended and Restated Notes Payable Subordination Agreement by and between Priority Fulfillment Services, Inc., Supplies Distributors, Inc. and IBM Credit Corporation. | |
10.51 (13)
|
First Amendment to Loan and Security Agreement by and between Congress Financial Corporation (Southwest), as Lender and Supplies Distributors, Inc., as Borrower. | |
10.52 (13)
|
Form of Modification to Executive Severance Agreement. | |
10.53 (14)
|
Industrial Lease Agreement by and between Industrial Developments International, Inc. and Priority Fulfillment Services, Inc. | |
10.54 (14)
|
Guaranty by PFSweb, Inc. in favor of Industrial Developments International, Inc. | |
10.55 (14)
|
Lease between Fleet National Bank and Priority Fulfillment Services, Inc. | |
10.56 (14)
|
Guaranty by PFSweb, Inc. in favor of Fleet National Bank | |
10.57 (14)
|
Amendment No. 3 to Lease dated as of March 3, 1999 between Fleet National Bank and Priority Fulfillment Services, Inc. | |
10.58 (15)
|
Loan Agreement between Mississippi Business Finance Corporation and Priority Fulfillment Services, Inc. dated as of November 1, 2004 | |
10.59 (15)
|
Placement Agreement between Priority Fulfillment Services, Inc., Comerica Securities and Mississippi Business Finance Corporation | |
10.60 (15)
|
Reimbursement Agreement between Priority Fulfillment Services, Inc. and Comerica Bank | |
10.61 (15)
|
First Amended and Restated Loan and Security Agreement by and between Comerica Bank and Priority Fulfillment Services, Inc. | |
10.62 (15)
|
Remarketing Agreement between Priority Fulfillment Services, Inc. and Comerica Securities | |
10.63 (20)
|
Amendment to factoring agreement dated December 12, 2005 between Supplies Distributors S.A. and Fortis Commercial Finance N.V. | |
10.64 (21)
|
Fourth Amended and Restated Notes Payable Subordination Agreement by and between Priority Fulfillment Services, Inc., Supplies Distributors, Inc. and IBM Credit Corporation. | |
10.65 (21)
|
Amendment 7 to Agreement for Inventory Financing. | |
10.66 (21)
|
Amendment 6 to Amended and Restated Platinum Plan Agreement. | |
10.67 (21)
|
Agreement for IBM Global Financing Platinum Plan Invoice Discounting Schedule. |
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Table of Contents
| Exhibit | ||
| Number | Description of Exhibits | |
10.68 (21)
|
Second Amendment to Loan and Security Agreement by and between eCOST.com, Inc. and Wachovia Capital Finance Corporation (Western). | |
10.69 (21)
|
Amendment 4 to Loan and Security Agreement. | |
10.70 (21)
|
Guaranty by PFSweb, Inc., in favor of Wachovia Capital Finance Corporation (Western). | |
10.71 (21)
|
Second Amendment to First Amended and Restated Loan and Security Agreement by and between Comerica Bank and Priority Fulfillment Services, Inc. | |
10.72 (23)
|
Tenth Amendment to Lease Agreement by and between Plano Atrium, LLC and Priority Fulfillment Services, Inc. | |
10.73 (24)
|
Third Amendment to the Loan and Security Agreement by and between eCOST.com, Inc. and Wachovia Capital Finance Corporation (Western). | |
10.74 (25)
|
Fifth Amended and Restated Notes Payable Subordination Agreement by and between Priority Fulfillment Services, Inc., Supplies Distributors, Inc. and IBM Credit Corporation. | |
10.75 (25)
|
Amendment 8 to Agreement for Inventory Financing. | |
10.76 (25)
|
Fourth Amendment to the Loan and Security Agreement by and between eCOST.com, Inc. and Wachovia Capital Finance Corporation (Western). | |
10.77 (25)
|
Amendment 5 to Loan and Security Agreement. | |
10.78 (25)
|
Amendment 7 to Amended and Restated Platinum Plan Agreement. | |
10.79 (25)
|
Agreement for IBM Global Financing Platinum Plan Invoice Discounting Schedule. | |
21 (25)
|
Subsidiary Listing | |
23.1 (25)
|
Consent of KPMG LLP, Independent Registered Public Accounting Firm | |
31.1 (25)
|
Certifications of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 | |
31.2 (25)
|
Certifications of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 | |
32.1 (25)
|
Certifications of Chief Executive 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. Registration Statement on Form S-1 (Commission File No. 333-87657). | |
| (2) | Incorporated by reference from PFSweb, Inc. Form 10-K for the fiscal year ended March 31, 2001 | |
| (3) | Incorporated by reference from PFSweb, Inc. Form 10-Q/A for the quarterly period ended September 30, 2001 | |
| (4) | Incorporated by reference from PFSweb, Inc. Form 10-K for the transition period ended December 31, 2001 | |
| (5) | Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended March 31, 2002 | |
| (6) | Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended June 30, 2002 | |
| (7) | Incorporated by reference from PFSweb, Inc. Form 10-K for the year ended December 31, 2002 | |
| (8) | Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended March 31, 2003 | |
| (9) | Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended June 30, 2003 | |
| (10) | Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended September 30, 2003 | |
| (11) | Incorporated by reference from PFSweb, Inc. Report on Form 8-K filed on November 10, 2003 | |
| (12) | Incorporated by reference from PFSweb, Inc. Form 10-K for the year ended December 31, 2003 | |
| (13) | Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended March 31, 2004 |
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| (14) | Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended September 30, 2004 | |
| (15) | Incorporated by reference from PFSweb, Inc. Form 10-K for the year ended December 31, 2004. | |
| (16) | Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended March 31, 2005. | |
| (17) | Incorporated by reference from PFSweb, Inc. Report on Form 8-K filed on June 14, 2005. | |
| (18) | Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended June 30, 2005. | |
| (19) | Incorporated by reference from PFSweb, Inc. Current Report on Form 8-K filed on November 30, 2005. | |
| (20) | Incorporated by reference from PFSweb, Inc. Form 10-K for the year ended December 31, 2005. | |
| (21) | Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended March 31, 2006. | |
| (22) | Incorporated by reference from PFSweb, Inc. Current Report on Form 8-K filed on June 2, 2006. | |
| (23) | Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended September 30, 2006. | |
| (24) | Incorporated by reference from PFSweb, Inc. Current Report on Form 8-K filed on November 20, 2006. | |
| (25) | Filed herewith |
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SCHEDULE I
PFSWEB, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS – PARENT COMPANY ONLY
(In thousands)
BALANCE SHEETS – PARENT COMPANY ONLY
(In thousands)
| December 31, | December 31, | |||||||
| 2006 | 2005 | |||||||
ASSETS: |
||||||||
Cash and cash equivalents |
$ | 281 | $ | — | ||||
Receivable from Priority Fulfillment Services, Inc. |
5,478 | 6,846 | ||||||
Receivable from eCOST.com, Inc. |
4,700 | — | ||||||
Investment in subsidiaries |
38,381 | 23,088 | ||||||
Total assets |
$ | 48,840 | $ | 29,934 | ||||
LIABILITIES: |
||||||||
Total liabilities |
$ | — | $ | — | ||||
SHAREHOLDERS’ EQUITY: |
||||||||
Preferred stock |
— | — | ||||||
Common stock |
47 | 23 | ||||||
Additional paid-in capital |
91,302 | 58,736 | ||||||
Accumulated deficit |
(44,354 | ) | (29,824 | ) | ||||
Accumulated other comprehensive income |
1,930 | 1,084 | ||||||
Treasury stock |
(85 | ) | (85 | ) | ||||
Total shareholders’ equity |
48,840 | 29,934 | ||||||
Total liabilities and shareholders’ equity |
$ | 48,840 | $ | 29,934 | ||||
The condensed financial statements should be read in conjunction with the consolidated
financial statements and notes.
