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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2000
OR
[ ] 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.
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(Exact name of registrant as specified in its charter)
DELAWARE 75-2837058
------------------------------- ---------------------------
(State of Incorporation) (I.R.S. Employer I.D. No.)
500 NORTH CENTRAL EXPRESSWAY, PLANO, TEXAS 75074
- ------------------------------------------- --------------------------
(Address of principal executive offices) (Zip Code)
Registrant's 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 X No
--- ---
At November 3, 2000 there were 17,870,000 shares of registrant's common stock
outstanding.
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PFSWEB, INC. AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 2000
INDEX
PART I. FINANCIAL INFORMATION PAGE
NUMBER
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Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 2000
(unaudited) and March 31, 2000.......................................... 3
Unaudited Interim Condensed Consolidated Statements of Operations for the
Three and Six Months Ended September 30, 2000 and 1999.................. 4
Unaudited Interim Condensed Consolidated Statements of Cash Flows for the
Six Months Ended September 30, 2000 and 1999............................ 5
Notes to Unaudited Interim Condensed Consolidated Financial Statements....... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................................... 10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.............................. 18
Item 6. Exhibits and Reports on Form 8-K ................................................ 18
SIGNATURES ............................................................................. 19
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PFSWEB, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
September 30, March 31,
2000 2000
------------ ------------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents .................................................... $ 22,218 $ 24,896
Accounts receivable, net of allowance for doubtful accounts of
$2,573 and $690 at September 30, 2000 and March 31, 2000, respectively ... 10,811 8,892
Other receivables ............................................................ -- 3,482
Prepaid expenses and other current assets .................................... 2,660 1,052
------------ ------------
Total current assets ........................................... 35,689 38,322
------------ ------------
NET PROPERTY AND EQUIPMENT ....................................................... 20,630 21,555
OTHER ASSETS ..................................................................... 138 528
------------ ------------
Total assets ................................................... $ 56,457 $ 60,405
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ............................................ $ 287 $ 274
Trade accounts payable ....................................................... 6,787 6,277
Accrued expenses ............................................................. 5,262 3,525
Payable to Daisytek .......................................................... -- 272
------------ ------------
Total current liabilities ...................................... 12,336 10,348
------------ ------------
CAPITAL LEASE OBLIGATIONS, less current portion .................................. 2,257 2,407
DEFERRED CREDIT .................................................................. 1,000 --
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000,000 shares authorized; none issued and
outstanding .............................................................. -- --
Common stock, $0.001 par value; 40,000,000 shares authorized;
17,870,000 shares issued and outstanding ................................. 18 18
Additional paid-in capital ................................................... 50,711 50,673
Retained deficit ............................................................. (9,539) (2,836)
Accumulated other comprehensive loss ......................................... (326) (205)
------------ ------------
Total shareholders' equity ..................................... 40,864 47,650
------------ ------------
Total liabilities and shareholders' equity ..................... $ 56,457 $ 60,405
============ ============
The accompanying notes are an integral part of these unaudited interim
condensed consolidated statements.
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PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- --------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
REVENUES:
Product revenue ........................................ $ -- $ 23,158 $ -- $ 55,778
Service fee revenue .................................... 12,563 3,813 25,933 7,004
------------- ------------- ------------- -------------
Total revenues ..................................... 12,563 26,971 25,933 62,782
------------- ------------- ------------- -------------
COSTS OF REVENUES:
Cost of product revenue ................................ -- 21,846 -- 52,639
Cost of service fee revenue (including $711 of net costs
from certain terminated contracts) .............. 10,169 2,667 18,814 4,898
------------- ------------- ------------- -------------
Total costs of revenues ............................ 10,169 24,513 18,814 57,537
------------- ------------- ------------- -------------
Gross profit ....................................... 2,394 2,458 7,119 5,245
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ............... 7,358 3,083 12,588 5,871
OTHER ...................................................... 1,800 -- 1,800 --
------------- ------------- ------------- -------------
Loss from operations ............................... (6,764) (625) (7,269) (626)
INTEREST EXPENSE (INCOME), net ............................. (316) 324 (632) 650
------------- ------------- ------------- -------------
Loss before income taxes ........................... (6,448) (949) (6,637) (1,276)
PROVISION (BENEFIT) FOR INCOME TAXES ....................... 17 (374) 66 (503)
------------- ------------- ------------- -------------
NET LOSS ................................................... $ (6,465) $ (575) $ (6,703) $ (773)
============= ============= ============= =============
NET LOSS PER SHARE:
Basic and diluted ..................................... $ (0.36) $ (0.04) $ (0.38) $ (0.05)
============= ============= ============= =============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic and diluted ..................................... 17,870 14,305 17,870 14,305
============= ============= ============= =============
The accompanying notes are an integral part of these unaudited interim
condensed consolidated statements.
