e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2008
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from _________to _________
Commission File Number 000-28275
PFSweb, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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75-2837058 |
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(State of Incorporation)
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(I.R.S. Employer I.D. No.) |
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500 North Central Expressway, Plano, Texas
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75074 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (972) 881-2900
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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 May 10, 2008 there were 46,586,180 shares of registrants common stock outstanding.
PFSWEB, INC. AND SUBSIDIARIES
Form 10-Q
March 31, 2008
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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March 31, |
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December 31, |
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2008 |
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2007 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
13,721 |
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$ |
14,272 |
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Restricted cash |
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4,166 |
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2,021 |
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Accounts receivable, net of allowance for doubtful accounts of $1,205
and $1,483 at March 31, 2008 and December 31, 2007, respectively |
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43,666 |
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48,493 |
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Inventories, net of reserves of $2,278 and $2,080 at March 31, 2008
and December 31, 2007,
respectively |
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50,539 |
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46,392 |
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Other receivables |
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14,901 |
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10,372 |
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Prepaid expenses and other current assets |
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3,356 |
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2,608 |
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Total current assets |
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130,349 |
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124,158 |
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PROPERTY AND EQUIPMENT, net |
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11,412 |
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11,918 |
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IDENTIFIABLE INTANGIBLES |
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5,623 |
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5,824 |
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GOODWILL |
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15,362 |
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15,362 |
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OTHER ASSETS |
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845 |
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911 |
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Total assets |
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$ |
163,591 |
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$ |
158,173 |
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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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$ |
13,683 |
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$ |
22,238 |
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Trade accounts payable |
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72,560 |
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56,975 |
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Accrued expenses |
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20,727 |
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22,438 |
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Total current liabilities |
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106,970 |
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101,651 |
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LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current
portion |
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5,313 |
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6,378 |
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OTHER LIABILITIES |
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1,167 |
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1,302 |
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Total liabilities |
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113,450 |
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109,331 |
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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, $0.001 par value; 75,000,000 shares authorized;
46,579,564 and 46,574,189 shares issued at March 31, 2008
and December 31, 2007, respectively; and 46,493,264 and
46,487,889 outstanding at March 31, 2008 and December 31,
2007, respectively |
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47 |
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47 |
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Additional paid-in capital |
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92,292 |
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92,084 |
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Accumulated deficit |
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(45,324 |
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(45,738 |
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Accumulated other comprehensive income |
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3,211 |
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2,534 |
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Treasury stock at cost, 86,300 shares |
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(85 |
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(85 |
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Total shareholders equity |
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50,141 |
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48,842 |
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Total liabilities and shareholders equity |
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$ |
163,591 |
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$ |
158,173 |
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The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
3
PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
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Three Months Ended |
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March 31, |
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2008 |
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2007 |
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REVENUES: |
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Product revenue, net |
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$ |
90,291 |
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$ |
80,457 |
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Service fee revenue |
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20,812 |
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16,962 |
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Pass-through revenue |
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7,366 |
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6,988 |
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Total net revenues |
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118,469 |
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104,407 |
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COSTS OF REVENUES: |
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Cost of product revenue |
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83,979 |
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74,771 |
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Cost of service fee revenue |
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13,844 |
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12,664 |
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Pass-through cost of revenue |
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7,366 |
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6,988 |
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Total costs of revenues |
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105,189 |
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94,423 |
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Gross profit |
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13,280 |
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9,984 |
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SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES, including stock based
compensation expense of $201 and $209 in
the three months ended March 31, 2008 and
2007, respectively |
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12,094 |
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11,201 |
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MERGER INTEGRATION EXPENSE |
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150 |
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AMORTIZATION OF IDENTIFIABLE INTANGIBLES |
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202 |
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204 |
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Total operating expenses |
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12,296 |
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11,555 |
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Income (loss) from operations |
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984 |
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(1,571 |
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INTEREST EXPENSE, NET |
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330 |
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584 |
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Income (loss) before income taxes |
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654 |
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(2,155 |
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INCOME TAX EXPENSE, NET |
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240 |
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206 |
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NET INCOME (LOSS) |
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$ |
414 |
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$ |
(2,361 |
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NET INCOME (LOSS) PER SHARE: |
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Basic |
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$ |
0.01 |
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$ |
(0.05 |
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Diluted |
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$ |