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SCHEDULE I
PFSWEB, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS – PARENT COMPANY ONLY
FOR THE YEARS ENDED DECEMBER 31
(In thousands)
STATEMENTS OF OPERATIONS – PARENT COMPANY ONLY
FOR THE YEARS ENDED DECEMBER 31
(In thousands)
| 2006 | 2005 | 2004 | ||||||||||
EQUITY IN
NET INCOME (LOSS) OF CONSOLIDATED SUBSIDIARIES |
$ | (14,530 | ) | $ | (747 | ) | $ | 226 | ||||
NET INCOME (LOSS) |
$ | (14,530 | ) | $ | (747 | ) | $ | 226 | ||||
The condensed financial statements should be read in conjunction with the consolidated
financial statements and notes.
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SCHEDULE I
PFSWEB, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS – PARENT COMPANY ONLY
FOR THE YEARS ENDED DECEMBER 31
(In thousands)
STATEMENTS OF CASH FLOWS – PARENT COMPANY ONLY
FOR THE YEARS ENDED DECEMBER 31
(In thousands)
| 2006 | 2005 | 2004 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Net income (loss) |
$ | (14,530 | ) | $ | (747 | ) | $ | 226 | ||||
Adjustments to reconcile net income (loss) loss to net cash
provided by operating activities: |
||||||||||||
Equity in net (income) loss of consolidated subsidiaries |
14,530 | 747 | (226 | ) | ||||||||
Net cash provided by operating activities |
— | — | — | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||
Payment for purchase of eCOST.com, Inc., net of cash
acquired |
(1,299 | ) | — | — | ||||||||
Net cash used in investing activities |
(1,299 | ) | — | — | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
Proceeds from issuance of common stock |
4,912 | 2,075 | 475 | |||||||||
Increase in receivable from eCOST.com, Inc. |
(4,700 | ) | — | — | ||||||||
Decrease/(increase) in receivable from Priority
Fulfillment Services, Inc., net |
1,368 | (2,075 | ) | (475 | ) | |||||||
Net cash provided by financing activities |
1,580 | — | — | |||||||||
NET INCREASE IN CASH |
281 | — | — | |||||||||
CASH AND CASH EQUIVALENTS, beginning of period |
— | — | — | |||||||||
CASH AND CASH EQUIVALENTS, end of period |
$ | 281 | $ | — | $ | — | ||||||
The condensed financial statements should be read in conjunction with the consolidated financial
statements and notes.
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SCHEDULE II
PFSWEB, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31
(Amounts in thousands)
FOR THE YEARS ENDED DECEMBER 31
(Amounts in thousands)
| Additions | ||||||||||||||||||||||||
| Charges | Balance | Balance | ||||||||||||||||||||||
| Balance at | to Cost | Charges | Acquired | at End | ||||||||||||||||||||
| Beginning | and | to Other | via | of | ||||||||||||||||||||
| of Period | Expenses | Accounts | Acquisition | Deductions | Period | |||||||||||||||||||
Year Ended December 31, 2004: |
||||||||||||||||||||||||
Allowance for doubtful accounts |
$ | 339 | 289 | — | — | (124 | ) | $ | 504 | |||||||||||||||
Allowance for slow moving inventory |
$ | 1,314 | 1,204 | — | — | (45 | ) | $ | 2,473 | |||||||||||||||
Income tax valuation allowance |
$ | 11,404 | 346 | 475 | — | — | $ | 12,225 | ||||||||||||||||
Year Ended December 31, 2005: |
||||||||||||||||||||||||
Allowance for doubtful accounts |
$ | 504 | 40 | — | — | (60 | ) | $ | 484 | |||||||||||||||
Allowance for slow moving inventory |
$ | 2,473 | (230 | ) | — | — | (704 | ) | $ | 1,539 | ||||||||||||||
Income tax valuation allowance |
$ | 12,225 | 107 | 90 | — | — | $ | 12,422 | ||||||||||||||||
Year Ended December 31, 2006: |
||||||||||||||||||||||||
Allowance for doubtful accounts |
$ | 484 | 960 | — | 1,072 | (164 | ) | $ | 2,352 | |||||||||||||||
Allowance for slow moving inventory |
$ | 1,539 | 1,495 | — | — | (47 | ) | $ | 2,987 | |||||||||||||||
Income tax valuation allowance |
$ | 12,422 | 3,285 | — | 6,243 | — | $ | 21,950 | ||||||||||||||||
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
| By: | /s/ THOMAS J. MADDEN | |||||
| Thomas J. Madden, | ||||||
| Executive Vice President and | ||||||
| Chief Financial and Accounting Officer | ||||||
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated.
| Signature | Title | Date | ||
/s/ MARK C. LAYTON
|
Chairman of the Board, President and | April 2, 2007 | ||
| Chief Executive Officer (Principal | ||||
| Executive Officer) | ||||
/s/ THOMAS J. MADDEN
|
Executive Vice President and Chief | April 2, 2007 | ||
| Financial and Accounting Officer | ||||
| (Principal Financial and Accounting Officer) | ||||
/s/ DR. NEIL JACOBS
|
Director | April 2, 2007 | ||
/s/ TIMOTHY M. MURRAY
|
Director | April 2, 2007 | ||
/s/ JAMES F. REILLY
|
Director | April 2, 2007 | ||
/s/ DAVID I. BEATSON
|
Director | April 2, 2007 | ||
100
EXHIBIT
10.1.1
PFSweb, Inc. 2007 Management Bonus Plan
WHEREAS, PFSweb, Inc. (the “Company”) has adopted and authorized the PFSweb, Inc. 2005
Employee Stock and Incentive Plan (the “Plan;” terms defined in the Plan having the same meaning
when used herein); and
WHEREAS, the Plan provides for the issuance of Performance-Based Cash Awards to be paid upon
achievement of such performance goals as the Committee establishes, from time to time, with regard
to such Awards; and
WHEREAS, the Committee has determined it is in the best interests of the Company to adopt this
2007 Management Bonus Plan (the “Bonus Plan”) to set forth the performance goals for the issuance
of Performance-Based Cash Awards under the Plan for fiscal year 2007;
NOW, THEREFORE, the Committee hereby adopts, authorizes and approves the following:
I. Purpose and Terms of the Bonus Plan:
A. The Bonus Plan has been established by the Committee pursuant to the Plan to attract,
motivate, retain, and reward the Company’s chief executive officer and other executive officers,
officers and senior management for assisting the Company in achieving its operational goals through
exceptional performance.
