e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2009
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission File Number 000-28275
PFSweb, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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75-2837058 |
(State of Incorporation)
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(I.R.S. Employer I.D. No.) |
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500 North Central Expressway, Plano, Texas
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75074 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (972) 881-2900
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or
a non-accelerated filer.
Large accelerated filer o |
Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller Reporting Company þ |
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
At November 16, 2009 there were 9,933,803 shares of registrants common stock outstanding.
PFSWEB, INC. AND SUBSIDIARIES
Form 10-Q
September 30, 2009
INDEX
2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
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September 30, |
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December 31, |
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2009 |
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2008 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
15,824 |
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$ |
16,050 |
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Restricted cash |
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2,021 |
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2,008 |
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Accounts receivable, net of allowance for doubtful accounts of
$629 and $980 at September 30, 2009 and December 31, 2008,
respectively |
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34,790 |
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44,546 |
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Inventories, net of reserves of $2,016 and $2,124 at September 30,
2009 and December 31, 2008, respectively |
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36,461 |
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47,186 |
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Other receivables |
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14,076 |
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13,072 |
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Prepaid expenses and other current assets |
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4,532 |
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3,802 |
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Total current assets |
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107,704 |
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126,664 |
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PROPERTY AND EQUIPMENT, net |
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10,988 |
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12,106 |
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IDENTIFIABLE INTANGIBLES |
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843 |
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961 |
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GOODWILL |
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3,602 |
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3,602 |
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OTHER ASSETS |
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1,524 |
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1,188 |
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Total assets |
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$ |
124,661 |
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$ |
144,521 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Current portion of long-term debt and capital lease obligations |
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$ |
20,191 |
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$ |
22,251 |
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Trade accounts payable |
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50,481 |
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61,988 |
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Accrued expenses |
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20,123 |
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21,054 |
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Total current liabilities |
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90,795 |
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105,293 |
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LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current
portion |
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1,910 |
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4,951 |
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OTHER LIABILITIES |
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1,621 |
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1,192 |
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Total liabilities |
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94,326 |
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111,436 |
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COMMITMENTS AND CONTINGENCIES |
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SHAREHOLDERS EQUITY: |
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Preferred stock, $1.00 par value; 1,000,000 shares authorized;
none issued and outstanding |
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Common stock, $0.001 par value; 35,000,000 shares authorized;
9,949,551 and 9,935,095 shares issued at September 30, 2009
and December 31, 2008, respectively; and 9,931,190 and
9,916,734 outstanding at September 30, 2009 and December 31,
2008, respectively |
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10 |
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10 |
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Additional paid-in capital |
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93,050 |
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92,728 |
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Accumulated deficit |
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(65,016 |
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(61,393 |
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Accumulated other comprehensive income |
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2,376 |
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1,825 |
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Treasury stock at cost, 18,361 shares |
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(85 |
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(85 |
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Total shareholders equity |
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30,335 |
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33,085 |
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Total liabilities and shareholders equity |
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$ |
124,661 |
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$ |
144,521 |
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The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
3
PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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REVENUES: |
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Product revenue, net |
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$ |
65,713 |
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$ |
79,157 |
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$ |
197,522 |
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$ |
252,496 |
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Service fee revenue |
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13,118 |
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22,900 |
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42,604 |
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64,966 |
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Pass-through revenue |
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6,776 |
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7,852 |
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16,748 |
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21,600 |
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Total net revenues |
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85,607 |
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109,909 |
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256,874 |
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339,062 |
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COSTS OF REVENUES: |
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Cost of product revenue |
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59,611 |
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73,128 |
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180,746 |
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233,475 |
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Cost of service fee revenue |
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9,674 |
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15,588 |
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30,406 |
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44,537 |
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Pass-through cost of revenue |
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6,776 |
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7,852 |
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16,748 |
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21,600 |
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Total costs of revenues |
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76,061 |
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96,568 |
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227,900 |
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299,612 |
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Gross profit |
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9,546 |
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13,341 |
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28,974 |
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39,450 |
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SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES, including stock based
compensation expense of $97 and
$109 in the three months ended
September 30, 2009 and 2008,
respectively, and $309 and $438 in
the nine months ended September 30,
2009 and 2008, respectively |
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9,972 |
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12,454 |
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31,283 |
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36,397 |
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AMORTIZATION OF IDENTIFIABLE INTANGIBLES |
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26 |
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202 |
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79 |
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605 |
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Total operating expenses |
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9,998 |
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12,656 |
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31,362 |
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37,002 |
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Income (loss) from operations |
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(452 |
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685 |
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(2,388 |
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2,448 |
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INTEREST EXPENSE, NET |
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288 |
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426 |
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967 |
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1,123 |
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Income (loss) before income taxes |
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(740 |
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259 |
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(3,355 |
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1,325 |
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INCOME TAX EXPENSE (BENEFIT), NET |
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106 |
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216 |
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268 |
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806 |
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NET INCOME (LOSS) |
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$ |
(846 |
) |
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$ |
43 |
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$ |
(3,623 |
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$ |
519 |
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NET INCOME (LOSS) PER SHARE: |
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Basic |
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$ |
(0.09 |
) |
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$ |
0.00 |
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$ |
(0.36 |
) |
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$ |
0.05 |
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Diluted |
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$ |
(0.09 |
) |
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$ |
0.00 |
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$ |
(0.36 |
) |
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$ |
0.05 |
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WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING: |
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Basic |
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9,931 |
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9,913 |
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9,927 |
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9,902 |
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Diluted |
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9,931 |
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9,972 |
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9,927 |
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9,991 |
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The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
4
PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
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Nine Months Ended |
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September 30, |
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2009 |
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2008 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income (loss) |
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$ |
(3,623 |
) |
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$ |
519 |
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Adjustments to reconcile net income (loss) to net cash provided by
operating activities: |
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Depreciation and amortization |
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5,191 |
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4,819 |
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Loss on sale of assets |
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17 |
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Provision for doubtful accounts |
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(170 |
) |
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Provision for excess and obsolete inventory |
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752 |
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950 |
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Deferred income taxes |
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(41 |
) |
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42 |
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Stock-based compensation |
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309 |
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438 |
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Changes in operating assets and liabilities: |
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Restricted cash |
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(6 |
) |
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227 |
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Accounts receivable |
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10,339 |
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7,106 |
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Inventories, net |
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10,676 |
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(5,252 |
) |
Prepaid expenses, other receivables and other assets |
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(1,461 |
) |
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(3,143 |
) |
Accounts payable, accrued expenses and other liabilities |
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(13,479 |
) |
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5,585 |
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Net cash provided by operating activities |
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8,487 |
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11,308 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchases of property and equipment |
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(3,523 |
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(4,738 |
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Proceeds from sale of assets |
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117 |
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Net cash used in investing activities |
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(3,523 |
) |
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(4,621 |
) |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Payments on capital lease obligations |
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(1,261 |
) |
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(1,354 |
) |
Increase in restricted cash |
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(7 |
) |
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|
(986 |
) |
Proceeds from issuance of common stock |
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|
13 |
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|
50 |
|
Payments on debt, net |
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(4,508 |
) |
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|
(3,953 |
) |
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Net cash used in financing activities |
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|
(5,763 |
) |
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|
(6,243 |
) |
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EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS |
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|
573 |
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|
(15 |
) |
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|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
(226 |
) |
|
|
429 |
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|
CASH AND CASH EQUIVALENTS, beginning of period |
|
|
16,050 |
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|
14,272 |
|
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|
CASH AND CASH EQUIVALENTS, end of period |
|
$ |
15,824 |
|
|
$ |
14,701 |
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SUPPLEMENTAL CASH FLOW INFORMATION |
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Non-cash investing and financing activities: |
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|
|
|
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|
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|
Property and equipment acquired under capital leases |
|
$ |
364 |
|
|
$ |
240 |
|
|
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|
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
5
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
1. OVERVIEW AND BASIS OF PRESENTATION
PFSweb, Inc. and its subsidiaries, including Supplies Distributors, Inc., and eCOST.com, Inc.,
are collectively referred to as the Company; Supplies Distributors refers to Supplies
Distributors, Inc. and its subsidiaries; eCOST refers to eCOST.com, Inc.; and PFSweb refers to
PFSweb, Inc. and its subsidiaries excluding Supplies Distributors and eCOST.
PFSweb Overview
PFSweb is an international provider of integrated business process outsourcing services to
major brand name companies seeking to maximize their supply chain efficiencies and to extend their
traditional and e-commerce initiatives in the United States, Canada, and Europe. PFSweb offers a
broad range of services such 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 InfoPrint Solutions Company (IPS), a joint venture company
owned by Ricoh and International Business Machines Corporation (IBM), have entered into master
distributor agreements under which Supplies Distributors acts as a master distributor of various
products, primarily IPS product.