0.01 |
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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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46,492 |
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46,475 |
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Diluted |
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47,199 |
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46,475 |
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The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
4
PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
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Three Months Ended |
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March 31, |
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2008 |
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2007 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income (loss) |
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$ |
414 |
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$ |
(2,361 |
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Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities: |
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Depreciation and amortization |
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1,581 |
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1,994 |
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Provision for doubtful accounts |
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67 |
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Provision for excess and obsolete inventory |
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324 |
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102 |
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Deferred income taxes |
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(23 |
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4 |
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Stock-based compensation |
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201 |
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209 |
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Changes in operating assets and liabilities: |
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Restricted cash |
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(441 |
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(92 |
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Accounts receivable |
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4,819 |
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472 |
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Inventories, net |
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(3,211 |
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739 |
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Prepaid expenses, other receivables and other assets |
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(4,096 |
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(2,208 |
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Accounts payable, accrued expenses and other liabilities |
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11,815 |
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(354 |
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Net cash provided by (used in) operating activities |
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11,383 |
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(1,428 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchases of property and equipment |
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(664 |
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(789 |
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Decrease in restricted cash |
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150 |
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Net cash used in investing activities |
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(664 |
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(639 |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Payments on capital lease obligations |
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(518 |
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(465 |
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Decrease (increase) in restricted cash |
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(1,704 |
) |
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1,743 |
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Proceeds from issuance of common stock |
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7 |
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Proceeds from (payments on) debt, net |
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(9,409 |
) |
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296 |
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Net cash provided by (used in) financing activities |
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(11,624 |
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1,574 |
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EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS |
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354 |
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(1 |
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NET DECREASE IN CASH AND CASH EQUIVALENTS |
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(551 |
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(494 |
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CASH AND CASH EQUIVALENTS, beginning of period |
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14,272 |
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15,066 |
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CASH AND CASH EQUIVALENTS, end of period |
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$ |
13,721 |
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$ |
14,572 |
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SUPPLEMENTAL CASH FLOW INFORMATION |
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Non-cash investing and financing activities: |
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Property and equipment acquired under capital leases |
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$ |
69 |
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$ |
1,237 |
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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. Additionally, Supplies Distributors does not
have its own sales force and relies upon outsourced sales force and product demand generation
services. 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 computer hardware and software, home
electronics, digital imaging, watches and jewelry, housewares, DVD movies, video games and
cellular/wireless. eCOST carries products from leading manufacturers such as Sony, JVC, Canon,
Hewlett-Packard, Denon, Onkyo, 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 usage of cash primarily due to losses incurred. As a
result, the Company has had to support eCOSTs cash needs with the goal of achieving a stabilized
operational position and profitable performance. The amount of additional cash needed to support
eCOST operations
6
PFSweb, Inc. and Subsidiaries
Notes To Unaudited Interim Condensed Consolidated Financial Statements
will depend upon working capital requirements, bank 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 reported improvement in eCOSTs financial results during 2007
and the first quarter of 2008 and currently expects continued 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 future 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 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 March 31, 2008, and
for the three months ended March 31, 2008 and 2007, 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 March 31, 2008, its
results of operations for the three months ended March 31, 2008 and 2007 and its cash flows for the
three months ended March 31, 2008 and 2007. Results of the Companys operations for interim periods
may not be indicative of results for the full fiscal year.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets
and liabilities. The recognition and allocation of certain revenues and operating expenses in these
consolidated financial statements also require management estimates and assumptions. The Companys
estimates and assumptions are continually evaluated based on available information and experience.
Because the use of estimates is inherent in the financial reporting process, actual results could
differ from estimates.
7
PFSweb, Inc. and Subsidiaries
Notes To Unaudited Interim Condensed Consolidated Financial Statements
Investment in Affiliates
Priority Fulfillment Services, Inc. (PFS), a wholly-owned subsidiary of PFSweb, has made
advances to Supplies Distributors which 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
lower than $5.5 million without prior
approval of the Companys lenders. As of March 31, 2008, the outstanding balance of the
Subordinated Note was $5.5 million. The Subordinated Note is eliminated in the Companys
consolidated financial statements.
PFS has also made advances to eCOST, which aggregated $8.4 million as of March 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 or increased above $11.8 million without
the approval of PFS lender. PFSweb has also advanced to eCOST $4.7 million as of March 31, 2008.
Subject to certain restrictions, PFS has received the approval of its lender to advance an
additional $3.3 million to certain of its subsidiaries, including eCOST, if needed.
Concentration of Business and Credit Risk
The Companys service fee revenue is generated under contractual service fee relationships
with multiple client relationships. No clients/customers exceeded 10% of consolidated revenue
during the three months ended March 31, 2008. A summary of the customer and client concentrations
is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
March 31, |
|
|
2008 |
|
2007 |
Product Revenue (as a percentage of Product
Revenue): |
|
|
|
|
|
|
|
|
Customer 1 |
|
|
11 |
% |
|
|
9 |
% |
Customer 2 |
|
|
10 |
% |
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
Service Fee Revenue (as a percentage of
Service Fee Revenue): |
|
|
|
|
|
|
|
|
Client 1 |
|
|
39 |
% |
|
|
24 |
% |
Client 2 |
|
|
10 |
% |
|
|
13 |
% |
Client 3 |
|
|
7 |
% |
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
Accounts Receivable: |
|
|
|
|
|
|
|
|
Client/Customer 1 |
|
|
5 |
% |
|
|
11 |
% |
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.
The Company has multiple arrangements with IBM and IPS and is dependent upon the continuation
of such arrangements. Substantially all of the Supplies Distributors revenue is generated by its
sale of product purchased from IPS. 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 IPS business units
and a term master lease agreement. Supplies Distributors also relies upon outsourced sales force
and product demand generation services and the termination 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 its financial position, results of operations and
cash flows. Sales of HP and HP-related products represented 57% of eCOSTs net revenues (13% of
the Companys consolidated total net revenues) in the three months ended March 31, 2008. Sales of
these products in the three month period ended March 31, 2007 were 51% and 11% of eCOSTs net
revenues and the
8
PFSweb, Inc. and Subsidiaries
Notes To Unaudited Interim Condensed Consolidated Financial Statements
Companys consolidated net revenues, respectively.