B. Under the terms of the Bonus Plan, Performance-Based Cash Awards, if any, will be awarded
to the Chief Executive Officer and other executive officers, officers and senior management based
on, and subject to, the achievement of the following performance goal. The performance goal shall
be for the Company to exceed, on a quarterly basis, the corresponding projected quarterly net
income contained in the Company’s annual budget (or, in case of a budgeted net loss, to reduce the
net loss below the budgeted net loss). As used herein, the amount by which the Company’s quarterly
net income exceeds the corresponding projected quarterly net income contained in the Company’s
annual budget (or, in case of a budgeted net loss, the amount by which the Company’s quarterly net
loss is less than the budgeted net loss) is referred to as the “Over Budget Amount.” The Over
Budget Amount shall be determined by the Committee on a quarter-by-quarter basis.
II. Determination of Performance-Based Cash Awards:
A. The total bonus amount (the “Bonus Pool Amount”) for each quarter shall be equal to the sum
of (i) an amount to be determined by the Committee for such quarter, but not to exceed the lesser
of (x) $250,000 or (y) the Over Budget Amount and (ii) if and to the extent the Over Budget Amount
exceeds $250,000, ten percent (10%) of such excess.
B. Following the end of each quarter, the Committee shall grant Performance-Based Cash Awards
in an aggregate amount to be determined by it, but not to exceed the Bonus Pool Amount for such
immediately preceding quarter, and shall allocate and award such Performance-
Based Cash Awards to the Chief Executive Officer and other executive officers, officers and
senior management based on the Committee’s determination of the relative contribution of each such
person. The Committee shall have sole discretion in determining the individuals to whom
Performance-Based Cash Awards are to be granted and the amounts thereof. The Chief Executive
Officer shall not be present for the Committee’s deliberations concerning any Performance-Based
Cash Award to be awarded to him, but he shall be present and shall advise the Committee regarding
the Performance-Based Cash Awards to be awarded to the other executive officers, officers and
senior management.
C. Performance-Based Cash Awards shall be paid as soon as practicable following the
Committee’s determination and designation thereof. Each recipient of a Performance-Based Cash Award
shall be responsible for the payment of all federal and state income taxes arising upon his or her
receipt thereof.
C. The Committee reserve the right to modify this Bonus Plan and performance goal at any time,
and the adoption of this Bonus Plan does not limit the ability of the Committee to award other
Awards under the Plan nor does it restrict the ability of the Company to pay or provide for the
payment of any compensation to any person.
IN WITNESS WHEREOF, the undersigned, being all the members of the Committee, have adopted and
authorized the foregoing as of the 28th day of March, 2007.
| Timothy Murray |
2
EXHIBIT 10.74
IBM Credit LLC
FIFTH AMENDED AND RESTATED
NOTES PAYABLE SUBORDINATION AGREEMENT
NOTES PAYABLE SUBORDINATION AGREEMENT
IBM CREDIT LLC
North Castle Drive
Armonk, NY 10504
North Castle Drive
Armonk, NY 10504
Ladies and/or Gentlemen:
This Fifth 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, Plano, 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 Wachovia Bank,
National Association (formerly known as Congress Financial Corporation (Southwest)) (“Wachovia”)
(“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 Dollars
($6,000,000), 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
Page 1 of 3
advisable and to 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 Wachovia subject to terms of the Intercreditor
Agreement dated the date hereof between Wachovia 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 Credit’s 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 Credit’s commitment, if any, under the Financing Agreement has been terminated.
Dated March __, 2007.
| 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 Credit’s prior written consent.
| SUPPLIES DISTRIBUTORS, INC. |
||||
| By: | ||||
| Name: | Joseph Farrell | |||
| Title: | President / CEO | |||
ACCEPTED:
IBM CREDIT LLC
By:
|
||||
Name: Title: |
Stanton Clark Manager, Credit |
ACKNOWLEDGMENT OF SUBORDINATION
| )SS | ) | ||||||
| ) |
On the ___ day of March, 2007, 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.
My Commission Expires: |
||||||
,
|
Page 3 of 3
EXHIBIT 10.75
AMENDMENT NO. 8
TO
AGREEMENT FOR INVENTORY FINANCING
TO
AGREEMENT FOR INVENTORY FINANCING
This Amendment No. 8 (“Amendment”) to the Agreement for Inventory Financing is made
as of March , 2007 by and among IBM Credit LLC, a Delaware limited liability company (“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 Fifth Amended and
Restated Notes Payable Subordination Agreement dated March
, 2007 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, 2008 or such other date as IBM Credit and the
Borrower may agree to from time to time in writing.”
C. Section 8.6 of the Agreement is hereby amended by amending this Section to read in its
entirety as follows:
Page 1 of 3
“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 of administration thereof make payments on the revolving loans made by Wachovia
Bank, National Association (formerly known as Congress Financial Corporation (Southwest))
(“Wachovia”) pursuant to the Congress Credit Agreement, except as permitted by the Amended and
Restated Notes Payable Subordination Agreement; (b) may in fiscal year 2007 pay cash dividends not
to exceed the aggregate of fifty percent (50%) of Holdings Net Income according to GAAP and (c) may
permit Supplies Distributors of Canada, Inc. to make a one-time payment in an amount not to exceed
$800,000.00 to Holdings.”
Section 3. Conditions of Effectiveness of Amendment. This Amendment shall become effective upon the
receipt by IBM Credit of: (i) this Amendment which 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 Fifth Amended and Restated Notes Payable Subordination Agreement
executed by PFS, (iii) a subordinated demand note issued in favor of IBM Credit and Wachovia, in
form and substance satisfactory to IBM Credit, in the amount of Six Million Dollars ($6,000,000)
and (iv) in the event that products currently supplied by IBM Printing Systems Division (“Infoprint
Products”) cease to be sold to Loan Parties by an entity that is wholly owned by IBM, on the date
of such cessation any Infoprint Products then forming part of the Collateral shall continue to be
Collateral any Infoprint Products supplied by any other legal entity thereafter shall only form
part of the Collateral from the date on which IBM Credit has established arrangements and entered
into agreements acceptable to IBM Credit with such supplier and Loan Parties for the continued
financing of Infoprint Products.
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.
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 Party’s
ability to perform such Loan Party’s 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.