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PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Six Months Ended
September 30,
-----------------------------
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................... $ (6,703) $ (773)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization ............................................ 3,550 634
Non-cash compensation expense ............................................ 37 --
Provision for doubtful accounts .......................................... 2,448 147
Deferred income tax provision ............................................ -- 71
Changes in operating assets and liabilities:
Accounts receivables ................................................. (4,261) 16,022
Inventories, net ..................................................... -- 29,864
Prepaid expenses and other current assets ............................ (1,257) (413)
Accounts payable, accrued expenses and other liabilities ............. 2,985 (31,547)
------------ ------------
Net cash provided by (used in) operating activities ............. (3,201) 14,005
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ......................................... (2,626) (6,232)
Decrease (increase) in other assets ......................................... 3,417 (344)
------------ ------------
Net cash provided by (used in) investing activities ............. 791 (6,576)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in long-term debt .................................................. (137) --
Decrease in payable to Daisytek, net ........................................ -- (6,710)
------------ ------------
Net cash used in financing activities ........................... (137) (6,710)
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EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS ........................... (131) (59)
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ............................ (2,678) 660
CASH AND CASH EQUIVALENTS, beginning of period .................................. 24,896 587
------------ ------------
CASH AND CASH EQUIVALENTS, end of period ........................................ $ 22,218 $ 1,247
============ ============
The accompanying notes are an integral part of these unaudited interim
condensed consolidated statements.
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PFSWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
1. OVERVIEW AND BASIS OF PRESENTATION:
In June 1999, Daisytek International Corporation ("Daisytek") created a
separate wholly-owned subsidiary named PFSweb, Inc. (the "Company" or "PFSweb"),
a Delaware corporation, to become a holding company for certain of Daisytek's
wholly-owned subsidiaries ("PFS") in contemplation of an initial public offering
(the "Offering") of PFSweb. Daisytek contributed $20,000 for 14,305,000 shares
of common stock of PFSweb. In December 1999, PFSweb sold 3,565,000 shares of
common stock at a price of $17 per share. Prior to the Offering, the financial
position, results of operations and cashflows of PFS were referred to as the
combined financial statements of PFSweb. Subsequent to the Offering and for all
periods presented herein, the financial position, results of operations and cash
flows of the Company are referred to as the consolidated financial statements of
PFSweb, Inc. and subsidiaries.
PFSweb is an international outsourcing provider of integrated business
infrastructure solutions to major brand name companies seeking to maximize their
supply chain efficiencies and to extend their e-commerce initiatives in the
United States, Canada, and Europe. The company offers such services as
professional consulting, e-marketplace logistics, order management, web-enabled
customer contact centers, customer lifecycle management, billing and collection
services, information management, and international distribution services.
On June 8, 2000, the Daisytek Board of Directors approved the separation of
PFSweb from Daisytek by means of a tax-free dividend of Daisytek's remaining
ownership of PFSweb after receiving a favorable ruling from the IRS to the
effect that the distribution by Daisytek of its shares of PFSweb stock would be
tax-free to Daisytek and to Daisytek's shareholders for U.S. federal income tax
purposes. The distribution of Daisytek's 14,305,000 shares of PFSweb occurred at
the close of business on July 6, 2000, to Daisytek shareholders of record as of
June 19, 2000.
On June 8, 2000, the Board of Directors declared a dividend distribution of
one preferred stock purchase right (a "Right") for each share of the Company's
common stock outstanding on July 6, 2000. Each Right entitles the registered
shareholders to purchase from the Company one one-thousandth of a share of
preferred stock at an exercise price of $67, subject to adjustment. The Rights
are not currently exercisable, but would become exercisable if certain events
occurred relating to a person or group acquiring or attempting to acquire 15
percent or more of the Company's outstanding shares of common stock. The Rights
expire on July 6, 2010, unless redeemed or exchanged by the Company earlier.
The unaudited interim condensed consolidated financial statements as of
September 30, 2000, and for the three and six months ended September 30, 2000
and 1999, have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC") and are unaudited. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations promulgated by the
SEC. For all periods presented, certain expenses reflected in the unaudited
interim condensed consolidated financial statements include an allocation of
certain Daisytek corporate expenses and infrastructure costs. Management
believes that the methods used to allocate expenses are reasonable, although the
cost of services could be higher if obtained from other sources. In addition,
certain service fee revenue and cost of service fee revenue have been reflected
by PFSweb for services subcontracted to PFSweb by Daisytek. The service fee
revenue, cost of service fee revenue and allocated expenses have been reflected
on bases that Daisytek and PFSweb consider to be a reasonable reflection of the
services provided and revenue earned by PFSweb and the utilization of services
provided by Daisytek and the benefit received by PFSweb. The financial
information included herein may not reflect the consolidated financial position,
operating results, and cash flows of PFSweb in the future or what it would have
been had PFSweb been a separate, stand-alone entity during the periods
presented.
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 Company's financial position as of September 30, 2000,
its results of operations for the three and six months ended September 30, 2000
and 1999 and its
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PFSWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
results of cash flows for the six months ended September 30, 2000 and 1999.
Results of the Company's operations for interim periods may not be indicative of
results for the full fiscal year.
Certain prior period data has been reclassified to conform to the current period
presentation. These reclassifications had no effect on previously reported net
income, shareholders' equity or cash flows.
2. COMPREHENSIVE LOSS (IN THOUSANDS):
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
Net loss ........................ $ (6,465) $ (575) $ (6,703) $ (773)
Comprehensive income adjustments:
Foreign currency translation
adjustment .............. (14) 11 (121) (46)
------------ ------------ ------------ ------------
Comprehensive loss .............. $ (6,479) $ (564) $ (6,824) $ (819)
============ ============ ============ ============
3. NET LOSS PER COMMON SHARE AND COMMON SHARE EQUIVALENT:
Basic and diluted net loss per common share attributable to PFSweb common
stock were determined based on dividing the loss available to common
stockholders by the weighted average number of common shares outstanding. For
purposes of this calculation, the 14,305,000 shares of PFSweb issued prior to
the Offering were treated as outstanding for the periods presented prior to the
Offering. There were no potentially dilutive securities outstanding during the
period presented prior to the Offering. During the three and six months ended
September 30, 2000, outstanding options to purchase common shares were
anti-dilutive and have been excluded from the weighted average share
computation.