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 estimated 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 $4.2 million and
$4.6 million, net of accumulated amortization of approximately $11.2 million and $10.5 million, at
March 31, 2008 and December 31, 2007, respectively.
Long-Lived Assets
The Company reviews long-lived assets for impairment periodically, but at a minimum annually,
or whenever events or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Long-lived assets include property, intangible assets, goodwill and certain
other assets. Recoverability of assets is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured as the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Fair value would be determined
using appraisals, discounted cash flow analysis or similar valuation techniques. 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.
Cash Paid
The Company made payments for interest of approximately $0.4 million and $0.7 million during
the three months ended March 31, 2008 and 2007, respectively. Income taxes of approximately
$43,000 and $0.4 million were paid by the Company during the three months ended March 31, 2008 and
2007, respectively.
3. COMPREHENSIVE INCOME (LOSS) (in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Net income (loss) |
|
$ |
414 |
|
|
$ |
(2,361 |
) |
Other comprehensive loss: |
|
|
|
|
|
|
|
|
Foreign currency translation
Adjustment |
|
|
677 |
|
|
|
67 |
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
1,091 |
|
|
$ |
(2,294 |
) |
|
|
|
|
|
|
|
4. NET INCOME (LOSS) PER COMMON SHARE
9
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
Basic and diluted net loss per share is computed by dividing net loss by the weighted-average
number of common shares outstanding for the reporting period. For the three months ended March 31,
2008, common stock equivalents of 0.7 million outstanding options are included in the diluted
weighted average number of shares outstanding. For the three months ended March 31, 2008,
outstanding options of 2.2 million to purchase common shares were anti-dilutive and have been
excluded from the weighted diluted average share computation. For the three months ended March 31,
2007, outstanding options of 5.9 million to purchase common shares were antidilutive and have been
excluded from the weighted diluted average share computation for each period. Warrants not included
in the calculation of diluted net loss per share for the three months ended March 31, 2007 were 0.6
million.
5. VENDOR FINANCING:
Outstanding obligations under vendor financing arrangements consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Inventory and working capital financing agreements: |
|
|
|
|
|
|
|
|
United States |
|
$ |
21,060 |
|
|
$ |
23,667 |
|
Europe |
|
|
22,602 |
|
|
|
13,340 |
|
|
|
|
|
|
|
|
Total |
|
$ |
43,662 |
|
|
$ |
37,007 |
|
|
|
|
|
|
|
|
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 for certain receivables up to $30.5 million through its expiration in March 2009. As of March
31, 2008, Supplies Distributors had $3.4 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 $5.5 million and a minimum shareholders
equity of $18.0 million. Borrowings under the credit facility accrue interest, after a defined free
financing period, at prime rate plus 0.5% (5.75% as of March 31, 2008). 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 subsidiaries have a short-term credit facility with IBM
Belgium Financial Services S.A. (IBM Belgium) to finance their distribution of IPS products in
Europe. The asset based credit facility with IBM Belgium provides up to 16.0 million Euros
(approximately $25.3 million) in financing for purchasing IPS inventory and for certain receivables
through its expiration in March 2009. As of March 31, 2008, Supplies Distributors European
subsidiaries had 4.9 million euros ($7.7 million) of available credit under this facility. The
credit facility contains cross default provisions, various restrictions upon the ability of
Supplies Distributors and its European subsidiaries to, among others, merge, consolidate, sell assets, incur indebtedness, make loans and payments to related parties (including
entities directly or indirectly owned by PFSweb, Inc.), provide guarantees, make investments and
loans, pledge assets, make changes to capital stock ownership structure and pay dividends, as well
as financial covenants, such as annualized revenue to working capital, net profit after tax to
revenue, and total liabilities to tangible net worth, as defined, and are secured by certain of the
assets of Supplies
10
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
Distributors European subsidiaries, as well as collateralized guaranties of
Supplies Distributors and PFSweb. Additionally, PFSweb is required to maintain a minimum
Subordinated Note receivable balance from Supplies Distributors of $5.5 million and a minimum
shareholders equity of $18.0 million. Borrowings under the credit facility accrue interest, after
a defined free financing period, at Euribor plus 1.5% (5.9% as of March 31, 2008). Supplies
Distributors European subsidiaries pay a monthly service fee on the commitment. 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.