Page 2 of 3
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.
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.
IBM Credit LLC
|
Supplies Distributors, Inc. | |
By:
|
By: | |
Print Name:
|
Print Name: | |||||||
Title:
|
Title: | |||||||
| Business Supplies Distributors Holdings, LLC | Priority Fulfillment Services, Inc. | |||||||
By:
|
as Managing Member | |||||||
By:
|
By: | |
Print Name:
|
Print Name: | |||||||
Title:
|
Title: | |||||||
| PFSweb, Inc. | ||||||||
| By: | ||
| Print Name: | ||||||||
| Title: | ||||||||
Page 3 of 3
EXHIBIT 10.76
FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT (this “Amendment”), dated as of
March 28, 2007, is entered into by and between WACHOVIA BANK, NATIONAL ASSOCIATION, as successor to
Wachovia Capital Finance Corporation (Western) (“Lender”), and ECOST.COM, INC., a Delaware
corporation, (“Borrower”).
RECITALS
A. Borrower and Lender are parties to that certain Loan and Security Agreement dated August 3,
2004, as amended by that certain First Amendment to Loan and Security Agreement, that certain
Second Amendment to Loan and Security Agreement and that certain Third Amendment to Loan and
Security Agreement, 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. Lender and Borrower now wish to amend the Loan Agreement on the terms and conditions set
forth herein.
C. Each of Borrower and Lender is entering into this Amendment with the understanding and
agreement that, except as specifically provided herein, none of Lender’s 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) Accounts Advance Rate. Clause (a) of the definition of “Borrowing Base” in
Section 1.7 of the Loan Agreement is hereby amended and restated to read in its entirety as
follows:
“(a) eighty percent (80%) of Eligible Accounts; plus;”
(b) Inventory Appraisals. Clause (d) of Section 7.3 of the Loan Agreement is hereby
amended and restated to read in its entirety as follows:
“(d) upon Lender’s request, Borrower shall, at its expense, no more than two (2)
times in any twelve (12) month period, but at any time or times as Lender may
request on and after an Event of Default, deliver or cause to be delivered to
Lender, Acceptable Appraisals as to the Inventory;”
(c) 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 Zero Dollars ($0) as
of the last day of each fiscal quarter (it being understood that no rent reserve for
the Borrower’s leased premises in Memphis, Tennessee will be deducted in calculating
Adjusted Tangible Net Worth).”
(d) The first sentence of Section 12.1(a) of the Loan Agreement is hereby amended and restated
to read in its entirety as follows:
“This Agreement and the other Financing Agreements shall become effective as of the
date set forth on the first page hereof and shall continue in full force and effect
for a term ending on May 31, 2009 (the ‘Renewal Date’), and from year to
year thereafter, unless sooner terminated pursuant to the terms hereof.”
(e) Early Termination Fee. The first sentence of Section 12.1(c) of the Loan
Agreement is hereby amended and restated to read in its entirety as follows:
“If for any reason this Agreement is terminated prior to the end of the then current
term or renewal term of this Agreement, in view of the impracticality and extreme
difficulty of ascertaining actual damages and by mutual agreement of the parties as
to a reasonable calculation of Lender’s lost profits as a result thereof, Borrower
agrees to pay to Lender, upon the effective date of such termination, an early
termination fee in the amount of one percent (1.0%) of the Revolving Loan Limit if
such termination is effective on or before May 31, 2008, and one-half of one percent
(0.5%) of the Revolving Loan Limit if such termination is effective after May 31,
2008.”
3. Amendment Fee. Borrower shall pay Lender an amendment fee in the amount of
$15,000, which shall be due and payable, and fully earned by Lender, on the date of this Amendment.
4. Effectiveness of this Amendment. The following shall have occurred before this
Amendment is effective:
(a) Amendment. Lender shall have received this Amendment duly executed by Borrower,
together with the following Acknowledgment by Guarantor duly executed by PFSweb, in a sufficient
number of counterparts for distribution to all parties.
(b) 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).
(c) 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.
5. 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.
(d) No Default. No event has occurred and is continuing that constitutes a Default or
an Event of Default.
6. 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.
7. 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.
8. 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.
9. Estoppel. To induce Lender to enter into this Amendment and to continue to make
advances to Borrower under the Loan Agreement, and without limiting Borrower’s rights to contest
Lender’s monthly statements in accordance with Section 6.2 of the Loan Agreement, 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.
10. 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.
11. 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.
12. 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.
13. 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.
14. 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.
15. 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.
16. 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.
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.
| ECOST.COM, INC., a Delaware corporation | ||||
| By: | ||||
| Name: | ||||
| Title: | ||||
| WACHOVIA BANK, NATIONAL ASSOCIATION | ||||
| By: | ||||
| Name: | ||||
| Title: | ||||
ACKNOWLEDGEMENT BY GUARANTOR
Dated as of March 28, 2007
The undersigned (“Guarantor”) with respect to its Guaranty made in favor of Lender (as
amended, modified or supplemented, “Guaranty”), hereby acknowledges and agrees to the
foregoing Fourth Amendment to Loan and Security Agreement (the “Amendment”) and confirms
and agrees that its Guaranty is and shall continue to be, in full force and effect and is hereby
ratified and confirmed in all respects except that, upon the effectiveness of, and on and after the
date of the Amendment, each reference in such Guaranty to the Loan Agreement (as defined in the
Amendment), “thereunder”, “thereof” or words of like import referring to the “Loan Agreement”,
shall mean and be a reference to the Loan Agreement as amended or modified by the Amendment.
Although Lender has informed Guarantor of the matters set forth above, and Guarantor has
acknowledged the same, Guarantor understands and agrees that Lender has no duty under the Loan
Agreement, the Guaranty or any other agreement with Guarantor to so notify Guarantor or to seek
such an acknowledgement, and nothing contained herein is intended to or shall create such a duty as
to any advances or transaction hereafter.
| PFSWEB, INC., a Delaware corporation | ||||
| By: | ||||
| Name: | ||||
| Title: | ||||
EXHIBIT 10.77
FIFTH AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS FIFTH AMENDMENT TO LOAN AND SECURITY AGREEMENT (this “Amendment”) is dated as of
March 28, 2007 (the “Amendment Date”), by and between WACHOVIA BANK, NATIONAL ASSOCIATION
(formerly known as Congress Financial Corporation (Southwest), a Texas corporation)
(“Lender”), and SUPPLIES DISTRIBUTORS, INC., a Delaware corporation (“Borrower”).
RECITALS
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, and by that certain Fourth Amendment to the Loan and Security Agreement dated as
of April 17, 2006 (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, in consideration of the premises herein contained and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, do
hereby amend the Loan Agreement as follows:
AGREEMENT
ARTICLE I
DEFINITIONS
DEFINITIONS
1.01 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 by this Amendment.