4. TRANSACTIONS WITH DAISYTEK:
Until October 25, 2000, and for all periods presented prior to that date,
two of the Company's executive officers served as directors of Daisytek.
The Company's costs and expenses include allocations from Daisytek for
certain general administrative services including information technology,
financial, treasury, legal, insurance and other corporate functions as well as
certain costs of operations including facility charges. These allocations have
been estimated on bases that Daisytek and the Company consider to be a
reasonable reflection of the utilization of services provided or the benefit
received by the Company. The methods used for allocation of expenses from
Daisytek were either (i) percentage of: revenue, shipped orders, or number of
employees or (ii) management's best estimate. However, these allocations of
costs and expenses do not necessarily indicate the costs and expenses that would
have been or will be incurred by the Company on a stand-alone basis. Management
estimates that incremental selling, general and administrative expenses
associated with PFSweb operating as a stand-alone publicly traded company,
including executive management, overhead and public company costs, insurance and
risk management costs, and other costs would have been approximately $0.2
million for the three and six months ended September 30, 2000 and $0.5 million
and $1.0 million for the three and six months ended September 30, 1999,
respectively.
The Company's product revenue from sales to Daisytek was zero for the three
and six months ended September 30, 2000, and $3.1 million and $7.2 million for
the three and six months ended September 30, 1999, respectively.
During the quarter ended September 30, 1999 and in connection with the
restructuring of certain IBM master distribution agreements, the Company
transferred to Daisytek certain related product inventory,
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PFSWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
accounts receivable and accounts payable that it held under its prior
agreements. In consideration of this transfer, the Company received the net book
value of these assets and liabilities of approximately $20 million and reduced
its payable to Daisytek by a corresponding amount.
In conjunction with the successful completion of the Offering, PFSweb
entered into agreements with Daisytek, including a tax sharing agreement, a
transaction management services agreement, a transition services agreement and a
master separation agreement which are expected to have a significant impact on
the financial position and results of operations of PFSweb.
In addition, included in the financial statements are service fee revenues
and cost of service fee revenue which have been reflected by PFSweb for certain
services subcontracted to PFSweb by Daisytek under Daisytek's contractual
agreements.
Service fee revenues charged to Daisytek under (i) the new IBM contracts,
entered into during the quarter ended September 30, 1999, (ii) terms of the
transaction management services agreement with Daisytek and (iii) for certain
subcontracted services, were $6.9 million and $14.4 million for the three and
six months ended September 30, 2000, respectively. Service fee revenues
applicable to the subcontracted services were $0.2 million and $0.4 million for
the three and six months ended September 30, 1999.
5. COSTS FROM CERTAIN TERMINATED CONTRACTS
Included in cost of service fee revenue are costs from certain terminated
contracts, net of termination fees to be collected by the Company. Costs that
resulted from the contract terminations primarily include employee severance
costs, asset impairments from fixed assets which were specific to terminated
contracts and have no further value to PFSweb, and certain unbillable or
uncollectible amounts receivables from, and liabilities applicable to, clients
who have terminated contracts.
6. OTHER EXPENSE
Other expense represents a foreign currency transaction loss as a result of
the recent devaluation in the Euro.
7. DEFERRED CREDIT
The deferred credit included in the accompanying financial statements
represents the long-term portion of a governmental grant received by the Company
related to investments in fixed assets made in its Belgium operation. The total
grant of approximately $1.4 million has been deferred and will be recognized as
a reduction to depreciation expense over the same period over which the costs of
the related fixed assets will be depreciated. The current unrecognized portion
of the grant is included in accrued expenses. The grant was earned by the
company upon the achievement of certain minimum capital expenditure
requirements. However, the Company could be required to refund some or all of
the grant if a certain minimum workforce is not maintained through December
2004. The Company's management believes that the likelihood of a refund of this
grant is remote.
8. STOCK OPTIONS
In connection with the completion of the spin-off, as of July 6, 2000, all
outstanding Daisytek options ("Daisytek Pre-spin Options") were adjusted and/or
replaced with Daisytek options (the "Daisytek Post-spin Options") and PFSweb
options (the "PFSweb Post-spin Options," and together with the Daisytek
Post-spin Options, the "Replacement Options").
In general, the exercise price and the number of shares subject to each of
the Replacement Options was established pursuant to a formula designed to ensure
that: (1) the aggregate "intrinsic value" (i.e. the difference between the
exercise price of the option and the market price of the common stock underlying
the option) of the Replacement Option did not exceed the aggregate intrinsic
value of the outstanding Daisytek Pre-spin Option which is replaced by such
Replacement Option immediately prior to the spin-off, and (2)
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PFSWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
the ratio of the exercise price of each option to the market value of the
underlying stock immediately before and after the spin-off was preserved.