7. DEBT AND CAPITAL LEASE OBLIGATIONS;
Outstanding obligations under debt and capital lease obligations consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Loan and security agreements, United States |
|
|
|
|
|
|
|
|
Supplies Distributors |
|
$ |
8,003 |
|
|
$ |
10,353 |
|
PFS |
|
|
2,300 |
|
|
|
7,225 |
|
Credit facility eCOST |
|
|
|
|
|
|
|
|
Factoring agreement, Europe |
|
|
330 |
|
|
|
1,212 |
|
Taxable revenue bonds |
|
|
3,200 |
|
|
|
4,000 |
|
Master lease agreements |
|
|
4,716 |
|
|
|
5,033 |
|
Other |
|
|
491 |
|
|
|
793 |
|
|
|
|
|
|
|
|
Total |
|
|
19,040 |
|
|
|
28,616 |
|
Less current portion of long-term debt |
|
|
13,727 |
|
|
|
22,238 |
|
|
|
|
|
|
|
|
Long-term debt, less current portion |
|
$ |
5,313 |
|
|
$ |
6,378 |
|
|
|
|
|
|
|
|
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 March 31, 2008, Supplies Distributors had $4.4 million of available credit under this
agreement. The Wachovia facility expires on the earlier of March 29, 2009 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 or Eurodollar rate plus 1.75% to 2.25%, dependent on excess
availability, as defined. The interest rate as of March 31, 2008 was 6.0% for $4.0 million of
outstanding borrowings and 5.1% for $4.0 million of outstanding borrowings. This agreement
contains cross default provisions, various restrictions upon the ability of Supplies Distributors
to, among other things, merge, consolidate, sell assets, incur indebtedness, make loans and
payments to related parties (including entities directly or indirectly owned by PFSweb, Inc.),
provide guarantees, make investments and loans, pledge assets, make changes to capital stock
ownership structure and pay dividends, as well as financial covenants, such as minimum net worth,
as defined, and is secured by all of the assets of Supplies Distributors, as well as a
collateralized guaranty of PFSweb. Additionally, PFSweb is required to maintain a Subordinated Note
receivable balance from Supplies Distributors of no less than $5.5 million and restricted cash of
less than $5.0 million, and is restricted with regard to transactions with related parties,
indebtedness and changes to capital stock ownership structure. Supplies Distributors has entered
into blocked account agreements with its banks and Wachovia pursuant to which a security interest
was granted to Wachovia for all U.S. and Canadian customer remittances received in specified bank
accounts. At March 31, 2008 and December 31, 2007, these bank accounts held $1.5 million and $1.4
million, respectively, which was restricted for payment to Wachovia.
11
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
Loan and Security Agreement PFSweb
PFS has a Loan and Security Agreement (Comerica Agreement) with Comerica Bank (Comerica).
The Comerica Agreement provides for up to $10.0 million of eligible accounts receivable financing
(Working Capital Advances) through March 2009. Outstanding Working Capital Advances, $2.3 million
as of March 31, 2008, accrue interest at prime rate plus 1% (6.25% as of March 31, 2008). As of
March 31, 2008, PFS had $6.7 million of available credit under this facility. In April 2008, the
Company repaid the $2.3 million of Working Capital Advances outstanding as of March 31, 2008. The
Comerica Agreement contains cross default provisions, various restrictions upon PFS ability to,
among other things, merge, consolidate, sell assets, incur indebtedness, make loans and payments to
related parties (including entities directly or indirectly owned by PFSweb, Inc.), make 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. Subject to certain restrictions, Comerica has provided approval for PFS to
advance an additional $3.3 million to certain of its subsidiaries, 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 2009, which is collateralized by substantially all of eCOSTs assets. Borrowings under the
facility are limited to a percentage of eligible accounts receivable and inventory. Outstanding
amounts under the facility bear interest at rates ranging from the prime rate to the prime rate
plus 0.5% (5.75% as of March 31, 2008), depending on eCOSTs financial results. As of March 31,
2008, eCOST had $1.6 million of letters of credit outstanding and $1.9 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 March 31,
2008 and December 31, 2007, the restricted cash amount was
$0.9 million and $0.5 million, respectively. 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 $11.9
million) of eligible accounts receivables through March 2009. As of March 31, 2008, Supplies
Distributors European subsidiary had approximately 2.4 million euros ($3.8 million) of available
credit under this agreement. Borrowings accrue interest at Euribor plus 0.6% (5.0% at March 31,
2008). 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 PFSweb for the purpose of financing the acquisition
and installation of equipment, machinery and related assets located in the Companys Southaven,
Mississippi distribution facility. The Bonds bear interest at a variable rate (3.3% as of March 31,
2008), 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.
12
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
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 2009 at which time,
if not renewed or replaced, will result in a draw on the undrawn face amount thereof. If the
Letter of Credit is renewed or replaced, the Bonds require future annual principal repayments of
$800,000 in January of each year through 2012. PFSs 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 its 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, 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.
Master Lease Agreements
The Company has a Term Lease Master Agreement with IBM Credit Corporation (Master Lease
Agreement) that provides for leasing or financing transactions of equipment and other assets,
which generally have terms of 3 years. The outstanding leasing transactions ($0.9 million as of
March 31, 2008 and December 31, 2007) 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
$1.6 million and $1.8 million as of March 31, 2008 and December 31, 2007, respectively, and are
secured by the related equipment.
The Company has other leasing and financing agreements and will continue to enter into those
arrangements as needed to finance the purchasing or leasing of certain equipment or other assets.
Borrowings under these agreements are generally secured by the related equipment.
8. SEGMENT INFORMATION
The Company is organized into three operating segments: PFSweb is an international provider of
integrated business process outsourcing solutions and operates as a service fee business; Supplies
Distributors is a master distributor primarily of IPS products; and eCOST is a multi-category
online discount retailer of new, close-out and recertified brand-name merchandise.