Supplies Distributors has obtained certain financing that allows it to fund the working
capital requirements for the sale of primarily IPS products. Pursuant to the transaction management
services agreements between PFSweb and Supplies Distributors, PFSweb provides to Supplies
Distributors transaction management and fulfillment services such 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. Supplies Distributors does not have its own
sales force and relies upon IPS sales force and product demand generation activities for its sale
of IPS products. 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 PFSwebs and Supplies
Distributors arrangement with IPS. Although management believes that the terms of these agreements
are generally 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 computers, networking, electronics and
entertainment, TVs, plasmas and monitors, cameras and camcorders, memory and storage, For the
Home and sports and leisure. eCOST carries products from leading manufacturers such as Sony, JVC,
Canon, Hewlett-Packard, Denon, Dyson, Sennheiser, Garmin, Panasonic, Toshiba and Microsoft.
The Companys liquidity has been negatively impacted as a result of the merger with eCOST.
Since the merger, eCOST has experienced a net use of cash primarily due to operating losses. As a
result, the Company has had to support eCOSTs cash needs with the goal of reducing losses. The
amount of additional cash needed to support eCOST operations will depend upon working capital
requirements, bank
6
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
financing availability as well as eCOSTs continued ability to improve its
financial results. Further advances to eCOST may be limited by the Companys current cash and
future cash flow and may be restricted by the Companys credit facility obligations.
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 Companys 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 Companys expectations related to improved
overall profitability. The Company has reported improvement in eCOSTs financial results beginning
in 2007, excluding the impact of any non-cash impairment charges, and currently expects improvement
as a result of efforts to increase sales, improve product mix and control operating costs, although
there can be no assurance that these future improvements will be achieved. If eCOST does not meet
expectations, the Company currently anticipates that it would be able to terminate or sublease
eCOSTs facilities, liquidate remaining inventory through the eCOST website and reduce certain
personnel related costs as needed so as to minimize any material impact upon the Companys other
segments.
Basis of Presentation
The unaudited interim condensed consolidated financial statements as of September 30, 2009,
and for the three and nine months ended September 30, 2009 and 2008, have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission (SEC) and are unaudited.
Certain information and note disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of America have been
condensed or omitted pursuant to the rules and regulations promulgated by the SEC. In the opinion
of management and subject to the foregoing, the unaudited interim condensed consolidated financial
statements of the Company include all adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation of the Companys financial position as of September 30, 2009, its
results of operations for the three and nine months ended September 30, 2009 and 2008 and its cash
flows for the nine months ended September 30, 2009 and 2008. Results of the Companys operations
for interim periods may not be indicative of results for the full fiscal year.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements and related disclosures in conformity
with generally accepted accounting principles requires management to make judgments, 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 revenues
and operating expenses in these consolidated financial statements also require management estimates
and assumptions.
Estimates and assumptions about future events and their effects cannot be determined with
certainty. The Company bases its estimates on historical experience and on various other
assumptions believed to be applicable and reasonable under the circumstances. These estimates may
change as new events occur, as additional information is obtained and as the operating environment
changes. These changes have been
7
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
included in the consolidated financial statements as soon as they
became known. In addition, management is periodically faced with uncertainties, the outcomes of
which are not within its control and will not be known for prolonged periods of time. These
uncertainties are discussed in this report and in the Companys Annual Report on Form 10-K for the
year ended December 31, 2008 in the section entitled Risk Factors. Based on a critical assessment
of accounting policies and the underlying judgments and uncertainties affecting the application of
those policies, management believes that the Companys consolidated financial statements are fairly
stated in accordance with generally accepted accounting principles in the United States of America,
and provide a fair presentation of the Companys financial position and results of operations.
Investment in Affiliates
Priority Fulfillment Services, Inc. (PFS), a wholly-owned subsidiary of PFSweb, has made
advances to Supplies Distributors that are evidenced by a Subordinated Demand Note (the
Subordinated Note). Under the terms of certain of the Companys debt facilities, the outstanding
balance of the Subordinated Note cannot be increased to more than $6.5 million or decreased to less
than $5.0 million without prior approval of the Companys lenders. As of September 30, 2009 and
December 31, 2008, the outstanding balance of the Subordinated Note was $5.0 million and $5.5
million, respectively. The Subordinated Note is eliminated in the Companys consolidated financial
statements.
PFS has also made advances to eCOST, which aggregated $10.9 million as of September 30, 2009
and $10.6 million as of December 31, 2008. Certain of the Companys debt facilities provide that
the total advances to eCOST may not be less than $2.0 million without prior approval of eCOSTs
lender. PFS has received the approval of its lender to advance incremental amounts subject to
certain cash inflows to PFS, as defined, to certain of its subsidiaries and/or affiliates,
including eCOST, if needed. PFSweb has also advanced to eCOST $5.0 million and $4.7 million as of
September 30, 2009 and December 31, 2008, respectively.
Concentration of Business and Credit Risk
The Companys service fee revenue is generated under contractual service fee relationships
with multiple client relationships. No service fee clients or product revenue customers exceeded
10% of consolidated total net revenue or accounts receivable during the nine months ended September
30, 2009. A summary of the nonaffiliated customer and client concentrations is as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2009 |
|
2008 |
Product Revenue (as a percentage of
Product Revenue): |
|
|
|
|
|
|
|
|
Customer 1 |
|
|
12 |
% |
|
|
11 |
% |
Customer 2 |
|
|
9 |
% |
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
Service Fee Revenue (as a percentage of
Service Fee Revenue): |
|
|
|
|
|
|
|
|
Client 1 |
|
|
9 |
% |
|
|
40 |
% |
Client 2 |
|
|
16 |
% |
|
|
10 |
% |
Client 3 |
|
|
11 |
% |
|
|
6 |
% |
Client 4 |
|
|
10 |
% |
|
|
7 |
% |
Client 1 did not renew its contract with PFS effective January 2009, though certain project
work continued to occur through the quarter ended June 30, 2009.
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.
8
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
The Company has multiple arrangements with IBM and IPS and is dependent upon the continuation
of such arrangements. These arrangements, which are critical to the Companys ongoing operations,
include Supplies Distributors master distributor agreements, certain of Supplies Distributors
working capital financing agreements, product sales to IBM and IPS business units and an IBM term
master lease agreement. Substantially all of the Supplies Distributors revenue is generated by
its sale of product purchased from IPS. Supplies Distributors also relies upon IPS sales force
and product demand generation activities and the discontinuance of such services would have a
material impact upon Supplies Distributors business.
eCOSTs arrangements with its vendors are terminable by either party at will. Loss of any
vendors could have a material adverse effect on eCOSTs financial position, results of operations
and cash flows. Sales of HP and HP-related products represented 45% of eCOSTs net revenues (11%
of the Companys consolidated total net revenues) in the nine months ended September 30, 2009 and
48% of eCOSTs net revenues (11% of the Companys consolidated total net revenues) in the
comparable 2008 period.
Inventories
The Company establishes inventory reserves based upon estimates of declines in values due to
inventories that are slow moving or obsolete, excess levels of inventory or values assessed at
lower than cost. Recoverability of the inventory on hand is measured by comparison of the carrying
value of the inventory to the fair value of the inventory.
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. In the event PFSweb, Supplies Distributors
and IPS 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.
Property and Equipment
The Companys property held under capital leases amounted to approximately $2.5 million and
$3.4 million, net of accumulated amortization of approximately $9.8 million and $8.4 million, at
September 30, 2009 and December 31, 2008, respectively.
Stock-Based Compensation
During the nine months ended September 30, 2009, the Company issued an aggregate of 352,767
options to purchase shares of common stock to officers, directors, employees and consultants of the
Company.
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. The Company makes
judgments and estimates in conjunction with the carrying value of these assets, including amounts
to be capitalized, depreciation and amortization methods and useful lives. The Company records
impairment losses in the period in which it determines that the carrying amount is not
recoverable. This may require the Company to make judgments regarding long-term forecasts of
their future revenues and costs related to the assets subject to review.
9
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
Cash Paid for Interest and Taxes
The Company
made payments for interest of approximately $1.0 million and $1.2 million during
the nine months ended September 30, 2009 and 2008, respectively. Income taxes of approximately
$0.6 million and $1.5 million were paid by the Company during the nine months ended September 30,
2009 and 2008, respectively.
Subsequent Events
The Company has
evaluated its subsequent events through November 16, 2009. There were no
events or transactions that occurred after September 30, 2009 that required disclosure in the
financial statements.
Impact of Recently Issued Accounting Standards
On January 1, 2009,
the Company adopted the Financial Accounting Standards Boards, or FASB,
new accounting guidance for the fair value measurement of all non-financial assets and liabilities.
The guidance delayed the effective date for the treatment of certain non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at fair value on a recurring basis, at
least annually, until fiscal years beginning after November 15, 2008, and interim periods within
those fiscal years. The adoption of this guidance did not have a material impact on the Companys
consolidated financial statements.