Substantially all of the other terms and conditions of each Replacement
Option, including the time or times when, and the manner in which, each option
is exercisable, the duration of the exercise period, the permitted method of
exercise, settlement and payment, the rules that apply in the event of the
termination of employment of the employee, the events, if any, that may give
rise to an employee's right to accelerate the vesting or the time or exercise
thereof and the vesting provisions, is the same as those of the replaced
Daisytek Pre-spin Option, except that option holders who are employed by one
company are permitted to exercise, and are subject to all of the terms and
provisions of, options to acquire shares in the other company as if such holder
was an employee of such other company.
As a result of the spin-off, on July 6, 2000, 3,479,697 PFSweb Post-spin
Options, with a weighted average exercise price of $7.26, were issued to
Daisytek and PFSweb officers, directors and employees.
In addition to the stock options discussed above, during the three months
ended September 30, 2000, stock options to purchase 1,210,700 shares of common
stock, with a weighted average exercise price of $1.97, were issued to PFSweb
officers, directors and employees.
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ITEM 2. MANAGEMENT'S 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, our Prospectus dated
December 2, 1999, and our Form 10-K for the year ended March 31, 2000, could
cause our results to differ materially from those expressed in our
forward-looking statements. These factors include:
o our reliance on the fees generated by the transaction volume or product
sales of our clients;
o the impact of strategic alliances;
o trends in the market for our services;
o trends in e-commerce;
o whether we can continue and manage growth;
o changes in the trend toward outsourcing;
o increased competition;
o effects of changes in profit margins;
o the unknown effects of possible system failures and rapid changes in
technology;
o trends in government regulation; and
o our relationship with and separation from Daisytek, our former parent
corporation.
In addition, some forward-looking statements are based upon assumptions as
to future events that may not prove to be accurate. Therefore, actual
outcomes and results may differ materially from what is expected or
forecasted in such forward-looking statements. We undertake no obligation
to update publicly any forward-looking statement for any reason, even if
new information becomes available or other events occur in the future.
There may be additional risks that we do not currently view as material or
that are not presently known.
OVERVIEW
PFSweb is an international outsourcing provider of integrated business
infrastructure solutions to major brand name companies seeking to maximize their
supply chain efficiencies and to extend their e-commerce initiatives. We derive
our revenues from a broad range of services, including professional consulting,
e-marketplace logistics, order management, web-enabled customer contact centers,
customer lifecycle management, billing and collection services, payment
processing and fraud protection, data mining, and international 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
our warehouses and include real-time inventory management and
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customized picking, packing and shipping of our clients' customer orders. We
currently provide infrastructure and distribution solutions to over 30 clients
that operate in a range of vertical markets, including apparel, computer
products, printers, cosmetics, fragile goods, and consumer electronics, among
others.
Our service fee revenue is typically charged on 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 contracts with our clients 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
passed on to our clients (and, in many cases, our clients' customers) and are
not reflected in our revenue or expense. Historically, our services have also
included purchasing and reselling client product inventory. In these
arrangements, our product revenue was recognized at the time product was
shipped. During the quarter ended September 30, 1999, our primary client
agreement under which we previously purchased and sold inventory was
restructured to provide transaction management services only on a service fee
basis.
Our expenses are comprised of:
o on an historical basis prior to September 30, 1999, cost of
product revenue, which consisted of the purchase price of product
sold and net freight costs;
o cost of service fee revenue, which 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; and
o selling, general and administrative expenses, which consist
primarily of compensation and related expenses for sales and
marketing staff, executive, management and administrative
personnel and other overhead costs, including certain occupancy
and information technology costs and depreciation and
amortization expenses. In addition, on an historical basis,
certain direct contract costs related to our IBM master
distributor agreements have been reflected as selling and
administrative expenses.
ADJUSTED FINANCIAL PRESENTATION
We believe our historical financial statements for the three and six months
ended September 30, 1999 may not provide a meaningful comparison to our current
and future financial statements for the reasons described below.
In 1996, we entered into an agreement with the printer supplies division of
IBM. Under this agreement, we provided IBM with various transaction management
services, such as customer contact center services and order fulfillment and
distribution. We also served as an IBM master distributor of printer supply
products. Under this master distributor arrangement, we purchased the printer
supply products from IBM and resold them to IBM customers. Following our initial
agreement with the printer supplies division, we entered into several similar
agreements with other divisions of IBM, both in the U.S. and Europe, and
expanded our then existing agreements to include more product lines.
During the quarter ended September 30, 1999, we, Daisytek and IBM entered
into new agreements to conform to our current business model. Under these new
agreements, Daisytek acts as the master distributor of the IBM products and we
will continue to provide various transaction management services. As part of
this restructuring, we transferred to Daisytek the IBM product inventory, which
we held as the master distributor, together with our customer accounts
receivable and our accounts payable owing to IBM in respect of the product
inventory. The purpose of the restructuring was to separate the master
distributor and transaction management responsibilities between ourselves and
Daisytek so that each could focus on its core competencies.
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As a result of the restructuring of the IBM agreements, our historical
financial statements for the three and six months ended September 30, 1999 may
not provide a meaningful comparison to our current and future financial
statements. This is because, as a master distributor under our prior agreements,
we recorded revenue as product revenue as we sold the product to IBM customers.