13
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Revenues (in thousands): |
|
|
|
|
|
|
|
|
PFSweb |
|
$ |
30,280 |
|
|
$ |
26,084 |
|
Supplies Distributors |
|
|
62,322 |
|
|
|
58,810 |
|
eCOST |
|
|
27,969 |
|
|
|
21,647 |
|
Eliminations |
|
|
(2,102 |
) |
|
|
(2,134 |
) |
|
|
|
|
|
|
|
|
|
$ |
118,469 |
|
|
$ |
104,407 |
|
|
|
|
|
|
|
|
Income (loss) from operations (in
thousands): |
|
|
|
|
|
|
|
|
PFSweb |
|
$ |
99 |
|
|
$ |
(1,612 |
) |
Supplies Distributors |
|
|
1,652 |
|
|
|
1,367 |
|
eCOST |
|
|
(767 |
) |
|
|
(1,326 |
) |
Eliminations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
984 |
|
|
$ |
(1,571 |
) |
|
|
|
|
|
|
|
Depreciation and amortization
(in thousands): |
|
|
|
|
|
|
|
|
PFSweb |
|
$ |
1,335 |
|
|
$ |
1,745 |
|
Supplies Distributors |
|
|
4 |
|
|
|
4 |
|
eCOST |
|
|
242 |
|
|
|
245 |
|
Eliminations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,581 |
|
|
$ |
1,994 |
|
|
|
|
|
|
|
|
Capital expenditures (in thousands): |
|
|
|
|
|
|
|
|
PFSweb |
|
$ |
605 |
|
|
$ |
738 |
|
Supplies Distributors |
|
|
6 |
|
|
|
7 |
|
eCOST |
|
|
53 |
|
|
|
44 |
|
Eliminations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
664 |
|
|
$ |
789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Assets (in thousands): |
|
|
|
|
|
|
|
|
PFSweb |
|
$ |
103,660 |
|
|
$ |
102,950 |
|
Supplies Distributors |
|
|
85,948 |
|
|
|
79,446 |
|
eCOST |
|
|
32,639 |
|
|
|
33,615 |
|
Eliminations |
|
|
(58,656 |
) |
|
|
(57,838 |
) |
|
|
|
|
|
|
|
|
|
$ |
163,591 |
|
|
$ |
158,173 |
|
|
|
|
|
|
|
|
9. 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.
On July 25, 2007 a purported class action lawsuit entitled Darral Frank and Joseph F. Keeley,
Jr.. v. PC Mall, Inc. dba eCOST.com and eCOST.com, Inc. was filed in the Superior Court of
California, Los Angeles County. The purported class consists of all of current and former sales
representatives who worked for the defendants in California from July 24, 2003 through July 24,
2007. The lawsuit alleges that the defendants failed to pay overtime compensation and interest
thereon, failed to timely pay compensation to terminated employees and failed to provide meal and
rest periods, all in violation of the California Labor Code and Business and Professions Code. The
complaint seeks unpaid overtime, statutory penalties, interest, attorneys fees, punitive damages,
restitution and injunctive relief. The Company intends to
14
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
vigorously contest this action and does not believe the claims have any merit. The matter has been
submitted to arbitration.
In February 2008, eCOST and the Company were served with a Complaint For Civil Penalties and
Injunctive Relief filed by Jamie Teo in the Superior Court of California, Alameda County, alleging
violation of California Proposition 65 arising from the sale by eCOST of certain computer
components. The Company intends to vigorously contest this action and does not believe the claims
have any merit. The Company may also seek indemnification for these claims from the manufacturers
of these products.
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. Except as disclosed
herein, the Company is not aware of any such litigation.
10. SUBSEQUENT EVENT
On May 13, 2008, the Company announced that its Board of Directors had approved a 1-for-4.7
reverse stock split of its Common Stock which is expected to be effective as of June 2, 2008. All
references to number of shares of the Companys Common Stock (including options to purchase shares
of Common Stock) in this Quarterly Report are as of the date hereof, or such earlier date as may be
indicated, and do not reflect the reverse stock split.
15
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, 2007, could cause our results to differ
materially from those expressed in our forward-looking statements. These factors include:
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our ability to retain and expand relationships with existing clients and attract and
implement new clients; |
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our reliance on the fees generated by the transaction volume or product sales of our
clients; |
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our reliance on our clients projections or transaction volume or product sales; |
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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; |
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our dependence upon our agreements with our major clients; |
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our client mix, their business volumes and the seasonality of their business; |
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our ability to finalize pending contracts; |
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the impact of strategic alliances and acquisitions; |
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trends in e-commerce, outsourcing, government regulation both foreign and domestic and
the market for our services; |
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whether we can continue and manage growth; |
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increased competition; |
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our ability to generate more revenue and achieve sustainable profitability; |
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effects of changes in profit margins; |
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the customer and supplier concentration of our business; |
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the unknown effects of possible system failures and rapid changes in technology; |
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foreign currency risks and other risks of operating in foreign countries; |
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potential litigation; |
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potential delisting and impact of reverse stock split; |
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our dependency on key personnel; |
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the impact of new accounting standards, and changes in existing accounting rules or the
interpretations of those rules; |
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our ability to raise additional capital or obtain additional financing; |
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our ability and the ability of our subsidiaries to borrow under current financing
arrangements and maintain compliance with debt covenants; |
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relationship with and our guarantees of certain of the liabilities and indebtedness of
our subsidiaries; |
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whether outstanding warrants issued in a prior private placement will be exercised in
the future; |
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our ability to successfully achieve the anticipated benefits of our merger with eCOST; |
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taxation on the sale of our products; |
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eCOSTs potential indemnification obligations to its former parent; |
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eCOSTs ability to maintain existing and build new relationships with manufacturers and
vendors and the success of its advertising and marketing efforts; |
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eCOSTs ability to increase its sales revenue and sales margin and improve operating
efficiencies; and |
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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
16
that these expectations actually will be achieved. In addition, some forward-looking statements
are based upon assumptions as to future events that may not prove to be accurate. Therefore, actual
outcomes and results may differ materially from what is expected or forecasted in such
forward-looking statements. We undertake no obligation to update publicly any forward-looking
statement for any reason, even if new information becomes available or other events occur in the
future.