On January 1, 2009, the Company adopted new FASB guidance contained in FASB Accounting
Standards Codification (ASC) 805, which changes the method of accounting for business
combinations. Under ASC 805, an acquiring entity is required to recognize all the assets acquired
and liabilities assumed in a transaction at the acquisition-date fair value with limited
exceptions. ASC 805 requires that transaction costs such as legal, accounting and advisory fees be
expensed and requires a substantial number of new disclosures. The Company applied the
provisions of the new standard in the first quarter of 2009, which did not have a material impact
on the Companys consolidated financial statements.
On January 1, 2009, the Company adopted new FASB guidance contained in ASC 810, which
establishes new accounting and reporting standards for noncontrolling interests in a subsidiary and
for the deconsolidation of a subsidiary. The Company applied the provisions of the new standard in
the first quarter of 2009. The adoption of the statement did not have a material impact on the
Companys consolidated financial statements.
On January 1, 2009, the Company adopted the applicable sections of ASC 350-30, which amends
the factors that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset. ASC 350-30 applies prospectively to all
intangible assets acquired after January 1, 2009, whether acquired in a business combination or
otherwise. The adoption of the applicable sections of ASC 350-30 will impact the Companys
accounting for new intangible assets acquired in business combinations that occur after January 1,
2009. The adoption of this guidance did not have any impact on the Companys consolidated
financial statements.
In May 2009, the FASB updated, and we adopted, the Subsequent Events Topic of the FASB ASC to
establish general standards of accounting for and disclosure of events that occur after the balance
sheet date but before financial statements are issued or are available to be issued. This topic
requires the disclosure of the date through which an entity has evaluated subsequent events and the
basis for that date, that is, whether the date represents the date the financial statements were
issued or were available to be issued. This topic is effective in the first interim period ending
after June 15, 2009. The adoption of this update did not have a material impact on the Companys
financial statements.
In June 2009, the FASB issued ASU 2009-01, Generally Accepted Accounting Principles and
approved
the FASB Accounting Standards Codification (Codification) as the single source of
authoritative nongovernmental US GAAP. The Codification does not change previous US GAAP, but is
intended to
10
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
simplify user access to all authoritative US GAAP by providing all the authoritative
literature related to a particular topic in one place. All prior accounting standard documents
will be superseded and all other accounting literature not included in the Codification will be
considered non-authoritative. ASU 2009-01 is effective for interim and annual periods ending after
September 15, 2009. The implementation of this update did not have an impact on the Companys
consolidated financial statements.
In October 2009, the FASB issued Accounting Standards Update (ASU) 2009-13,
Multiple-Deliverable Revenue Arrangements a consensus of the FASB Emerging Issues Task Force to
amend certain guidance in FASB Accounting Standards CodificationTM (ASC) 605, Revenue
Recognition, 25, Multiple-Element Arrangements. The amended guidance in ASC 605-25 (1) modifies
the separation criteria by eliminating the criterion that requires objective and reliable evidence
of fair value for the undelivered item(s), and (2) eliminates the use of the residual method of
allocation and instead requires that arrangement consideration be allocated, at the inception of
the arrangement, to all deliverables based on their relative selling price.
The FASB also issued ASU 2009-14, Certain Revenue Arrangements That Include Software Elements
a consensus of the FASB Emerging Issues Task Force, to amend the scope of arrangements under ASC
985, Software, 605, Revenue Recognition to exclude tangible products containing software
components and non-software components that function together to deliver a products essential
functionality.
The amended guidance in ASC 605-25 and ASC 985-605 is effective prospectively for revenue
arrangements entered into or materially modified in fiscal years beginning on or after June 15,
2010, with early application and retrospective application permitted. The Company is in the process
of evaluating the impact the amendments to ASC 605-25 and ASC 985-605 will have on its consolidated
financial statements.
3. COMPREHENSIVE INCOME (LOSS) (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net income (loss) |
|
$ |
(846 |
) |
|
$ |
43 |
|
|
$ |
(3,623 |
) |
|
$ |
519 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment |
|
|
435 |
|
|
|
(1,041 |
) |
|
|
551 |
|
|
|
(381 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
(411 |
) |
|
$ |
(998 |
) |
|
$ |
(3,072 |
) |
|
$ |
138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. NET INCOME (LOSS) PER COMMON SHARE
Basic and diluted net income (loss) per share is computed by dividing net income (loss) by the
weighted-average number of common shares outstanding for the reporting period. For both the three
and nine months ended September 30, 2009, 1.8 million outstanding options to purchase common shares
were anti-dilutive and have been excluded from the diluted weighted average share computation. For
the three and nine months ended September 30, 2008, common stock equivalents of 0.1 million and 0.8
million, respectively, are included in the diluted weighted average number of shares outstanding.
For both the three and nine months ended September 30, 2008, 1.3 million and 0.6 million,
respectively, of outstanding options to purchase common shares were anti-dilutive and have been
excluded from the diluted weighted average share computation.
11
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
5. VENDOR FINANCING:
Outstanding obligations under vendor financing arrangements consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Inventory and working capital financing agreements: |
|
|
|
|
|
|
|
|
United States |
|
$ |
15,083 |
|
|
$ |
23,885 |
|
Europe |
|
|
13,687 |
|
|
|
16,422 |
|
|
|
|
|
|
|
|
Total |
|
$ |
28,770 |
|
|
$ |
40,307 |
|
|
|
|
|
|
|
|
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 IPS products in the United States, providing financing for eligible IPS inventory
and certain receivables up to $30.5 million through its expiration in March 2010. As of September
30, 2009, Supplies Distributors had $3.5 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, PFS is required to maintain a minimum Subordinated
Note receivable balance from Supplies Distributors of $5.0 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% (3.75% as of September 30, 2009). The facility also
includes a monthly service fee. Given the structure of this facility and as outstanding balances,
which represent inventory purchases, are repaid within twelve months, 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 subsidiary has a short-term credit facility with IBM Belgium
Financial Services S.A. (IBM Belgium) to finance its distribution of IPS products in Europe. The
asset based credit facility with IBM Belgium provides up to 16.0 million euros (approximately $23.4
million) in inventory financing and cash advances based on eligible inventory and accounts
receivable through its expiration in March 2010. As of September 30, 2009, Supplies Distributors
European subsidiaries had 0.8 million euros ($1.2 million) of available credit. 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 subsidiary, 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 $5.0 million and a minimum shareholders equity of $18.0 million.
Borrowings under the credit facility accrue interest at Euribor plus 1.94% for cash advances, and,
after a defined free financing period, at Euribor plus 4.25% for inventory financings. As of
September 30, 2009, the interest rate was 2.4% on the $3.1 million of outstanding cash advances
(see Note 6) and 4.7% on the $13.7 million of outstanding inventory financings. Supplies
Distributors European subsidiary pays a monthly service fee on the commitment. Given the
structure of this facility and as outstanding inventory
12
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
financing balances are repaid within twelve months,
the Company has classified the outstanding inventory financing amounts under this facility as
accounts payable in the consolidated balance sheets.
6. DEBT AND CAPITAL LEASE OBLIGATIONS;
Outstanding obligations under debt and capital lease obligations consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Loan and security agreements, United States |
|
|
|
|
|
|
|
|
Supplies Distributors |
|
$ |
6,814 |
|
|
$ |
9,649 |
|
PFS |
|
|
3,400 |
|
|
|
6,000 |
|
Inventory and Working Capital Financing
Agreement, Europe (see Note 5) |
|
|
3,064 |
|
|
|
599 |
|
Credit facility eCOST |
|
|
|
|
|
|
|
|
Factoring agreement, Europe |
|
|
1,738 |
|
|
|
2,577 |
|
Taxable revenue bonds |
|
|
2,400 |
|
|
|
3,200 |
|
Master lease agreements |
|
|
4,003 |
|
|
|
4,657 |
|
Other |
|
|
682 |
|
|
|
520 |
|
|
|
|
|
|
|
|
Total |
|
|
22,101 |
|
|
|
27,202 |
|
Less current portion of long-term debt |
|
|
20,191 |
|
|
|
22,251 |
|
|
|
|
|
|
|
|
Long-term debt, less current portion |
|
$ |
1,910 |
|
|
$ |
4,951 |
|
|
|
|
|
|
|
|
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 September 30, 2009, Supplies Distributors had $2.9 million of available credit under
this agreement. The Wachovia facility expires on the earlier of March 2011 or the date on which the
parties to the IPS master distributor agreement no longer operate under the terms of such agreement
and/or IPS no longer supplies products pursuant to such agreement. Borrowings under the Wachovia
facility accrue interest at prime rate plus 0.25% to 0.75% (3.75% as of September 30, 2009) or
Eurodollar rate plus 2.5% to 3.0%, dependent on excess availability, as defined,. 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, PFS is required to maintain a Subordinated Note
receivable balance from Supplies Distributors of no less than $5.0 million and may not maintain
restricted cash of more 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 September 30, 2009 and December 31, 2008, these bank
accounts held $0.2 million and $0.1 million, respectively, which was restricted for payment to
Wachovia.