ARTICLE II
AMENDMENTS TO THE LOAN AGREEMENT
AMENDMENTS TO THE LOAN AGREEMENT
Effective as of the date hereof, the Loan Agreement is hereby amended and supplemented as
follows:
2.01 Amendment to Section 1.1; Addition of Defined Terms. The following new
definitions shall be added to Section 1.1 of the Loan Agreement in their appropriate
alphabetical order:
‘Amendment
Closing Date’ shall mean, March 28, 2007.
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‘Capital Expenditures’ shall mean with respect to any Person for any period,
the aggregate of all expenditures by such Person during such period that in accordance with
GAAP are or should be included in “property, plant and equipment” or in a similar fixed
asset account on its balance sheet, whether such expenditures are paid in cash or financed
and including all liabilities and obligations in respect of Capital Leases paid or payable
during such period; provided, however, Capital Expenditures shall not
include any expenditures made with proceeds of condemnation or eminent domain proceedings
affecting real property.
‘Capital Leases’ shall mean, as applied to any Person, any lease of (or any
agreement conveying the right to use) any property (whether real, personal or mixed) by such
Person as lessee which in accordance with GAAP, is required to be reflected as a liability
on the balance sheet of such Person.
‘EBITDA’ shall mean, at any date of determination, and for the applicable
period, without duplication, the total of the following for Borrower and its subsidiaries on
a consolidated basis calculated for such period: Net Income plus, to the extent deducted in
determining Net Income, interest expense, taxes, depreciation, amortization, other
non-recurring loss or expenses, amortization of intangibles and organization costs, any
non-cash losses or expenses and losses attributable to foreign currency adjustments, minus
all non-cash items increasing Net Income for such period and income attributable to foreign
currency adjustments for such period, all determined in accordance with GAAP.
‘Fixed Charges’ shall mean, for any period, the sum, without duplication, of
the amounts determined for any Person during such period equal to (i) total cash interest
expense (including that portion attributable to Capital Leases that is treated as interest
in accordance with GAAP and capitalized interest), net of cash interest income, of such
Person with respect to all outstanding Indebtedness, (ii) scheduled payments of principal on
indebtedness of such Person, excluding payments of principal made hereunder, under the
Agreement for Inventory Financing or under any credit facility that replaces the Agreement
for Inventory Financing, (iii) the total unfinanced portion of Capital Expenditures of such
Person and (iv) total distributions made to equity holders of such Person actually paid in
cash (other than any dividends or distributions permitted pursuant to Section 9.9
and Section 9.11 hereof).
‘Net Income’ shall mean, for any period, the amount that should, in accordance
with GAAP, be reflected on Borrower’s income statement as net income for that period.”
2.02
Amendment to definition of “Eligible Borrower Accounts”. Clause (m) of
the definition of “Eligible Borrower Accounts” contained in Section 1.1 of the Loan
Agreement shall be deleted in its entirety and the following new clause (m) shall be
substituted therefor:
“(m) such Accounts of a single account debtor or its affiliates do not constitute more
than thirty-five (35%) percent of all otherwise Eligible Accounts (but the portion of the
Accounts not in excess of such percentage may be deemed Eligible Borrower
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Accounts);”
2.03 Amendment to definition of “Interest Rate”. The definition of “Interest Rate”
contained in Section 1.1 of the Loan Agreement shall be deleted in its entirety and the
following new definition shall be substituted therefor:
‘Interest Rate’ shall mean,
(a) Subject to clause (b) of this definition below:
(i) as to Prime Rate Loans, a rate per annum equal to the sum
of the “Applicable Prime Rate Margin” if the average Excess
Availability for the immediately preceding four (4) fiscal quarters
for the Borrower is at or within the amounts indicated for such
percentage (set forth below), plus the Prime Rate,
(ii) as to Eurodollar Rate Loans, a rate per annum equal to the
sum of the corresponding “Applicable Eurodollar Rate Margin” if the
Excess Availability is at or within the amounts indicated from such
percentage (set forth below), plus the Adjusted Eurodollar Rate (in
each case, based on the Eurodollar Rate applicable for the Interest
Period selected by Borrower, as in effect three (3) Business Days
after the date of receipt by Lender of the request of Borrower for
such Eurodollar Rate Loans in accordance with the terms hereof,
whether such rate is higher or lower than any rate previously quoted
to Borrower).
| Applicable | ||||||
| Applicable Prime | Eurodollar | |||||
| Pricing Level | Excess Availability | Rate Margin | Rate Margin | |||
I |
$3,000,001 or more | 0% | 1.75% | |||
II |
$1,000,000 to | 0% | 2.00% | |||
| $3,000,000 | ||||||
III |
less than $1,000,000 | 0% | 2.25% |
Any increase or decrease in the Interest Rate resulting from a change in
average Excess Availability for the immediately preceding four (4) fiscal
quarters shall become effective as of the first Business Day immediately
following the end of a fiscal quarter of Borrower; provided,
however, that if average Excess Availability for the immediately
preceding four (4) fiscal quarters cannot be determined, Pricing Level III
shall apply as of the first Business Day immediately
following the end of a fiscal quarter of Borrower until such time as average
Excess Availability is determined. In addition, at all times (i) either (A)
during the period on and after the date of termination or non-renewal hereof
until such time as all Obligations are
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indefeasibly paid and satisfied in
full in immediately available funds, or (B) during the period from and after
the date of the occurrence of any Event of Default, and for so long as such
Event of Default is continuing as determined by Lender and (ii) when the
Revolving Loans are outstanding in excess of the amounts available to
Borrower under Section 2 (whether or not such excess(es) arise or
are made with or without Lender’s knowledge or consent and whether made
before or after an Event of Default), Pricing Level III shall apply.
(b) Notwithstanding anything to the contrary contained in clause
(a) of this definition, the Interest Rate shall mean the rate of two
percent (2.00%) per annum in excess of the Prime Rate as to Prime Rate Loans
and the rate of four and one-quarter percent (4.25%) per annum in excess of
the Adjusted Eurodollar Rate as to Eurodollar Rate Loans, at Lender’s
option, without notice, (i) either (A) for the period on and after the date
of termination or non-renewal hereof until such time as all Obligations are
indefeasibly paid and satisfied in full in immediately available funds, or
(B) for the period from and after the date of the occurrence of any Event of
Default, and for so long as such Event of Default is continuing as
determined by Lender and (ii) on the Revolving Loans to at any time
outstanding in excess of the amounts available to Borrower under Section
2 (whether or not such excess(es) arise or are made with or without
Lender’s knowledge or consent and whether made before or after an Event of
Default).”
2.04 Amendment to Section 3.3. Section 3.3 of the Loan Agreement shall be
deleted in its entirety and the following shall be substituted therefor:
“Servicing Fee. Borrower shall pay to Lender quarterly, a servicing fee in an
amount equal to $2,000 in respect of Lender’s services for each fiscal quarter (or part
thereof) while the Loan Agreement remains in effect and for so long thereafter as any of the
Obligations are outstanding, which fee shall be fully earned as of and payable in advance on
the first day of every fiscal quarter hereafter.”