Overview
We are an international provider of integrated business process outsourcing solutions to major
brand name companies seeking to maximize their supply chain efficiencies and to extend their
traditional business and e-commerce initiatives as well as a leading multi-category online discount
retailer of new, close-out and recertified brand-name merchandise. We derive our revenues from
three business segments: business process outsourcing, a master distributor and a discount online
retailer.
First, in our business process outsourcing segment we derive our revenues from a broad range
of services, including professional consulting, technology collaboration, order management, managed
web hosting and web development, customer relationship management, financial services including
billing and collection services and working capital solutions, kitting and assembly services,
information management and international fulfillment and distribution services. We offer our
services as an integrated solution, which enables our clients to outsource their complete
infrastructure needs to a single source and to focus on their core competencies. Our distribution
services are conducted at warehouses that we lease or manage and include real-time inventory
management and customized picking, packing and shipping of our clients customer orders. We
currently offer the ability to provide infrastructure and distribution solutions to clients that
operate in a range of vertical markets, including technology manufacturing, computer products,
printers, cosmetics, fragile goods, high security collectibles, pharmaceuticals, contemporary home
furnishings, apparel, aviation, telecommunications and consumer electronics, among others.
In this business process outsourcing segment, we do not own the underlying inventory or the
resulting accounts receivable, but provide management services for these client-owned assets. We
typically charge our service fee revenue on a cost-plus basis, a percent of shipped revenue basis
or a per-transaction basis, such as a per-minute basis for web-enabled customer contact center
services and a per-item basis for fulfillment services. Additional fees are billed for other
services. We price our services based on a variety of factors, including the depth and complexity
of the services provided, the amount of capital expenditures or systems customization required, the
length of contract and other factors.
Many of our service fee contracts involve third-party vendors who provide additional services
such as package delivery. The costs we are charged by these third-party vendors for these services
are often passed on to our clients. Our billings for reimbursements of these and other
out-of-pocket expenses include travel, shipping and handling costs and telecommunication charges
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 more than $90 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 170,000 products in several primary
merchandise categories, primarily including computer hardware and software, home electronics,
digital imaging, watches and jewelry, housewares, DVD movies, video games and cellular/wireless.
Growth is a key element to achieving our future goals, including achieving and maintaining
sustainable profitability. Growth in our business process outsourcing segment is driven by two
main elements: new client relationships and organic growth from existing clients. We focus our
sales efforts on larger contracts with brand-name companies within two primary target markets,
which, by nature, require a longer duration
17
to close but also often provide the opportunity 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 and expand its product line.
We continue to monitor and control our costs to focus on profitability. While we are
targeting our new service fee contracts to yield increased gross profit, we also expect to incur
incremental investments to implement new contracts, investments in infrastructure and sales and
marketing to support our targeted growth and increased public company professional fees.
Our expenses comprise primarily four categories: 1) cost of product revenue, 2) cost of
service fee revenue, 3) cost of pass-through revenue and 4) operating expenses.
Cost of product revenues consists of the purchase price of product sold and freight costs,
which are reduced by certain reimbursable expenses. These reimbursable expenses include
pass-through customer marketing programs, direct costs incurred in passing on any price decreases
offered by vendors to cover price protection and 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,
on-line marketing and catalog production, distribution costs (excluding freight) applicable to the
Supplies Distributors and eCOST businesses, executive, management and administrative personnel and
other overhead costs, including certain occupancy and information technology costs and depreciation
and amortization expenses.
Monitoring and controlling our available cash balances continues to be a primary focus. Our
cash and liquidity positions are important components of our financing of both current operations
and our targeted growth. In recent years we have added to our available cash and liquidity
positions through various transactions:
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Each of our primary operating subsidiaries has one or more asset based working
capital financing agreements with various lenders. |
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Between 2003 and 2006, we raised approximately $9.3 million in net proceeds from the
sale of approximately 7 million shares of common stock in private placements to certain
investors. |
Results of Operations
For the Three-Month Periods Ended March 31, 2008 and 2007
The following table sets forth certain historical financial information from our unaudited
interim condensed consolidated statements of operations expressed as a percent of net revenues.