Loan and Security Agreement PFS
PFS has a Loan and Security Agreement (Comerica Agreement) with Comerica Bank (Comerica).
The Comerica Agreement provides for up to $10.0 million of eligible accounts receivable financing
through March 2010. Borrowings under the Comerica Agreement accrue interest at a defined rate,
which will generally be prime rate plus 2%, with a minimum of 4.5% (5.25% at September 30, 2009).
As of September 30, 2009, PFS had $3.8 million of available credit under this facility. 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
13
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
directly or
indirectly owned by PFSweb, Inc.), make capital expenditures, make investments and loans,
pledge assets, make changes to capital stock ownership structure, as well as financial covenants of
a minimum tangible net worth of $20 million, as defined, a minimum earnings before interest and
taxes, plus depreciation, amortization and non-cash compensation accruals, if any, as defined, and
a minimum liquidity ratio, as defined. The Comerica Agreement restricts the amount of the
subordinated note receivable from Supplies Distributors to a maximum of $6.5 million. Comerica has
provided approval for PFS to advance incremental amounts subject to certain cash inflows to PFS, as
defined, to certain of its subsidiaries and/or affiliates, including eCOST, if needed. The
Comerica Agreement is secured by all of the assets of PFS, as well as a guarantee of PFSweb, Inc.
Credit Facility eCOST
eCOST has an asset-based line of credit facility of up to $7.5 million from Wachovia, through
May 2011, which is collateralized by substantially all of eCOSTs assets. Borrowings under the
facility are limited to a percentage of eligible accounts receivable and inventory. Outstanding
borrowings under the facility bear interest at rates ranging prime rate plus 0.75% to 1.25% or
Eurodollar rate plus 3.0% to 4.0%, depending on eCOSTs financial results. There were no
outstanding borrowings as of September 30, 2009. As of September 30, 2009, eCOST had $1.0 million
of letters of credit outstanding and $1.3 million of available credit under this facility. In
connection with the line of credit, eCOST entered into a cash management arrangement whereby
eCOSTs operating amounts are considered restricted and swept and used to repay outstanding amounts
under the line of credit. As of September 30, 2009 and December 31, 2008, the restricted cash
amount was $0.2 million in each period. The credit facility restricts eCOSTs ability to, among
other things, merge, consolidate, sell assets, incur indebtedness, make loans, investments and
payments to subsidiaries, affiliates and related parties (including entities directly or indirectly
owned by PFSweb, Inc.), make investments and loans, pledge assets, make changes to capital stock
ownership structure, and requires a minimum tangible net worth of $0 million, as defined. PFSweb
has guaranteed all current and future obligations of eCOST under this line of credit.
Factoring Agreement
Supplies Distributors European subsidiary has a factoring agreement with Fortis Commercial
Finance N.V. (Fortis) to provide factoring for up to 7.5 million euros (approximately $11.0
million) of eligible accounts receivables through March 2010. As of September 30, 2009, Supplies
Distributors European subsidiary had approximately 0.9 million euros ($1.3 million) of available
credit under this agreement. Borrowings accrue interest at Euribor plus 1.2% (1.6% at September 30,
2009). 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
PFS 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 PFS for the purpose of financing the acquisition and
installation of equipment, machinery and related assets located in one of the Companys Southaven,
Mississippi distribution facilities. The Bonds bear interest at a variable rate (0.8% as of
September 30, 2009), as determined by Comerica Securities, as Remarketing Agent. PFS, 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 PFS and Comerica under which PFS is obligated to pay to Comerica all amounts drawn under
the Letter of Credit. The Letter of Credit has a maturity date of April 2010 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,
14
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
the Bonds
require future annual principal repayments of $800,000 in January of each year through 2012.
PFS obligations under the Reimbursement Agreement are secured by substantially all of the assets
of PFS, including restricted cash of $1.5 million and a Company parent guarantee.
Debt Covenants
To the extent the Company or any of its subsidiaries fail to comply with covenants applicable
to its debt or vendor financing obligations, including the monthly financial covenant requirements
and required level of shareholders 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, or if PFS service fee revenue declines from
expected levels and it is unable to reduce costs to correspond to such reduced revenue levels or if
Supplies Distributors revenue or gross profit declines from expected levels, such events may result
in a breach of 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 Companys 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. As of September 30, 2009, the Company was in
compliance with all debt covenants.
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 three years. The amounts outstanding under this Master Lease
Agreement ($1.9 million as of September 30, 2009 and $1.7 million as of December 31, 2008) are
secured by the related equipment.
The Company has two other master agreements with financing companies that provide for leasing
or financing transactions of certain equipment. The amounts outstanding under these agreements were
$1.1 million and $1.5 million as of September 30, 2009 and December 31, 2008, 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.
7. SEGMENT INFORMATION
The Company is organized into three operating segments: PFSweb is an international provider of
integrated eCommerce and business process outsourcing solutions and operates as a service fee
business; Supplies Distributors is a master distributor primarily of IPS products; and eCOST is a
multi-category online discount retailer of new, close-out and recertified brand-name merchandise.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Revenues (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PFSweb |
|
$ |
21,494 |
|
|
$ |
32,645 |
|
|
$ |
64,812 |
|
|
$ |
92,637 |
|
Supplies Distributors |
|
|
45,120 |
|
|
|
55,448 |
|
|
|
135,720 |
|
|
|
177,795 |
|
eCOST |
|
|
20,593 |
|
|
|
23,709 |
|
|
|
61,802 |
|
|
|
74,701 |
|
Eliminations |
|
|
(1,600 |
) |
|
|
(1,893 |
) |
|
|
(5,460 |
) |
|
|
(6,071 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
85,607 |
|
|
$ |
109,909 |
|
|
$ |
256,874 |
|
|
$ |
339,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Income (loss) from operations (in
thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PFSweb |
|
$ |
(2,375 |
) |
|
$ |
6 |
|
|
$ |
(5,760 |
) |
|
$ |
(289 |
) |
Supplies Distributors |
|
|
2,162 |
|
|
|
1,427 |
|
|
|
4,559 |
|
|
|
5,136 |
|
eCOST |
|
|
(239 |
) |
|
|
(748 |
) |
|
|
(1,187 |
) |
|
|
(2,399 |
) |
Eliminations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(452 |
) |
|
$ |
685 |
|
|
$ |
(2,388 |
) |
|
$ |
2,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
(in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PFSweb |
|
$ |
1,445 |
|
|
$ |
1,426 |
|
|
$ |
4,910 |
|
|
$ |
4,074 |
|
Supplies Distributors |
|
|
8 |
|
|
|
2 |
|
|
|
26 |
|
|
|
12 |
|
eCOST |
|
|
87 |
|
|
|
248 |
|
|
|
255 |
|
|
|
733 |
|
Eliminations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,540 |
|
|
$ |
1,676 |
|
|
$ |
5,191 |
|
|
$ |
4,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PFSweb |
|
$ |
1,563 |
|
|
$ |
2,987 |
|
|
$ |
3,408 |
|
|
$ |
4,467 |
|
Supplies Distributors |
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
77 |
|
eCOST |
|
|
11 |
|
|
|
96 |
|
|
|
113 |
|
|
|
194 |
|
Eliminations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,574 |
|
|
$ |
3,083 |
|
|
$ |
3,523 |
|
|
$ |
4,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Assets (in thousands): |
|
|
|
|
|
|
|
|
PFSweb |
|
$ |
62,405 |
|
|
$ |
108,436 |
|
Supplies Distributors |
|
|
69,245 |
|
|
|
82,280 |
|
eCOST |
|
|
13,585 |
|
|
|
13,489 |
|
Eliminations |
|
|
(20,574 |
) |
|
|
(59,684 |
) |
|
|
|
|
|
|
|
|
|
$ |
124,661 |
|
|
$ |
144,521 |
|
|
|
|
|
|
|
|
8. COMMITMENTS AND CONTINGENCIES
The Company receives municipal tax abatements in certain locations. During 2004 the Company
received notice from a municipality that it did not satisfy certain criteria necessary to maintain
the abatements. In December 2006, the Company received notice that the municipal authority planned
to make an adjustment to the Companys tax abatement. The Company has disputed the adjustment, but
if the dispute is not resolved favorably, additional taxes of approximately $1.7 million could be
assessed against the Company.
The Company is subject to claims in the ordinary course of business, including claims of
alleged infringement by the Company or its subsidiaries of the patents, trademarks and other
intellectual property rights of third parties. If the party asserting such claims commences
litigation, the Company could be required to defend itself or its customers. The Company is not
aware of any such litigation.
16
ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our results of operations and financial condition
should be read in conjunction with the unaudited interim condensed consolidated financial
statements and related notes appearing elsewhere in this Form 10-Q.