Similarly, our gross profit was based upon the difference between our revenue
from product sales and the cost of purchasing the product from IBM. Currently,
however, our revenue under the new IBM agreements is service fee revenue that is
payable by Daisytek and is based upon a variable percentage of Daisytek's gross
profit arising from its IBM product sales.
As a result of this restructuring of our IBM agreements, our total revenues
arising under our new IBM agreements will be reduced, as compared to the total
revenues arising under the prior IBM agreements. However, our gross profit
margin as a percent of service fee revenue under the new IBM agreements is
anticipated to be significantly higher as compared to our gross profit margin as
a percent of product revenue under the prior IBM agreements.
In addition, upon completion of the Offering in December 1999, we entered
into a new transaction management services agreement with Daisytek. Under this
agreement, we receive service fee revenue based upon a percentage of Daisytek's
shipped product revenue. Consequently, the service fee revenue we receive from
Daisytek under this new agreement have been recognized only subsequent to the
Offering.
Additionally, upon completion of the Offering, Daisytek transferred to us
fixed assets and other assets which are used in our business. We paid to
Daisytek a portion of the net proceeds of the Offering and assumed capital and
operating lease obligations related to these assets.
We have set forth below an adjusted presentation of our total current and
historical revenue and cost of revenue. This presentation shows, retroactively,
what our service fee revenue and cost of service fee revenue for the three and
six months ended September 30, 1999, would have been if (i) our modified
agreement with IBM and our new agreement with Daisytek had been in effect for
this period, and (ii) our acquisition of the assets and liabilities that
Daisytek transferred to us upon completion the IPO had occurred as of the
beginning of the three and six months ended September 30, 1999. This
presentation also shows what our results of operations over the three and six
months ended September 30, 2000 would have been excluding approximately $0.5
million of previously deferred revenue associated with terminated contracts and
approximately $1.8 million of incremental costs primarily related to net costs
of certain terminated contracts which we do not believe will be incurred in
future periods. The incremental costs, net of termination fees to be collected
by the Company, include (i) previously deferred costs associated with terminated
contracts, (ii) costs that resulted from the contract terminations such as
employee severance costs and asset impairments from fixed assets which were
specific to terminated contracts and have no further value to PFSweb, (iii)
costs related to certain unbillable or uncollectible amounts receivable from,
and liabilities applicable to, clients who have terminated contracts and (iv)
other incremental costs incurred during the three months ended September 30,
2000, related to the terminated contracts.
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(IN THOUSANDS) (IN THOUSANDS)
(UNAUDITED) (UNAUDITED)
Service fee revenue ................ $ 12,073 $ 9,831 $ 25,443 $ 19,081
Cost of service fee revenue ........ 8,335 6,280 16,980 12,107
Service fee gross profit ........... 3,738 3,551 8,463 6,974
Service fee gross profit margin .... 31.0% 36.1% 33.3% 36.5%
Based on this presentation, our largest clients for the three months ended
September 30, 2000 were Daisytek (42.2%) and IBM (14.2%), and our largest
clients for the three months ended September 30, 1999 would have been Daisytek
(55.7%) and IBM (18.2%). Based on this presentation, our largest clients for the
six months ended September 30, 2000 were Daisytek (42.6%) and IBM (13.8%), and
our largest clients for the six months ended September 30, 1999 would have been
Daisytek (52.2%) and IBM (13.4%). In calculating these percentages, we have
considered IBM as our client under our new IBM agreements even though the
service fees arising under these agreements are paid by Daisytek.
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We based the adjusted operating data on available information and certain
estimates and assumptions. We believe that such assumptions provide a reasonable
basis for presenting our results, adjusting for the transactions described
above. This adjusted financial information does not reflect what our operating
income or net income would have been during the period presented or what our
results of operations may be in the future.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Product revenue .................................... 0.0% 85.9% 0.0% 88.8%
Service fee revenue ................................ 100.0 14.1 100.0 11.2
---------- ---------- ---------- ----------
Total revenues .............................. 100.0 100.0 100.0 100.0
Cost of product revenue (as % of product revenue) .. 0.0 94.3 0.0 94.4
Cost of service fee revenue (as % of service fee
revenue) ....................................... 80.9 69.9 72.5 69.9
---------- ---------- ---------- ----------
Total costs of revenues ..................... 80.9 90.9 72.5 91.6
---------- ---------- ---------- ----------
Gross profit ....................................... 19.1 9.1 27.5 8.4
Selling, general and administrative expenses ....... 58.6 11.4 48.6 9.4
Other .............................................. 14.3 -- 6.9 --
---------- ---------- ---------- ----------
Loss from operations ............................... (53.8) (2.3) (28.0) (1.0)
Interest (income) expense, net ..................... (2.4) 1.2 (2.4) 1.0
---------- ---------- ---------- ----------
Loss before income taxes ........................... (51.4) (3.5) (25.6) (2.0)
Provision (benefit) for income taxes ............... 0.1 (1.4) 0.2 (0.8)
---------- ---------- ---------- ----------
Net loss ........................................... (51.5)% (2.1)% (25.8)% (1.2)%
========== ========== ========== ==========
RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
We believe our historical financial statements for the three and six months
ended September 30, 1999 may not provide a meaningful comparison to our current
and future financial statements for the reasons described above.