18
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Three Months Ended |
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% of Total |
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March 31, |
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Change |
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Revenue |
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2008 |
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2007 |
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$ |
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% |
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2008 |
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2007 |
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Revenues: |
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Product revenue, net |
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$ |
90.3 |
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$ |
80.5 |
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$ |
9.8 |
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12.2 |
% |
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76.2 |
% |
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77.1 |
% |
Service fee revenue |
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20.8 |
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17.0 |
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3.8 |
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22.7 |
% |
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17.6 |
% |
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16.2 |
% |
Pass-through revenue |
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7.4 |
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7.0 |
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0.4 |
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5.4 |
% |
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6.2 |
% |
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6.7 |
% |
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Total net revenues |
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118.5 |
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104.4 |
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14.1 |
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13.5 |
% |
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100.0 |
% |
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100.0 |
% |
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Cost of Revenues |
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Cost of product revenue |
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84.0 |
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74.8 |
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9.2 |
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12.3 |
% |
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93.0 |
%(1) |
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92.9 % |
(1) |
Cost of service fee revenue |
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13.8 |
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12.7 |
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1.1 |
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9.3 |
% |
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66.5 |
%(2) |
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74.7 % |
(2) |
Pass-through cost of revenue |
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7.4 |
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7.0 |
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0.4 |
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5.4 |
% |
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100.0 |
%(3) |
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100.0 % |
(3) |
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Total cost of revenues |
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105.2 |
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94.4 |
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10.8 |
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11.4 |
% |
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88.8 |
% |
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90.4 |
% |
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Product revenue gross profit |
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6.3 |
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5.7 |
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0.6 |
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11.0 |
% |
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7.0 |
%(1) |
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7.1 % |
(1) |
Service fee gross profit |
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7.0 |
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4.3 |
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2.7 |
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62.1 |
% |
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33.5 |
%(2) |
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25.3 % |
(2) |
Pass-through gross profit |
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% |
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%(3) |
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%(3) |
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Total gross profit |
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13.3 |
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10.0 |
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3.3 |
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33.0 |
% |
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11.2 |
% |
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9.6 |
% |
Operating Expenses |
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12.3 |
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11.6 |
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0.7 |
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6.4 |
% |
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10.4 |
% |
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11.1 |
% |
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Income (loss) from operations |
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1.0 |
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(1.6 |
) |
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2.6 |
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(162.6) |
% |
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0.8 |
% |
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(1.5) |
% |
Interest expense, net |
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0.4 |
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0.6 |
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(0.2 |
) |
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(43.5) |
% |
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0.3 |
% |
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0.6 |
% |
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Income (loss) before income taxes |
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0.6 |
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(2.2 |
) |
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2.8 |
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(130.3) |
% |
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0.6 |
% |
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(2.1) |
% |
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Income tax expense, net |
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0.2 |
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0.2 |
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16.5 |
% |
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0.2 |
% |
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0.2 |
% |
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Net income (loss) |
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$ |
0.4 |
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$ |
(2.4 |
) |
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$ |
2.8 |
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(117.5) |
% |
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0.3 |
% |
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(2.3) |
% |
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(1) |
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Represents the percent of Product revenue, net. |
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(2) |
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Represents the percent of Service fee revenue. |
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(3) |
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Represents the percent of Pass-through revenue. |
Product Revenue, net. eCOST product revenue was $28.0 million in the three months ended March
31, 2008, a 29.2% increase as compared to $21.6 million in the comparable quarter of the prior
year. The increase is primarily due to the continued emphasis on growth through an expanded
product line, improved service capabilities and enhanced website capabilities.
Supplies Distributors product revenue of $62.3 million increased $3.5 million, or 6.0% in the
three months ended March 31, 2008 as compared to the same quarter of the prior year. This increase
was primarily due to the negative impact of foreign currency
fluctuations during the 2007 three month period that created alternative purchasing channels for certain customers, which did not
occur in 2008.
Service Fee Revenue. Service fee revenue for the three months ended March 31, 2008 included
increased service fees generated from the impact of new service contract relationships that were
added in 2007, benefits from incremental project work and a modified contract with an existing
client. The change in service fee revenue is shown below ($ millions):
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Period ended March 31, 2007 |
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$ |
17.0 |
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New service contract relationships, including certain
incremental projects under new contracts |
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1.1 |
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Change in existing client service fees and certain
incremental projects with existing clients |
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4.0 |
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Terminated clients not included in 2008 revenue |
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(1.3 |
) |
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Period ended March 31, 2008 |
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$ |
20.8 |
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|
Service fee revenue for the three months ended March 31, 2008 included approximately $0.7
million of fees earned from client contracts terminated during late 2007 or during the three months
ended March 31, 2008.
19
Based on historical activity and current projection of existing clients, including new clients
signed in 2007, we currently anticipate that 2008 annual service fee revenue will be higher than
2007 annual service fee revenue.
Cost of Product Revenue. The gross margin for eCOST was $2.2 million or 8.0% of product
revenue in the three months ended March 31, 2008 and $1.8 million or 8.4% of product revenue during
the comparable period of 2007. Gross margin for eCOST decreased from the prior period primarily
due to a shift in the product mix that resulted in increased sales of lower margin product.
Supplies Distributors cost of product revenue increased by $3.4 million, or 6.0%, to $58.3
million in the three months ended March 31, 2008, primarily as a result of increased product sales.
The resulting gross profit margin was $4.1 million or 6.5% of product revenue for the three months
ended March 31, 2008 and $3.9 million or 6.6% of product revenue for the comparable 2007 period.
Cost of Service Fee Revenue. The increase in gross profit as a percentage of service fees to
33.5% in the three months ended March 31, 2008 from 25.3% in same period of 2007 is primarily due
to the timing of certain existing client projects and the impact of a
modified contract with an existing client. In addition, the three months ended March 31,
2007 reflects lower gross margin on several new clients added in late 2006, which generally operate
at lower margins in the first several quarters after implementation.