Forward-Looking Information
We have made forward-looking statements in this Report on Form 10-Q. These statements are
subject to risks and uncertainties, and there can be no guarantee that these statements will prove
to be correct. Forward-looking statements include assumptions as to how we may perform in the
future. When we use words like seek, strive, believe, expect, anticipate, predict,
potential, continue, will, may, could, intend, plan, target and estimate or
similar expressions, we are making forward-looking statements. You should understand that the
following important factors, in addition to those set forth above or elsewhere in this Report on
Form 10-Q and our Form 10-K for the year ended December 31, 2008, 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 International Business Machines Corporation
(IBM) and InfoPrint Solutions Company (IPS), a joint venture company owned by Ricoh and
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 reliance on third-party subcontracted services; |
|
|
|
|
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; |
|
|
|
|
taxation on the sale of our products; |
|
|
|
|
eCOSTs ability to maintain existing and build new relationships with manufacturers and
vendors and the success of its advertising and marketing efforts; |
|
|
|
|
eCOSTs ability to increase its sales revenue and sales margin and improve operating
efficiencies; and |
|
|
|
|
eCOSTs ability to generate 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
17
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.
Overview
We are an international provider of integrated eCommerce and business process outsourcing
solutions to major brand name companies seeking to optimize their supply chain efficiencies and to
extend their traditional business and e-commerce initiatives. Through our eCOST.com business unit,
we are a leading multi-category online discount retailer of new, close-out and recertified
brand-name merchandise. We derive our revenues from three business segments: as an eCommerce and
business process outsourcer, a master distributor and an online discount retailer.
First, in our eCommerce and business process outsourcing segment we derive our revenues from a
broad range of services, including professional consulting, technology collaboration, order
management, managed web hosting and web development, the development of an eCommerce technology
platform, 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, cosmetics, fragile goods,
contemporary home furnishings, apparel, aviation, telecommunications and consumer electronics,
among others.
In this eCommerce and 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
are included in pass-through revenue.
Our second business segment is a product revenue model. In this segment, we are a master
distributor of product for IPS 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 approximately $91 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 350,000 products in several primary
merchandise categories, primarily including computers, networking, electronics and entertainment,
TVs, plasmas and monitors, cameras and camcorders, memory and storage, For the Home and sports
and leisure.
Growth is a key element to achieving our future goals, including achieving and maintaining
sustainable profitability. Growth in our eCommerce and 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
18
larger contracts with brand-name companies within two primary target markets, online brands
and retailers and technology manufacturers, which, by nature, require a longer duration to close
but also have the potential to be higher-quality and longer duration engagements.
Growth within our product revenue business is primarily driven by our ability to attract new
master distributor arrangements with IPS 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 eCOSTs ability to
increase sales by generating organic growth, new customers 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.
Monitoring and controlling our expenditures and 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.
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 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.
19
Results of Operations
For the Interim Periods Ended September 30, 2009 and 2008
The following table sets forth certain historical financial information from our unaudited
interim condensed consolidated statements of operations expressed as a percent of net revenues (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net Revenues |
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
2009 |
|
|
2008 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue, net |
|
$ |
65.7 |
|
|
$ |
79.1 |
|
|
$ |
(13.4 |
) |
|
|
76.8 |
% |
|
|
72.0 |
% |
|
$ |
197.5 |
|
|
$ |
252.5 |
|
|
$ |
(55.0 |
) |
|
|
76.9 |
% |
|
|
74.4 |
% |
Service fee revenue |
|
|
13.1 |
|
|
|
22.9 |
|
|
|
(9.8 |
) |
|
|
15.3 |
% |
|
|
20.9 |
% |
|
|
42.6 |
|
|
|
65.0 |
|
|
|
(22.4 |
) |
|
|
16.6 |
% |
|
|
19.2 |
% |
Pass-through revenue |
|
|
6.8 |
|
|
|
7.9 |
|
|
|
(1.1 |
) |
|
|
7.9 |
% |
|
|
7.1 |
% |
|
|
16.8 |
|
|
|
21.6 |
|
|
|
(4.8 |
) |
|
|
6.5 |
% |
|
|
6.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
85.6 |
|
|
|
109.9 |
|
|
|
(24.3 |
) |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
256.9 |
|
|
|
339.1 |
|
|
|
(82.2 |
) |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue (1) |
|
|
59.6 |
|
|
|
73.1 |
|
|
|
(13.5 |
) |
|
|
90.7 |
% |
|
|
92.4 |
% |
|
|
180.7 |
|
|
|
233.5 |
|
|
|
(52.8 |
) |
|
|
91.5 |
% |
|
|
92.5 |
% |
Cost of service fee revenue (2) |
|
|
9.7 |
|
|
|
15.6 |
|
|
|
(5.9 |
) |
|
|
73.7 |
% |
|
|
68.1 |
% |
|
|
30.4 |
|
|
|
44.5 |
|
|
|
(14.1 |
) |
|
|
71.4 |
% |
|
|
68.6 |
% |
Pass-through cost of revenue
(3) |
|
|
6.8 |
|
|
|
7.9 |
|
|
|
(1.1 |
) |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
16.8 |
|
|
|
21.6 |
|
|
|
(4.8 |
) |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
|
76.1 |
|
|
|
96.6 |
|
|
|
(20.5 |
) |
|
|
88.8 |
% |
|
|
87.9 |
% |
|
|
227.9 |
|
|
|
299.6 |
|
|
|
(71.7 |
) |
|
|
88.7 |
% |
|
|
88.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue gross profit |
|
|
6.1 |
|
|
|
6.0 |
|
|
|
0.1 |
|
|
|
9.3 |
% |
|
|
7.6 |
% |
|
|
16.8 |
|
|
|
19.0 |
|
|
|
(2.2 |
) |
|
|
8.5 |
% |
|
|
7.5 |
% |
Service fee gross profit |
|
|
3.4 |
|
|
|
7.3 |
|
|
|
(3.9 |
) |
|
|
26.3 |
% |
|
|
31.9 |
% |
|
|
12.2 |
|
|
|
20.5 |
|
|
|
(8.3 |
) |
|
|
28.6 |
% |
|
|
31.4 |
% |
Pass-through gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit |
|
|
9.5 |
|
|
|
13.3 |
|
|
|
(3.8 |
) |
|
|
11.2 |
% |
|
|
12.1 |
% |
|
|
29.0 |
|
|
|
39.5 |
|
|
|
(10.5 |
) |
|
|
11.3 |
% |
|
|
11.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses |
|
|
10.0 |
|
|
|
12.7 |
|
|
|
(2.7 |
) |
|
|
11.7 |
% |
|
|
11.5 |
% |
|
|
31.4 |
|
|
|
37.0 |
|
|
|
(5.6 |
) |
|
|
12.2 |
% |
|
|
10.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
(0.5 |
) |
|
|
0.6 |
|
|
|
(1.1 |
) |
|
|
(0.4) |
% |
|
|
0.6 |
% |
|
|
(2.4 |
) |
|
|
2.5 |
|
|
|
(4.9 |
) |
|
|
(0.9) |
% |
|
|
0.7 |
% |
Interest expense, net |
|
|
0.2 |
|
|
|
0.4 |
|
|
|
0.2 |
|
|
|
0.3 |
% |
|
|
0.4 |
% |
|
|
1.0 |
|
|
|
1.2 |
|
|
|
0.2 |
|
|
|
0.4 |
% |
|
|
0.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
(0.7 |
) |
|
|
0.2 |
|
|
|
(0.9 |
) |
|
|
(0.7) |
% |
|
|
0.2 |
% |
|
|
(3.4 |
) |
|
|
1.3 |
|
|
|
(4.7 |
) |
|
|
(1.3) |
% |
|
|
0.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense, net |
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.1 |
|
|
|
0.1 |
% |
|
|
0.2 |
% |
|
|
0.2 |
|
|
|
0.8 |
|
|
|
0.6 |
|
|
|
0.1 |
% |
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(0.8 |
) |
|
$ |
0.0 |
|
|
$ |
(0.8 |
) |
|
|
(0.8) |
% |
|
|
|
% |
|
$ |
(3.6 |
) |
|
$ |
0.5 |
|
|
$ |
(4.1 |
) |
|
|
(1.4) |
% |
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
% of net revenues represents the percent of Product revenue, net. |
|
(2) |
|
% of net revenues represents the percent of Service fee revenue. |
|
(3) |
|
% of net revenues represents the percent of Pass-through revenue. |
Product Revenue, net. eCOST product revenue was $20.6 million in the three months ended
September 30, 2009, a 13.1% decrease as compared to $23.7 million in the comparable quarter of the
prior year. The decrease is primarily due to a decline in sales in the business to consumer sales
channel during the three month period compared to prior year primarily resulting from the impact of
the global economic environment. eCOST product revenue was $61.8 million in the nine months ended
September 30, 2009, a 17.3% decrease as compared to $74.7 million in the comparable quarter of the
prior year. The decrease in the nine month period is primarily due to a decline in sales in the
business to business channel resulting from the impact of the global economic environment as well
as eCOSTs reduced emphasis on this lower margin channel.