Product Revenue. Product revenue was zero for the three and six months ended
September 30, 2000. Product revenue was $23.2 and $55.8 million for the three
and six months ended September 30, 1999. As stated above, during the quarter
ended September 30, 1999, we, Daisytek and IBM entered into new agreements
applicable to all of our IBM relationships. As a result of these agreements, the
activities performed under these contracts since that date were accounted for as
service fee revenue as opposed to product revenue. In future periods, we do not
expect to have any product revenue.
Service Fee Revenue. Service fee revenue was $12.6 million for the three
months ended September 30, 2000, as compared to $3.8 million during the three
months ended September 30, 1999, an increase of $8.8 million or 229.5%. Service
fee revenue was $25.9 million for the six months ended September 30, 2000, as
compared to $7.0 million during the six months ended September 30, 1999, an
increase of $18.9 million or 270.3%. The increases in service fee revenues over
prior periods were due to the further expansion of existing contracts, the
restructuring of all the IBM contracts, and new service contract relationships,
including our new transaction management services agreement with Daisytek which
commenced on the completion of the Offering in December 1999. Service fee
revenue from existing contracts increased $1.5 million and new service contract
relationships added $6.8 million for the three months ended September 30, 2000.
Service fee revenue from existing contracts increased $0.9 million and new
service contract relationships added $17.5 million for the six months ended
September 30, 2000. Service fee revenue for the three and six months ended
September 30, 2000, also includes approximately $0.5 million of previously
deferred revenue associated with terminated contracts. For the three and six
months ended September 30, 2000, service fee revenue totaling $6.9 million and
$14.4 million, respectively, included fees earned from Daisytek under our new
transaction management services agreement, effective as of the Offering, our
new IBM contracts that, prior to the September 1999 quarter, would have been
reported as product revenue, and for certain subcontracted services. As a result
of certain contract terminations with annualized service fee revenues of
approximately $7 to $10
13
14
million and a longer implementation cycle associated with new larger contracts,
service fee revenue performance is expected to be generally flat or declining
for the next few quarters.
Cost of Product Revenue. Cost of product revenue was zero for the three and
six months ended September 30, 2000. Cost of product revenue as a percent of
product revenue was 94.3% and 94.4% during the three and six months ended
September 30, 1999, respectively. The resulting gross profit margin was 5.7% and
5.6% during the three and six months ended September 30, 1999, respectively. As
a result of the new IBM arrangements, we do not expect to incur any cost of
product revenue in future periods.
Cost of Service Fee Revenue. Cost of service fee revenue was $10.2 million
for the three months ended September 30, 2000, as compared to $2.7 million
during the three months ended September 30, 1999, an increase of $7.5 million or
281.3%. The resulting service fee gross profit margin was 19.1% during the three
months ended September 30, 2000, and 30.1% during the three months ended
September 30, 1999. Cost of service fee revenue was $18.8 million for the six
months ended September 30, 2000, as compared to $4.9 million during the six
months ended September 30, 1999, an increase of $13.9 million or 284.1%. The
resulting service fee gross profit margin was 27.5% during the six months ended
September 30, 2000, and 30.1% during the six months ended September 30, 1999.
During both the three and six months ended September 30, 2000, cost of service
fee revenue increased related to a large number of new service contract
relationships. In addition, cost of service fee revenue for the three and six
months ended September 30, 2000 increased over prior quarters due to
approximately $0.5 million of previously deferred costs associated with
terminated contracts, $0.7 million of costs primarily related to net costs of
certain contract terminations, other incremental costs related to the terminated
contract, and certain infrastructure costs that, due to late notification of
reduced volume expectations by certain clients, we were unable to reduce.
Gross Profit. Gross profit was $2.4 million, or 19.1% of revenues, for the
three months ended September 30, 2000, as compared to $2.5 million, or 9.1% of
revenues, for the three months ended September 30, 1999. Gross profit was $7.1
million, or 27.5% of revenues, for the six months ended September 30, 2000, as
compared to $5.2 million, or 8.4% of revenues, for the six months ended
September 30, 1999. The changes in total gross profit, for the three and six
month comparable periods, resulted primarily from the further expansion of
existing contracts and new service contract relationships, including our new
transaction management services agreement with Daisytek, which commenced on the
completion of the Offering in December 1999, being offset by incremental costs
primarily related to net costs of certain terminated contracts. The increases in
gross profit as a percentage of revenues resulted from the restructuring of all
of the IBM contracts into service fee contracts, which typically have a higher
gross profit margin as a percent of revenue as compared to the gross profit
margin as a percent of revenue earned under the IBM master distributor
agreements. In the Adjusted Financial Presentation data above for the three and
six months ending September 30, 2000, we have provided an adjusted presentation
of our gross profit margin excluding deferred revenue and incremental costs
primarily related to net costs of certain terminated contracts. We have also
provided, retroactively, what our service fee gross profit margin would have
been for the three and six months ended September 30, 1999, considering the
impact of our modified agreement with IBM and our new agreement with Daisytek
and our acquisition of the assets and liabilities which Daisytek transferred to
us upon completion of the Offering.
Selling, General and Administrative and Other Expenses. SG&A expenses were
$7.4 million for the three months ended September 30, 2000, or 58.6% of
revenues, as compared to $3.1 million, or 11.4% of revenues, for the three
months ended September 30, 1999. SG&A expenses were $12.6 million for the six
months ended September 30, 2000, or 48.6% of revenues, as compared to $5.9
million, or 9.4% of revenues, for the six months ended September 30, 1999.