2.05 Amendment to Section 3.4. Section 3.4 of the Loan Agreement shall be
deleted in its entirety and the following shall be substituted therefor:
“Unused Line Fee. Borrower shall pay to Lender monthly an unused line fee at a
rate equal to one-quarter of one percent (0.25%) per annum calculated upon the amount by
which $17,500,000 exceeds the average daily principal balance of the outstanding Revolving
Loans during the immediately preceding month (or part thereof) while this Agreement is in
effect and
for so long thereafter as any of the Obligations are outstanding, which fee shall be payable
on the first day of each month in arrears.”
2.06 Amendment to Section 9.9. The amount “$6,500,000” contained in Section
9.9(g) of the Loan Agreement shall be deleted and the amount “$5,500,000” shall be substituted
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therefor.
2.07 Amendment to Section 9.11(a). Subsection (a) of Section 9.11 shall be
deleted in its entirety and the following new subsection (a) shall be substituted therefor:
“(a) Excess Availability shall be not less than $1,000,000,”.
2.08 Amendment to Section 9.11(c). Subsection (c) of Section 9.11 shall be
deleted in its entirety and the following new subsection (c) shall be substituted therefor:
“(c) the aggregate amount of all such dividends does not exceed (i) $1,400,000 per
year, plus (ii) an amount equal to any cash dividends received by Borrower from Business
Supplies Distributors Europe BV, plus (iii) an amount equal to any cash dividends received
by Borrower from Supplies Distributors SA, plus (iv) an amount equal to any cash dividends,
up to $800,000 in any year, received by Borrower from Supplies Canada.”
2.09 Amendment to Section 9.14. Section 9.14 shall be deleted in its entirety
and the following shall be substituted therefor:
Section 9.14 ‘Minimum Fixed Charge Coverage Ratio’ As of the last day
of each quarter, beginning with the quarter ending on March 31, 2007, the ratio of (i)
EBITDA for the immediately preceding twelve (12) calendar months minus the unfinanced
portion of Capital Expenditures made by Borrower during such period to (ii) Fixed Charges of
Borrower for such period shall not be less than 1.0 to 1.0.
2.10 Amendment to Section 12.1. The following subsections of Section 12.1 of
the Loan Agreement are hereby amended as follows:
The first sentence of Section 12.1(a) of the Loan Agreement shall be deleted in its
entirety and the following new sentence shall be substituted therefor:
“(a): This Agreement and the other Financing Agreements shall become effective as of
the Closing Date and shall continue in full force and effect for a term ending on the
earlier to occur of (i) March 29, 2009, or (ii) the date on which the parties to the IBM
Master Distributor Agreement (or any similar agreement reached with Infoprint Solutions
Company LLC (“Infoprint”)) shall no longer operate under the terms of such agreement and/or
IBM or Infoprint, as applicable, no longer supplies products pursuant to such agreement to
Borrower (the “Renewal Date”), and from year to year thereafter, unless sooner terminated
pursuant to the terms hereof;”
Subsection (c) of Section 12.1 shall be deleted in its entirety and the following new
subsection shall be substituted therefor:
“(c) If for any reason this Agreement is terminated prior to the end of the then
current term or renewal term of this Agreement, in view of the impracticality and extreme
difficulty of ascertaining actual damages and by mutual agreement of the parties as to a
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reasonable calculation of Lender’s lost profits as a result thereof, Borrower agrees to pay
to Lender, upon the effective date of such termination, an early termination fee in the
amount set forth below if such termination is effective in the period indicated:
| Amount | Period | |||
(1)
|
0.50% of Maximum Credit | From the Amendment Date, to and including March 29, 2008 | ||
(2)
|
0.25% of Maximum Credit | From March 30, 2008 and thereafter |
Such early termination fee shall be presumed to be the amount of damages sustained by Lender as a
result of such early termination and Borrower agrees that it is reasonable under the circumstances
currently existing. In addition, Lender shall be entitled to such early termination fee upon the
occurrence of any Event of Default described in Sections 10.1(g) and 10.1(h) of the
Loan Agreement, even if Lender does not exercise its right to terminate this Agreement, but elects,
at its option, to provide financing to Borrower or permit the use of cash collateral under the
United States Bankruptcy Code. The early termination fee provided for in this Section 12.1
shall be deemed included in the Obligations. Notwithstanding anything contained herein to the
contrary, the early termination fee shall not apply to any early termination as the result of a
complete refinancing of the Loans by Wachovia Bank, N.A.”
ARTICLE III.
NO WAIVER
NO WAIVER
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 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
CONDITIONS PRECEDENT
4.01 Conditions to Effectiveness. The effectiveness of this Amendment is subject to
the satisfaction of the following conditions precedent, in a manner satisfactory to Lender, unless
specifically waived in writing by Lender:
(a) Lender shall have received a closing fee the amount of $25,000, which shall be
fully earned and payable on the Amendment Date.
(b) Lender
shall have received, in form and substance satisfactory to Lender
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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;
(c) 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;
(d) 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
(e) 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
RATIFICATIONS, REPRESENTATIONS AND WARRANTIES
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. The Borrower and Lender
agree that the Loan Agreement, as amended hereby, shall continue to be legal, valid, binding, and
enforceable in accordance with their respective terms.
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 (except to the extent any such
representation or warranty is by its terms expressly limited to a certain date or dates, in which
case it remains true, accurate and correct as of such date or
dates and except as otherwise disclosed to Lender pursuant to the Loan Documents prior to 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 the Closing Date of the Loan Agreement.
ARTICLE VI
MISCELLANEOUS PROVISIONS
MISCELLANEOUS PROVISIONS
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
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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.
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.
6.03 Expenses of Lender. As provided in the Loan Agreement, Borrower agrees to pay on
demand 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 Lender’s 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 Lender’s legal counsel.
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.
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.
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.
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 when taken together
shall constitute one and the same instrument.
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.
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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.
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.