Supplies Distributors product revenue of $45.1 million decreased $10.3 million, or 18.6%, in
the three months ended September 30, 2009 as compared to the same quarter of the prior year.
Product revenue of $135.7 million decreased $42.1 million, or 23.7%, in the nine months ended
September 30, 2009 as compared to the same period of the prior year. The decreases are primarily
due to decreased sales volume resulting from the impact of the overall global economic pressures,
inventory rationalization by customers, reduced IBM and IPS printer
installations in certain categories as well as the negative impact of foreign exchange rates
compared to the same three and nine month periods in the prior year. In addition, product revenue
in the nine months ended September 30, 2009 was negatively impacted by a $1.4 million reduction of
revenue resulting from a customer bankruptcy.
20
Service Fee Revenue. Service fee revenue of $13.1 million decreased $9.8 million, or 42.7%,
in the three months ended September 30, 2009 as compared to the same quarter of the prior year.
Service fee revenue of $42.6 million decreased $22.4 million, or 34.4%, in the nine months ended
September 30, 2009 as compared to the same period of the prior year. The decrease in service fee
revenue for the three and nine months ended September 30, 2009 is primarily due to the non-renewal
of a certain U.S. government agency client relationship partially offset by increased service fees
generated from the impact of new service contract relationships. The change in service fee revenue
is shown below ($ millions):
|
|
|
|
|
|
|
|
|
|
|
Three |
|
|
Nine |
|
|
|
Months |
|
|
Months |
|
Period ended September 30, 2008 |
|
$ |
22.9 |
|
|
$ |
65.0 |
|
New service contract relationships, including
certain incremental projects under new
contracts |
|
|
2.6 |
|
|
|
5.2 |
|
Change in existing client service fees |
|
|
(0.1 |
) |
|
|
(25.8 |
) |
Terminated clients |
|
|
(12.3 |
) |
|
|
(1.8 |
) |
|
|
|
|
|
|
|
Period ended September 30, 2009 |
|
$ |
13.1 |
|
|
$ |
42.6 |
|
|
|
|
|
|
|
|
The
$22.7 million reduction of service fee revenue which resulted
from the non-renewal of the U.S. government agency client is included in the existing
client line item above for the nine month period as there was activity with this client in each of
the nine month periods. For the three month period, the $10.3 million
reduction of service fee revenue which resulted from the non-renewal is included in the terminated
client line item.
Cost of Product Revenue. The gross margin for eCOST was $1.8 million or 9.0% of product
revenue in the three months ended September 30, 2009 and $2.2 million or 9.2% of product revenue
during the comparable period of 2008. The decline in gross margin is primarily due to the customer
mix, which included a larger percentage of sales to the lower margin business-to-business segment
during the three months ended September 30, 2009 compared to the same period last year.
The gross margin for eCOST was $5.9 million or 9.5% of product revenue in the nine months
ended September 30, 2009 and $6.2 million or 8.5% of product revenue during the comparable period
of 2008. The increase in gross margin percentage in the nine month period is primarily due to the
customer mix, which included a larger percentage of sales to the higher margin business-to-consumer
channel compared to the same period last year. We are targeting an increasing percentage of eCOST
revenues to be generated from the business-to-consumer channel, yet we continue to strive to
improve our product sales and gross margin in our business-to-business channel. We expect overall
gross margin for eCOST in 2009 will continue to be higher than the prior year.
Supplies Distributors cost of product revenue decreased by $10.7 million, or 20.8%, to $40.9
million in the three months ended September 30, 2009 primarily as a result of decreased product
sales. The resulting gross profit margin was $4.2 million, or 9.4% of product revenue, for the
three months ended September 30, 2009 and $3.8 million, or 6.9% of product revenue, for the
comparable 2008 period. The three month period ending September 30, 2009 includes the impact of
certain incremental inventory cost related adjustments which are not expected to continue at the
same rate in future periods.
Supplies Distributors cost of product revenue decreased by $40.3 million, or 23.7%, to $124.8
million in the nine months ended September 30, 2009 primarily as a result of decreased product
sales. The resulting gross profit margin was $10.9 million, or 8.0% of product revenue, for the
nine months ended September 30, 2009 and $12.7 million, or 7.1% of product revenue, for the
comparable 2008 period. The 2008 and 2009 nine month periods include the impact of certain
incremental inventory cost adjustments. The 2009 margin percentage reflects an increase due to
incremental gross margin earned on product sales resulting from certain product price increases,
which is partially offset by a reduction in revenue resulting from a customer bankruptcy during the
first quarter of 2009.
Cost of Service Fee Revenue. Gross profit as a percentage of service fees was 26.3% in the
three months ended September 30, 2009, compared to 31.9% in the same period of the prior year.
Gross profit as a percentage of service fees was 28.6% in the nine months ended September 30, 2009,
compared to 31.4% in the same period of the prior year. The margins in the prior year periods
included the benefit of nine months of higher margin incremental project work associated with the
U.S. government contract relationship that was not renewed and was completed in the second quarter
of 2009.
21
We target to earn an overall average gross profit of 25-30% on existing and new service fee
contracts, 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 for the three months ended September 30, 2009 decreased
$2.7 million to $10.0 million from $12.7 million in the same 2008 period. As a percentage of total
net revenue, operating expenses were 11.7% in the three months ended September 30, 2009 and 11.5%
in the comparable period.
Operating expenses for the nine months ended September 30, 2009 decreased $5.6 million to
$31.4 million from $37.0 million in the same 2008 period. As a percentage of total net revenue,
operating expenses were 12.2% in the nine months ended September 30, 2009 and 10.9% in the
comparable period. The increase in percentage of total net revenue is primarily due to the
reduction in total net revenues which decreased at a higher rate than the reduction in operating
expenses. During the three and nine months ended September 30, 2009, we implemented certain cost
reductions, primarily including personnel related adjustments, as a result of the lower service fee
revenue and product revenue.
Income Taxes. We recorded a tax provision associated primarily with state income taxes and our
subsidiary Supplies Distributors Canadian and European operations. During the nine months ended
September 30, 2009, we recognized a tax benefit relating to our adoption of a new transfer pricing
policy between certain international subsidiaries. This policy adoption resulted from the
completion of a transfer pricing study and its approval by appropriate tax regulators. A valuation
allowance has been provided for the majority of our net deferred tax assets as of September 30,
2009 and December 31, 2008, which are primarily related to our net operating loss carryforwards,
and certain foreign deferred tax assets. We expect that we will continue to record an income tax
provision associated with state income taxes and Supplies Distributors Canadian and European
results of operations.
Liquidity and Capital Resources
Net cash provided by operating activities was $8.5 million for the nine months ended September
30, 2009, and primarily resulted from a $10.3 million decrease in accounts receivable, a decrease
in inventories of $10.7 million and cash income before working capital changes of $2.4 million
partially offset by a $13.5 million decrease in accounts payable, accrued expenses and other
liabilities and a $1.5 million increase in prepaid expenses, other receivables and other assets.
Net cash provided by operating activities was $11.3 million for the nine months ended
September 30, 2008, and primarily resulted from cash income before working capital changes of $6.8
million, a $5.6 million of increase in accounts payable, accrued expenses and other liabilities and
a $7.1 million decrease in accounts receivable. These benefits were offset by a $3.1 million
increase in prepaid expenses, other receivables and other assets and a $5.3 million increase in
inventories.
Net cash used in investing activities for the nine months ended September 30, 2009 and 2008
totaled $3.5 million and $4.6 million, respectively, resulting primarily from capital expenditures.
Capital expenditures have historically consisted primarily of additions to upgrade our
management information systems, development of customized technology solutions to support and
integrate with our service fee clients, and general expansion and upgrades to 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 our total investment in upgrades and additions to facilities
and information technology services for the upcoming twelve months will be approximately $3 to $5
million, although additional capital expenditures may be necessary to support the infrastructure
requirements of new clients. To maintain our current operating cash position, a portion of these
expenditures may be financed through client reimbursements, debt, operating or capital leases or
additional equity. We may elect to modify or defer a portion of such anticipated investments in
the event we do not obtain the financing or achieve the financial results necessary to support such
investments.
22
Net cash used in financing activities was approximately $5.8 million for the nine months ended
September 30, 2009, primarily representing payments on debt and capital lease obligations.
Net cash used in financing activities was approximately $6.2 million for the nine months ended
September 30, 2008, primarily representing payments on debt and capital lease obligations,
partially offset by an increase in restricted cash.
Our liquidity has been negatively impacted as a result of the merger with eCOST. Since the
merger, eCOST has experienced a net use of cash primarily due to operating losses. As a result,
PFSweb has had to support eCOSTs cash needs with the goal of reducing operating losses. The
amount of further cash needed to support eCOST operations will depend upon the financing available
as well as eCOSTs ability to improve its financial results. eCOSTs results, excluding the impact
of any non-cash impairment charges, have improved beginning in 2007, and we currently expect
improvement as a result of efforts to increase sales, improve product mix and further improve
operational efficiencies.