Primarily, as a result of the restructuring of the IBM agreements and the
related reduction in product revenue, SG&A expenses as a percentage of total
revenue are higher for the three and six month comparable periods. SG&A expenses
increased as a result of costs incurred to support the higher transaction
volumes under both new and existing contracts, incremental investments in
resources and technology to support our continued growth, public company costs
and incremental costs attributable to client disputed items. In the future,
while we anticipate that we will continue to incur incremental costs as we make
further SG&A investments in our sales, marketing, and technology areas to
support our growth strategies, we are targeting our SG&A, as a percent of sales,
to decrease as we increase our service fee revenue. For the three and six months
ended September 30, 2000, we also incurred other costs of $1.8 million related
to a foreign currency transaction loss as a result of the recent devaluation in
the Euro.
Interest (Income) Expense, Net. Interest income was $0.3 million for the
three months ended September 30, 2000 as compared to interest expense of $0.3
million for the three months ended September 30, 1999.
14
15
Interest income was earned for the three months ended September 30, 2000 at a
weighted average interest rate of 6.5%. The weighted average interest rate
charged for the three months ended September 30, 1999 was 6.5%. Interest income
was $0.6 million for the six months ended September 30, 2000 as compared to
interest expense of $0.6 million for the six months ended September 30, 1999.
Interest income was earned for the six months ended September 30, 2000 at a
weighted average interest rate of 6.3%. The weighted average interest rate
charged for the six months ended September 30, 1999 was 6.3%. In December 1999,
we used a portion of the funds from the Offering to repay our intercompany
payable balance to Daisytek and purchase certain assets from Daisytek. The
remaining available cash will be used for future capital expenditures, general
working capital needs and possible acquisitions. To the extent that we have
excess cash available, we expect to generate interest income in future periods.
Income Taxes. Our income tax provision as a percentage of pre-tax loss was
0.3% for the three months ended September 30, 2000 as compared to an income tax
benefit of 39.4% for the three months ended September 30, 1999. Our income tax
provision as a percentage of pre-tax loss was 1.0% for the six months ended
September 30, 2000 as compared to and income benefit of 39.4% for the six months
ended September 30, 1999. Although we had a pre-tax loss for the three and six
months ended September 30, 2000, we recorded an income tax provision associated
with a pre-tax income from our Canadian operations. Because of our limited
operating history in Europe, it is uncertain whether it is "more likely than
not" that we will be able to utilize our European losses in future periods and
therefore we did not record an income tax benefit for those pre-tax losses. To
the extent we have future losses in Europe, it will continue to negatively
impact our income tax provision. Additionally, since we ceased to be included in
Daisytek's consolidated return due to the completion of the spin-off and we have
not established a sufficient history of earnings, on a stand-alone basis, a
valuation allowance has been provided for the remaining net deferred income tax
asset as of September 30, 2000. For the three and six months ended September 30,
1999, the income tax percentage is impacted by the differences between our U.S.
and foreign subsidiaries, which are taxed at different rates.
LIQUIDITY AND CAPITAL RESOURCES
As a subsidiary of Daisytek, we have historically funded our business
through intercompany borrowings from Daisytek. As a result of the Offering, we
repaid such intercompany borrowings. Since Daisytek is prohibited from advancing
funds to us, except in the normal course of business, in order to provide
additional financing flexibility in the future above the over $22 million
current cash position, we plan to seek our own credit facility. Working capital
decreased to $23.4 million at September 30, 2000 from $28.0 million at March 31,
2000 as a result of funding operations and capital expenditures. We currently
believe that the remaining net proceeds from the Offering and funds generated
from operations will satisfy our working capital and capital expenditure
requirements for the next twelve months.
Net cash used in financing activities was $0.1 million for the six months
ended September 30, 2000, representing payments on our capital lease
obligations. Net cash used in financing activities was $6.7 million for the six
months ended September 30, 1999. This usage relates to the reduction in the
intercompany payable arising primarily from the transfer of the IBM related
working capital assets from us to Daisytek in conjunction with the new IBM
agreements, which was partially offset by capital expenditures and incremental
financing of one of our client's inventory.
Cash flows used in operating activities totaled $3.2 million during the six
months ended September 30, 2000. For the six months ended September 30, 2000,
the net cash used in operating activities primarily reflected increases in
prepaid expenses and accounts receivables partially offset by increases in
accounts payable and accrued expenses. Cash flows provided by operating
activities totaled $14.0 million during the six months ended September 30, 1999.
For the six months ended September 30, 1999, the net cash provided by operating
activities primarily reflected a reduction in accounts payable and accrued
expenses of $31.5 million, accounts receivable of $16.0 million and inventory of
$29.9 million. These reductions primarily related to the transfer of the IBM
related working capital assets from us to Daisytek in conjunction with the new
IBM agreements.
Cash provided by investing activities was $0.8 million for the six months
ended September 30, 2000 as compared to cash used of $6.6 million for the six
months ended September 30, 1999. During the six months ended September 30, 2000,
our capital expenditures of $2.6 million for property and equipment
15
16
were more than offset by a $3.4 million reduction of third-party financed
inventory. Cash used in investing activities for the six months ended September
30, 1999 was primarily related to the $6.2 million of capital expenditures.