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]
Fifth
Amendment to Loan and Security Agreement
9
IN WITNESS WHEREOF, this Amendment has been duly executed by Borrower and Lender to be
effective as of the date first above written.
| LENDER: | BORROWER: | |||||||
| WACHOVIA BANK, NATIONAL ASSOCIATION |
SUPPLIES DISTRIBUTORS, INC., | |||||||
By:
|
By: | |||||||
Name:
|
Name: | |||||||
Title:
|
Title: | |||||||
| Address: | Chief Executive Office: | |||||||
| 5001 LBJ Freeway, Suite 1050 | 500 North Central Expressway, 5th Floor |
|||||||
Dallas,
|
Texas 75244 | Plano, | Texas 75074 | |||||
Fifth
Amendment to Loan and Security Agreement
1
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
undersigned’s liability under such documents, that the undersigned’s 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.
| PRIORITY FULFILLMENT SERVICES, INC. | ||||||
| By: | ||||||
| Name: | ||||||
| Title: | ||||||
| BUSINESS SUPPLIES DISTRIBUTORS HOLDINGS, LLC | ||||||
| By: | ||||||
| Name: | ||||||
| Title: | ||||||
Fifth
Amendment to Loan and Security Agreement
1
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
undersigned’s liability under such documents, that the undersigned’s 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.
| PFSWEB, INC. | ||||||
| By: | ||||||
| Name: | ||||||
| Title: | ||||||
Fifth
Amendment to Loan and Security Agreement
1
Exhibit 10.78
AMENDMENT 7
TO
AMENDED AND RESTATED PLATINUM PLAN AGREEMENT (WITH INVOICE DISCOUNTING)
TO
AMENDED AND RESTATED PLATINUM PLAN AGREEMENT (WITH INVOICE DISCOUNTING)
This Amendment 7 (“Amendment”) dated March 28, 2007 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, 2008 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:
| SDSA Amd 7 Amended & Restated Plat Plan | 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 BSDE’s
liquidation value, and (ii) SDSA may pay cash dividends in an amount not to exceed 407,000 euros to
Supplies Distributors, Inc. in fiscal year 2007.”
(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
IBM Receivables
| SDSA Amd 7 Amended & Restated Plat Plan | Page 2 of 5 |
Collateral Value of Stock-in-Trade: (A) 100% of paid for IBM Printing Systems Division or
InfoPrint Solution Company inventory (other than (a) machines which IBM Printing Systems Division
or Infoprint Solution Company 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 or InfoPrint Solution Company 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.
In the event that products currently supplied by IBM Printing Systems Division (“InfoPrint
Products”) cease to be sold to you by an entity that is wholly owned by IBM Corporation, on the
date of such cessation :
| • | Any InfoPrint Products then forming part of the Collateral shall continue to be Collateral; | |
| • | Any InfoPrint Products supplied by any other legal entity (as part of the InfoPrint Solutions Company group) thereafter shall only form part of the Collateral from the date on which IGF has established arrangements and entered into agreements acceptable to it with such supplier and you for the continued financing of the InfoPrint Products. |
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:
| Covenant | Covenant Requirement | |||
(i)
|
Debt to Tangible Net Worth | Greater than Zero and | ||
| Less than 7.0:1.0 | ||||
(ii)
|
Net Profit after Tax to Revenue | Greater than 0.10 percent | ||
(iii)
|
Working Capital Turnover (WCTO) | 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:
| Covenant | ||||||||
| Covenant | Requirement | Date as of | ||||||
(i)
|
Minimum Tangible Net Worth | $ | 18,000,000.00 | 03/31/07 and beyond | ||||
| SDSA Amd 7 Amended & Restated Plat Plan | Page 3 of 5 |
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 Party’s ability
to perform such Loan Party’s 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. 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.
| SDSA Amd 7 Amended & Restated Plat Plan | Page 4 of 5 |
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.
| IBM BELGIUM FINANCIAL SERVICES S.A. | SUPPLIERS DISTRIBUTORS S.A. | |||||||||
By:
|
By: | |||||||||
Print Name:
|
Print Name: | |||||||||
Title:
|
Title: | |||||||||
| BUSINESS SUPPLIES DISTRIBUTORS EUROPE BV | PFS WEB B.V. SPRL | |||||||||
By:
|
By: | |||||||||
Print Name:
|
Print Name: | |||||||||
Title:
|
Title: | |||||||||
| The following parties agree to Section 6 as applicable to them. | ||||||||||
| SUPPLIES DISTRIBUTORS, INC. | PRIORITY FULFILLMENT SERVICES, INC. | |||||||||
By:
|
By: | |||||||||
Print Name:
|
Print Name: | |||||||||
Title:
|
Title: | |||||||||
| BUSINESS SUPPLIES DISTRIBUTORS HOLDINGS, LLC | ||||||||||
By: |
||||||||||
Print Name: |
||||||||||
Title: |
||||||||||
| SDSA Amd 7 Amended & Restated Plat Plan | Page 5 of 5 |
Exhibit 10.79
Agreement for IBM Global Financing Platinum Plan
Invoice Discounting Schedule
Supplies Distributors S.A./Business Supplies Distributors Europe B.V.
Your Name |
Supplies Distributors | Schedule Number | 7 | |||
| S.A. and Business | ||||||
| Supplies Distributors | ||||||
| Europe B.V. | ||||||
Your Number |
SDSA - RC Liege | Effective date of | 28 March 2007 | |||
| 208795 | Schedule | |||||
| BSDE – HR Maastricht | ||||||
| 14062763 | ||||||
Credit Limit |
€12,500,000 | Commencement Date | 27 September 2001 | |||
No Charge Period |
IBM 45 days | Prepayment Percentage | (i) 80% of Eligible IBM | |||
| and InfoPrint Solution | ||||||
| Company Reimbursables | ||||||
| (1) | ||||||
| (ii) 80% of Eligible IBM | ||||||
| and InfoPrint Solution | ||||||
| Company Receivables |
1 of 8
Collateral Value of Stock-in-Trade
| (A) | 100% of paid for IBM Printing Sytems Division or InfoPrint Solution Company inventory (other than (a) machines which IBM Printing Systems Division or InfoPrint Solution Company 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 or InfoPrint Solution Company 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. | ||
| (B) | IBM Ireland is added as Authorised Supplier as well as IBM Endicott and IBM Singapore |
In the event that products currently supplied by IBM Printing Systems Division (“InfoPrint Products”) cease to be
sold to you by an entity that is wholly owned by IBM Corporation, on the date of such cessation :
| • | Any InfoPrint Products then forming part of the Collateral shall continue to be Collateral; | |
| • | Any InfoPrint Products supplied by any other legal entity thereafter (as part of the InfoPrint Solutions Company group) shall only form part of the Collateral from the date on which IGF has established arrangements and entered into agreements acceptable to it with such supplier and you for the continued financing of the InfoPrint Products. |
2 of 8
| FINANCE CHARGES (2) | REPORTING | |||||
Base Rate (3)
|
EURIBOR | Audited Accounts (4) | 90 days after fiscal year | |||
Discount Charge (5)
|
Base Rate plus 1.5.% | Management (unaudited) Accounts | 35 days after fiscal calendar quarter | |||
Default Rate
|
Base Rate plus 7% | Collateral Management Report |
10 days after calendar month | |||
Shortfall Fee
|
0.30% of Shortfall Amount | Aged Creditor Report | 10 days after calendar month | |||
Banking Transfer Charge |
Nil | Stock Report | 10 days after calendar month | |||
Service Fee per Notification |
N/A | Fixed Asset Register | 10 days after calendar month | |||
Monthly Service Fee, Set up Fee |
€1,500 plus VAT per month |
Surveys | A maximum of 4 times per year and not more than one per quarter | |||
Survey Fee
|
€5,000 plus VAT per IBM GF survey |
Financial Covenant Compliance Certificate from both SDSA and Holdings | 45 days after fiscal period | |||
Security Filing Fee
|
Any fees required as a result of Uniform Commercial Code filings in US in connection with Collateralised Guarantees granted by SDI, Holdings and PFS | Extended Credit Period | in 10 day increments up to 30 days | |||
Unused Line Fee
|
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 | |||||
Extended Credit Charge |
Base Rate plus 1.5% | |||||
3 of 8
ADDITIONAL COLLATERAL |
||
This Agreement |
||
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
|
Amended and Restated Stock Pledge | |
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
|
As provided by us | |
Guarantees of payment of
amounts due under the
agreement.