Our liquidity has also been negatively impacted by a decline in service fee revenue due to the
current general economic decline as well as the nonrenewal of a U.S. government agency contract and
certain other client contracts. To help minimize the impact of lower service fee revenue, we have
implemented certain measures that reduced variable costs and expenses and redeployed existing
infrastructure to other client activities. No assurance can be given that a further decline in
service fee revenue, will not have a material adverse effect upon our business, financial condition
or results of operations.
During the nine months ended September 30, 2009, our working capital decreased to $16.9
million from $21.4 million at December 31, 2008, partially due to the reclassification of our
taxable revenue bonds to short-term debt due to the April 2010 maturing of the related letters of
credit securing the taxable revenue bonds and the paydown of debt facilities. To obtain additional
financing in the future, in addition to our current cash position, we plan to evaluate various
financing alternatives including the sale of equity, utilizing capital or operating leases,
borrowing under our credit facilities, expanding our current credit facilities, entering into new
debt agreements or transferring to third parties a portion of our subordinated loan balance due
from Supplies Distributors. In conjunction with certain of these alternatives, we may be required
to provide certain letters of credit to secure these arrangements. We currently believe that our
cash position, financing available under our credit facilities and funds generated from operations
(including cost reductions related to the nonrenewal of our U.S. government contract) will satisfy
our presently known operating cash needs, our working capital and capital expenditure requirements,
our current debt and lease obligations, and additional loans to our subsidiaries Supplies
Distributors and eCOST, if necessary, for at least the next twelve months.
Recently, the credit markets and the financial services industry have been experiencing a
period of unprecedented turmoil and upheaval characterized by the bankruptcy, failure, collapse or
sale of various financial institutions and an unprecedented level of intervention from the United
States and foreign governments. While the ultimate outcome of these events cannot be predicted,
they may have a material adverse effect on our liquidity, financial condition, results of
operations and our ability to renew our credit facilities.
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 September
30, 2009, (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period |
|
|
|
|
|
|
|
Less than |
|
|
1-3 |
|
|
3-5 |
|
|
More than |
|
Contractual Obligations |
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
Debt and vendor financing |
|
$ |
48,883 |
|
|
$ |
47,748 |
|
|
$ |
958 |
|
|
$ |
177 |
|
|
$ |
|
|
Capital lease obligations |
|
|
2,464 |
|
|
|
1,573 |
|
|
|
888 |
|
|
|
3 |
|
|
|
|
|
Operating leases |
|
|
15,827 |
|
|
|
7,568 |
|
|
|
6,740 |
|
|
|
1,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
67,174 |
|
|
$ |
56,889 |
|
|
$ |
8,586 |
|
|
$ |
1,699 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In support of certain debt instruments and leases, as of September 30, 2009, we had $2.0
million of cash restricted for repayment to lenders. In addition, as described above, we have
provided collateralized
23
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 shareholders equity, and the
lenders accelerate the repayment of the credit facility obligations, we would be required to repay
all amounts outstanding thereunder. In particular, in the event eCOST is unable to increase its
revenue and/or gross profit from its present levels, or if PFS service fee revenue declines from
expected levels and it is unable to reduce costs to correspond to such reduced revenue levels or if
Supplies Distributors revenue or gross profit declines from expected levels, such events may result
in a breach of 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 September 30, 2009, we were in compliance with all debt covenants.
Further, any non-renewal of any of our credit facilities would have a material adverse impact on
our business and financial condition. We do not have any other material financial commitments,
although future client contracts may require capital expenditures and lease commitments to support
the services provided to such clients.
In the future, we may attempt to acquire other businesses or seek an equity or strategic
partner to generate capital or expand our services or capabilities in connection with our efforts
to grow our business. Acquisitions involve certain risks and uncertainties and may require
additional financing. Therefore, we can give no assurance with respect to whether we will be
successful in identifying businesses to acquire or an equity or strategic partner, whether we or
they will be able to obtain financing to complete a transaction, or whether we or they will be
successful in operating the acquired business.
To finance their distribution of IPS 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 16 million euros (approximately $23.4 million) with IBM Credit and IBM Belgium,
respectively. These agreements expire in March 2010.
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 2011 or the date on
which the parties to the IPS master distributor agreement no longer operate under the terms of such
agreement and/or IPS 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 $11.0
million) of eligible accounts receivables through March 2010.
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 $5.0 million, not maintain restricted cash of more than $5.0 million,
are restricted with regard to transactions with related parties, indebtedness and changes
24
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 and IPS,
excluding the trade payables that are financed by IBM credit.
Our subsidiary, Priority Fulfillment Services, Inc. (PFS), has a Loan and Security Agreement
(Agreement) with Comerica Bank (Comerica), which provides for up to $10 million of eligible
accounts receivable financing through March 2010. 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 capital expenditures, make investments and loans, pledge assets, make
changes to capital stock ownership structure, as well as financial covenants of a minimum tangible
net worth of $20 million, as defined, a minimum earnings before interest and taxes, plus
depreciation, amortization and non-cash compensation accruals, if any, as defined, and a minimum
liquidity ratio, as defined. The agreement also limits PFS ability to increase the subordinated
loan to Supplies Distributors to more than $6.5 million and permits PFS to advance incremental
amounts subject to certain cash inflows to PFS, as defined, to certain of its subsidiaries and/or
affiliates, including eCOST. 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, which is collateralized by substantially all of eCOSTs assets and expires in May 2011.
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 September 30, 2009, eCOST had $1 million of letters of credit outstanding and $1.3 million of
available credit under this facility. The credit facility restricts eCOSTs ability to, among
other things, merge, consolidate, sell assets, incur indebtedness, make loans, investments and
payments to subsidiaries, affiliates and related parties, make investments and loans, pledge
assets, make changes to capital stock ownership structure, as well as a minimum tangible net worth
of $0 million, as defined. PFSweb has guaranteed all current and future obligations of eCOST under
this line of credit.
In 2004, PFS incurred more than $5 million in capital expenditures to support incremental
business from a distribution facility in Southaven, MS. PFS 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 PFS the proceeds of the Bonds for the purpose of financing the acquisition and
installation of equipment, machinery and related assets located in the 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 PFS is obligated to pay to Comerica all
amounts drawn under the Letter of Credit. The Letter of Credit has a maturity date of April 2010
at which time, if not renewed or replaced, will result in a draw on the undrawn face amount
thereof. The amount outstanding on this Loan Agreement as of September 30, 2009 was $2.4 million.
PFS obligations under the Reimbursement Agreement are secured by substantially all of its assets,
including restricted cash of $1.5 million and a Company parent guarantee.
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 eCOSTs 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 eCOSTs ability to improve its financial results. Through September 30, 2009, we have
advanced $15.8 million to eCOST to fund eCOSTs cash flow requirements and have lender approval to
advance incremental amounts subject to certain cash inflows to PFS, as defined, to certain of our
subsidiaries and/or affiliates, including eCOST. 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
25
lenders or any terms or conditions required by our lenders in order to obtain such approval.
In addition, PFSweb has provided a guaranty of eCOSTs bank line of credit and certain eCOST vendor
trade payables.
We receive municipal tax abatements in certain locations. During 2004 we received notice from
a municipality that we did not satisfy certain criteria necessary to maintain the abatements. In
December 2006, we received notice that the municipal authority planned to make an adjustment to our
tax abatement. We have disputed the adjustment, but if the dispute is not resolved favorably,
additional taxes of $1.7 million could be assessed against us.
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 with our current client mix and their
current business volumes, our run rate service fee business activity will be at its lowest in the
quarter ended March 31. We anticipate 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 fourth fiscal quarter. We
believe 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.
Critical Accounting Policies
A description of our critical accounting policies, including goodwill and long-lived assets,
is included in Note 2 of the consolidated financial statements in our December 31, 2008 Annual
Report on Form 10-K.
26
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
We are exposed to various market risks including interest rates on financial instruments and
foreign exchange rates.
Interest Rate Risk
Our interest rate risk exists from our outstanding balances on our inventory and working
capital financing agreements, taxable revenue bonds, factoring agreement, and loan and security
agreements for the financing of inventory, accounts receivable and certain other receivables and
certain equipment, which amounted to $46.9 million at September 30, 2009. A 100 basis point
movement in interest rates would result in approximately $0.2 million annualized increase or
decrease in interest expense based on the outstanding balance of these agreements at September 30,
2009.
Foreign Exchange Risk
Currently, our foreign currency exchange rate risk is primarily limited to the Canadian Dollar
and the Euro. In the future, our foreign currency exchange risk may also include other currencies
applicable to certain of our international operations. We have and may continue, from time to
time, to employ derivative financial instruments to manage our exposure to fluctuations in foreign
currency rates. To hedge our net investment and intercompany payable or receivable balances in
foreign operations, we may enter into forward currency exchange contracts.