Capital expenditures have historically consisted primarily of additions to
upgrade our management information systems, including our Internet-based
customer tools, other methods of e-commerce and general expansion of our
facilities, both domestic and foreign. We expect to incur significant capital
expenditures in order to support new contracts and anticipated future growth
opportunities. We anticipate that our total investment in upgrades and additions
to facilities and information technology services for fiscal year 2001 will be
approximately $7 to $10 million. Some of these expenditures may be financed
through operating or capital leases.
We may consider entering into forward exchange contracts in order to
hedge our net investment in our Canadian or European operations or in other
international countries in which we establish a presence, although no assurance
can be given that we will be able to do so on acceptable terms.
In the future, we may attempt to acquire other businesses to expand our
services or capabilities in connection with our efforts to grow our business. We
currently have no binding agreements to acquire any such businesses. Should we
be successful in acquiring other businesses, we may require additional
financing. Acquisitions involve certain risks and uncertainties. Therefore, we
can give no assurance with respect to whether we will be successful in
identifying businesses to acquire, whether we will be able to obtain financing
to complete an acquisition, or whether we will be successful in operating the
acquired business.
Currently, the Company believes that it is operating with and incurring
costs applicable to excess capacity in both its North American and European
operations. The Company estimates that it will require approximately $15 million
of quarterly service fee revenue to more fully utilize its capacity, cover
existing operating costs and incremental stand-alone public company costs and
reach profitability. Based on current sales and contract implementation cycles,
the Company is targeting that profitability will be achieved in the last half of
calendar year 2001. No assurance can be given that the Company can achieve such
service fee revenue levels, or that, if achieved, the Company will be profitable
in any particular fiscal period.
SEASONALITY
The seasonality of our business is dependent upon the seasonality of our
clients' business and their sale of their products. Accordingly, our management
must rely upon the projections of our clients in assessing quarterly
variability. We believe that with our current client mix, our business activity
is expected to be slightly more significant in the quarter ended December 31.
We believe that results of operations for a quarterly period may not be
indicative of the results for any other quarter or for the full year.
INFLATION
Management believes that inflation has not had a material effect on our
operations.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires that an entity
recognize all derivative financial instruments as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. If certain conditions are met, a derivative may be used to hedge certain
types of transactions, including foreign currency exposures of a net investment
in a foreign operation. SFAS No. 133 is effective for fiscal years beginning
after June 15, 2000, with initial application as of the beginning of an entity's
fiscal quarter. The Company is currently evaluating the provisions of SFAS No.
133 and its effect on the accounting treatment of its financial instruments.
During 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition." SAB No. 101 requires that
revenue generally is realized or realizable and earned when all of the following
criteria are met: (i) persuasive evidence of an arrangement exists, (ii)
delivery has occurred or services have been rendered, (iii) the seller's price
to the buyer is fixed or
16
17
determinable, and (iv) collectibility is reasonably assured. SAB No. 101 is
effective for the Company's fourth quarter ending March 31, 2001. The Company is
currently evaluating the provisions of SAB No. 101 and its effect, if any, on
the Company's financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The carrying value of the Company's financial instruments, which include
cash and cash equivalents and a capital lease obligation, approximate their fair
values based on current market prices and rates.
Currently, our foreign currency exchange rate risk is primarily limited to
Canadian dollars and the Euro. In the future, we believe our foreign currency
exchange risk will also include other currencies applicable to certain of our
international operations. In order to mitigate foreign currency rate risk, we
will consider entering into forward currency exchange contracts to hedge our net
investment and long-term intercompany payable balances.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 15, 2000, the Company held its Annual Meeting of Stockholders. The
following matters were acted upon and votes cast or withheld:
1. Election of two Class I directors:
Peter P. J. Vikanis:
For: 12,917,874 Withheld: 2,083,548
James F. Reilly
For: 12,916,202 Withheld: 2,085,220
2. Approval of Company's 2000 Employee Stock Purchase Plan:
For: 12,763,181 Against: 2,167,665 Abstained: 70,596
3. Appointment of Arthur Andersen LLP as auditors for 2001 fiscal year:
For: 13,114,603 Against: 1,414,915 Abstained: 411,904
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
3.1* Amended and Restated Certificate of Incorporation
3.2* Amended and Restated Bylaws
27.1** Financial Data Schedule for the six months ended
September 30, 2000
- ----------
* Incorporated by reference from PFSweb, Inc. Registration Statement on
Form S-1 (Commission File No. 333-87657).
** Filed herewith.
b) Reports on Form 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 2000
PFSweb, Inc.
By: /s/ Thomas J. Madden
-----------------------------
Thomas J. Madden
Chief Financial Officer,
Chief Accounting Officer,
Executive Vice President
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1* Amended and Restated Certificate of Incorporation
3.2* Amended and Restated Bylaws
27.1** Financial Data Schedule for the six months ended September
30, 2000
- ----------
* Incorporated by reference from PFSweb, Inc. Registration Statement on
Form S-1 (Commission File No. 333-87657).
** Filed herewith.
5
1,000
6-MOS
MAR-31-2001
SEP-30-2000
22,218
0
13,384
2,573
0
35,689
26,256
5,626
56,457
12,336
2,544
0
0
18
40,846
56,457
25,933
25,933
18,814
18,814
11,940
2,448
(632)
(6,637)
66
(6,703)
0
0
0
(6,703)
(0.38)
(0.38)