|
Amended and Restated Collateralised
Guarantees from PFS, Holdings, and SDI Amended and Restated Corporate Guaranty from PFSweb |
|
Amended and Restated Notes
Payable Subordination from SDI
in respect of SDSA
|
As provided by us | |
Opinion of Counsel
|
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;. | |
Certificate of Authority
|
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; | |
Miscellaneous
|
• 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. |
4 of 8
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:
| Covenant | Covenant Requirement | |||
(i)
|
Debt to Tangible Net Worth | Greater than Zero and | ||
| Less than 7.0:1.0 | ||||
(ii)
|
Net Profit after Tax to Revenue | Greater than 0.10 percent | ||
(iii)
|
Working Capital Turnover (WCTO) | 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:
| Covenant | Covenant Requirement | |||
(v)
|
Tangible Net Worth | Greater than $18,000,000.00 for period ending 03/31/07 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.
5 of 8
“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 SDSA’s 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 owner’s or stockholder’s 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.
6 of 8
Addresses
Pursuant to Clause 11.9 of the Agreement, the following are the addresses of the parties to the
Agreement:
(i) if to IBM GF:
|
(ii) if to SDSA: | |
IBM
Belgium Financial Services S.A. Avenue du Bourget, BE- 42 1130 Brussels VAT BE 424300467 |
Supplies Distributors S.A. Rue Louis Blériot 5 B-4460 Gráce-Hollogne Belgium |
|
| : | ||
(iii) if to BSDE:
|
(iv) if to PFS Web B.V. | |
Business Supplies Distributors Europe BV Dalderhaag 13, 6136 KM Sittard The Nederlands |
PFS Web B.V. SPRL c/o SDSA |
Footnotes:
| (1) | The maximum value for collateral representing IBM Reimbursables is €2 million. | |
| (2) | All charges are exclusive of any taxes and duties. You agree to pay all applicable taxes and duties. | |
| (3) | “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
7 of 8
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.
| Signed on behalf of | Signed on behalf of | |||||||||
| SUPPLIES DISTRIBUTORS S.A. | IBM BELGIUM FINANCIAL SERVICES S.A. | |||||||||
| TVA BE 475.286.142 | TVA BE 424.300.467 | |||||||||
Signed:
|
Signed: | |||||||||
By Name:
|
By Name: | |||||||||
Title:
|
Title: | |||||||||
Signature:
|
Signature: | |||||||||
Date:
|
Date: | |||||||||
| BUSINESS SUPPLIES DISTRIBUTORS EUROPE BV | PFS WEB B.V. SPRL | |||||||||
Signed:
|
Signed: | |||||||||
By Name:
|
By Name: | |||||||||
Title:
|
Title: | |||||||||
Signature:
|
Signature: | |||||||||
Date:
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Date: | |||||||||
8 of 8
Exhibit 21
| Name | Jurisdiction | |
Priority Fulfillment Services, Inc.
|
Delaware | |
Priority Fulfillment Services of Canada, Inc.
|
Ontario | |
PFSweb BV SPRL (f/k/a Priority Fulfillment Services Europe, B.V.)
|
Belgium | |
Business Supplies Distributors Holdings, LLC
|
Delaware | |
Supplies Distributors, Inc.
|
Delaware | |
Supplies Distributors of Canada, Inc.
|
Ontario | |
Supplies Distributors S.A.
|
Belgium | |
eCOST.com, Inc.
|
Delaware | |
eCOST Philippines Services, LLC
|
Philippines |
Consent of Independent Registered Public Accounting Firm
The Board of Directors
PFSweb, Inc.:
PFSweb, Inc.:
We consent to the incorporation by reference in the registration statements (Nos. 333-128486,
333-75764, 333-75772, 333-40020, 333-42186 and 333-46096) on Form S-8 and (No. 333-135794 and
333-110853) on Form S-3 of our report dated April 2, 2007, with respect to the consolidated balance
sheets of PFSweb, Inc. and subsidiaries as of December 31, 2006 and 2005, and the related
consolidated statements of operations, shareholders’ equity and comprehensive income (loss), and
cash flows for each of the years in the three-year period ended December 31, 2006 and the
accompanying financial statement schedules as of December 31, 2006 and 2005, and for each of the
years in the three-year period ended December 31, 2006, which report appears in the December 31,
2006, annual report on Form 10-K of PFSweb, Inc.
As discussed in Note 1 to the consolidated financial statements, during 2006, the Company adopted
Statement of Financial Accounting Standards No. 123R, Share-Based Payment.
KPMG LLP
Dallas, Texas
April 2, 2007
April 2, 2007
EXHIBIT 31.1
CERTIFICATIONS OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
PURSUANT TO 18 U.S.C. SECTION 1350
I, Mark Layton, certify that:
1. I have reviewed this report on Form 10-K 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
annual 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 registrant’s 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:
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) | Evaluated the effectiveness of the registrant’s 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 | |
| c) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit
committee of registrant’s board of directors (or persons performing the equivalent function):
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and | |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date:
|
April 2, 2007 | |||
By:
|
/s/ Mark C. Layton
|
EXHIBIT 31.2
CERTIFICATIONS OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
PURSUANT TO 18 U.S.C. SECTION 1350
I, Tom Madden, certify that:
1. I have reviewed this report on Form 10-K 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
annual 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 registrant’s 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:
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) | Evaluated the effectiveness of the registrant’s 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 | |
| c) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit
committee of registrant’s board of directors (or persons performing the equivalent function):
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and | |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date:
|
April 2, 2007 | |||
By:
|
/s/ Thomas J. Madden
|
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
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 Annual Report on Form 10-K for the year ended December 31, 2005 (the “Form 10-K”) 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-K 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-K.
April 2, 2007
|
/s/ Mark C. Layton | |
| Mark C. Layton | ||
| Chief Executive Officer | ||
April 2, 2007
|
/s/ Thomas J. Madden | |
| Thomas J. Madden | ||
| Chief Financial Officer |
The foregoing certification is being furnished as an exhibit to the Form 10-K 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-K 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.