ITEM 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain a system of controls and procedures designed to provide reasonable assurance as to
the reliability of the financial statements and other disclosures included in this report, as well
as to safeguard assets from unauthorized use or disposition. We evaluated the effectiveness of the
design and operation of our disclosure controls and procedures under the supervision and with the
participation of management, including our Chief Executive Officer and Principal Financial and
Accounting Officer. Based upon the evaluation, our Chief Executive Officer and Principal Financial
and Accounting Officer concluded that our disclosure controls and procedures are effective in
timely alerting them to material information required to be included in our periodic Securities and
Exchange Commission filings. No significant changes were made to our internal controls or other
factors that could significantly affect these controls subsequent to the date of their evaluation.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal controls over financial reporting (as defined in
Rule 13(a)-15(f) or Rule 15-d-15(f) of the Exchange Act) during the three and nine months ended
September 30, 2009 that have materially affected, or are reasonable likely to materially affect,
our internal controls over financial reporting.
27
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
None.
ITEM 1A. Risk Factors
There have been no material changes with regard to the risk factors set forth in Part I, Item
1A of the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008 filed
with the Securities and Exchange Commissions on March 31, 2009 other than those as set forth below.
Risks Related to All Our Business Segments
Our business and future growth depend on our continued access to bank and commercial financing.
The current economic crisis may negatively impact our business, results of operations, financial
condition or liquidity.
Recently, the credit markets and the financial services industry have been experiencing a
period of unprecedented turmoil and upheaval characterized by the bankruptcy, failure, collapse or
sale of various financial institutions and an unprecedented level of intervention from the United
States and foreign governments. The current economic crisis could also adversely impact our
customers operations or ability to maintain liquidity which may negatively impact our business and
results of operations.
Our business and future growth currently depend on our ability to access bank and commercial
lines of credit. We currently depend on an aggregate of approximately $111 million in credit
facilities provided by various banks and commercial lenders. These facilities currently mature at
various dates through May 2011 and are secured by substantially all our assets. Our ability to
renew our credit facilities depends upon various factors, including the availability of bank loans
and commercial credit in general, as well as our financial condition and prospects. Therefore, we
cannot guarantee that these credit facilities will continue to be available beyond their current
maturity on reasonable terms or at all. Our inability to renew or replace our credit facilities or
find alternative financing would materially adversely affect our business, financial condition,
operating results and cash flow.
Risks Related to Our PFS and Supplies Distributors Operating Segments
Our business is subject to the risk of customer and supplier concentration.
For the nine months ended September 30, 2009 and 2008, a U.S. government agency, Xerox
Corporation and a consumer products company represented the source of approximately 9%, 16% and
11%, respectively, and approximately 40%, 10% and 6%, respectively, of our total service fee
revenue, excluding pass-through revenue. The loss of, or non-payment of invoices by, any or all
such clients would have a material adverse effect upon our business. In particular, the agreements
under which we provide services to such clients are terminable at will upon notice by such clients.
Our activity under our contract with the U.S. government agency concluded in the second quarter of
2009 and the nonrenewal of that contract, as well as the loss of, or non-payment of invoices by,
any or all of such other clients are likely to have a material adverse effect upon our business.
A substantial portion of our Supplies Distributors product revenue is generated by sales of
product purchased under master distributor agreements with IPS. These agreements are terminable at
will and no assurance can be given that IPS will continue the master distributor agreements with
Supplies Distributors. Supplies Distributors does not have its own sales force and relies upon IPS
sales force and product demand generation activities. Discontinuance of such activities would have
a material adverse effect on Supplies Distributors business and the Companys financial condition.
Sales by Supplies Distributors to two customers accounted for approximately 31% and 29% of
Supplies Distributors total product revenue for the nine months ended September 30, 2009 and 2008,
respectively (20% and 15% of our consolidated net revenues in each nine month period,
respectively). The loss of any one or both of such customers, or non-payment of any material amount
by these or any other customer, are likely to have a material adverse effect upon Supplies
Distributors business.
28
We subcontract a portion of our client services to third parties, and we are subject to various
risks and liabilities if such subcontractors do not provide the subcontracted services or provide
them in a manner which does not meet required service levels.
We currently, and may in the future, subcontract to one or more third parties a portion of our
end-to-end solution service offering. Although our end-to-end solution service clients generally
approve in advance the designation of the subcontractor and its provision of the subcontracted
services, under the terms of our contracts with our end-to-end solution service clients, we remain
liable to provide such subcontracted services and may be liable for the actions and omissions of
such subcontractors. In certain instances, our end-to-end solution service clients prepay in
advance a portion of the service fees payable in respect of the subcontracted services, and, under
certain circumstances, including our breach or the breach by our subcontractor of our or their
respective obligations, we are liable to refund all or a portion of such prepaid fees.
Consequently, in the event our subcontractor fails to provide the subcontracted services in
compliance with required services levels, or otherwise breaches its obligations, or discontinues
its business, whether as the result of bankruptcy, insolvency or otherwise, we may be required to
provide such services at a higher cost to us and may otherwise be liable for various costs and
expenses related to such event. In addition, any such failure may damage our reputation and
otherwise result in a material adverse affect upon our business and financial condition.
Risks Related to eCOST, our Online Discount Retailer Segment
Our business is subject to the risk of supplier concentration.
Our business is dependent on sales of Hewlett Packard (HP) and HP-related products, which
represented approximately 45% of eCOSTs net revenues (11% of our consolidated net revenues) in the
nine months ended September 30, 2009 and 48% of eCOSTs net revenues (11% of our consolidated net
revenues) in the comparable period of 2008. 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.
ITEM 2. Changes in Securities and Use of Proceeds
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
29
ITEM 6. Exhibits
a) Exhibits:
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Exhibit |
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|
No. |
|
Description of Exhibits |
3.1(1)
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Amended and Restated Certificate of Incorporation |
3.1.1
|
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Certificate of Amendment to Certificate of Incorporation of
PFSweb, Inc. |
3.2(1)
|
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Amended and Restated Bylaws |
31.1*
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Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
31.2*
|
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
32.1*
|
|
Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
(1) |
|
Incorporated by reference from PFSweb, Inc. Registration Statement on Form S-1 (Commission
File No. 333-87657) and Annual Report on Form 10-K for the Fiscal Year ended December 31, 2005
filed on March 31, 2006. |
|
* |
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Filed Herewith |
30
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 16, 2009
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PFSweb, Inc.
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By: |
/s/ Thomas J. Madden
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Thomas J. Madden |
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Chief Financial Officer,
Chief Accounting Officer,
Executive Vice President |
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31
exv31w1
EXHIBIT 31.1
CERTIFICATIONS OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
I, Mark Layton, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PFSweb, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) |
|
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared; |
|
b) |
|
Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles; |
|
c) |
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Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such evaluation; |
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d) |
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Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrants internal control over financial
reporting; and |
5. The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent 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
registrants ability to record, process, summarize, and report financial information; and |
|
b) |
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Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting. |
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Date:
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November 16, 2009 |
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By:
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/s/ Mark C. Layton |
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Chief Executive Officer
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exv31w2
EXHIBIT 31.2
CERTIFICATIONS OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
I, Tom Madden, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PFSweb, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) |
|
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared; |
|
b) |
|
Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles; |
|
c) |
|
Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such evaluation; |
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d) |
|
Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrants internal control over financial
reporting; and |
5. The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent 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
registrants ability to record, process, summarize, and report financial information; and |
|
b) |
|
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting. |
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Date:
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November 16, 2009 |
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By:
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/s/ Thomas J. Madden |
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Chief Financial Officer
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exv32w1
EXHIBIT 32.1
CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section
1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of PFSweb, Inc.
(the Company), does hereby certify that:
The Quarterly Report on Form 10-Q for the period ended September 30, 2009 (the Form 10-Q) of
the Company fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the
Securities Exchange Act of 1934 and the information contained in the Form 10-Q fairly presents, in
all material respects, the financial condition and results of operations of the Company as of, and
for, the periods presented in the Form 10-Q.
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November 16, 2009
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/s/ Mark C. Layton
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Mark C. Layton |
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Chief Executive Officer |
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November 16, 2009
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/s/ Thomas J. Madden |
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Thomas J. Madden |
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Chief Financial Officer |
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The foregoing certification is being furnished as an exhibit to the Form 10-Q pursuant to Item
601(b)(32) of Regulation S-K and Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and
(b) of Section 1350, Chapter 63 of Title 18, United States Code) and, accordingly, is not being
filed as part of the Form 10-Q for purposes of Section 18 of the Securities Exchange Act of 1934,
as whether made before or after the date hereof, regardless of any general incorporation language
in such filing.
A signed original of this written statement required by Section 906 has been provided to PFSweb,
Inc. and will be retained by PFSweb, Inc. and furnished to the Securities and Exchange Commission
or its staff upon request.