We expect 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 March 31, 2008 include an
increase in certain personnel related expenses partially offset by a favorable impact on exchange
rates on intercompany accounts during the three month 2008 period.
In 2008, we anticipate incremental operating expenses for certain of our facilities to support
our anticipated growth in revenue; however, as a percentage of net
revenues, we are targeting operating
expenses to remain relatively constant or lower than prior year
levels.
Income Taxes. We recorded a tax provision associated primarily with our subsidiary Supplies
Distributors Canadian and European operations. We did not record a federal income tax benefit
associated with our consolidated net loss in our U.S. operations or for our PFSweb Canadian pre-tax
losses in the current or prior periods. A valuation allowance has been provided for the majority of
our net deferred tax assets as of March 31, 2008 and December 31, 2007, 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 Supplies Distributors Canadian and
European results of operations.
Liquidity and Capital Resources
Net cash provided by operating activities was $11.4 million for the three months ended March
31, 2008, and primarily resulted from an $11.8 million of
increase in accounts payable, accrued expenses and other liabilities, a $4.8
million decrease in accounts receivable and cash income before
working capital changes of $2.5
million. These benefits were offset by a $4.1 million increase in prepaid expenses, other
receivables and other assets, a $3.2 million increase in inventories and an increase in restricted
cash of $0.4 million.
Net cash used in operating activities was $1.4 million for the three months ended March 31,
2007, and primarily resulted from a $2.2 million increase in prepaid expenses, other receivables
and other current assets, a $0.4 million decrease in accounts payable, accrued expenses and other
liabilities and a $0.1 million increase in restricted cash, partially offset by a decrease in
inventories of $0.7 million and a decrease in accounts receivable of $0.5 million.
Net cash used in investing activities for the three months ended March 31, 2008 totaled $0.7
million, resulting from capital expenditures.
Net cash used in investing activities for the three months ended March 31, 2007 totaled $0.6
million, representing capital expenditures of $0.8 million partially offset by a decrease in
restricted cash of $0.2 million.
20
Capital expenditures have historically consisted primarily of additions to upgrade our
management information systems, and general expansion of our facilities, both domestic and foreign.
We expect to incur capital expenditures to support new contracts and anticipated future growth
opportunities. Based on our current client business activity and our targeted growth plans, we
anticipate that our total investment in upgrades and additions to facilities and information
technology services for the upcoming twelve months will be approximately $5 to $8 million, although
additional capital expenditures may be necessary to support the infrastructure requirements of new
clients as well as the eCOST infrastructure. To maintain our current operating cash position, a
portion of these expenditures may be financed through debt, operating or capital leases or
additional equity. We may elect to modify or defer a portion of such anticipated investments in
the event that we do not obtain the financing or achieve the revenue necessary to support such
investments.
Net cash used in financing activities was approximately $11.6 million for the three months
ended March 31, 2008, primarily representing $9.4 million of payments on debt, a $1.7 million
increase in restricted cash and payments on capital leases of $0.5 million.
Net cash provided by financing activities was approximately $1.6 million for the three months
ended March 31, 2007, primarily representing $1.7 million decrease in restricted cash and $0.3
million of proceeds on debt, partially offset by $0.5 million of payments on capital leases.
Our liquidity has been negatively impacted as a result of the merger with eCOST. eCOST has
experienced a net usage of cash primarily due to losses incurred. As a result, during the process
of transitioning and integrating eCOSTs operations, PFSweb has had to support eCOSTs cash needs
with the goal of achieving a stabilized operational position. The amount of further cash needed to
support eCOST operations will depend upon the financing available as well as eCOSTs continued
ability to improve its financial results. eCOSTs results have improved during 2007 and the first
quarter of 2008 and we currently expect continued improvement as a result of efforts to increase
sales, improve product mix and further improve operational efficiencies.
During the three months ended March 31, 2008, our working capital increased to $23.4 million
from $22.5 million at December 31, 2007, primarily as a result of improved cash flows from
operations. To obtain additional financing in the future, in addition to our current cash
position, we plan to evaluate various financing alternatives including the sale of equity,
utilizing capital or operating leases, borrowing under our credit facilities, expanding our current
credit facilities, entering into new debt agreements or transferring to third parties a portion of
our subordinated loan balance due from Supplies Distributors. In conjunction with certain of these
alternatives, we may be required to provide certain letters of credit to secure these arrangements.
No assurances can be given that we will be successful in obtaining any additional financing or the
terms thereof. We currently believe that our cash position, financing available under our credit
facilities and funds generated from operations (including our anticipated revenue growth and/or
cost reductions to offset lower than anticipated revenue growth) will satisfy our presently known
operating cash needs, our working capital and capital expenditure requirements, our lease
obligations, and additional loans to our subsidiaries Supplies Distributors and eCOST, if
necessary, for at least the next twelve months.
The following is a schedule of our total contractual cash obligations which is comprised of
operating leases, debt, vendor financing and capital leases (including interest) as of March 31,
2008, (in millions):
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
58,951 |
|
|
$ |
55,831 |
|
|
$ |
2,100 |
|
|
$ |
1,020 |
|
|
$ |
|
|
Capital lease obligations |
|
|
4,562 |
|
|
|
1,951 |
|
|
|
2,313 |
|
|
|
298 |
|
|
|
|
|
Operating leases |
|
|
22,413 |
|
|
|
8,327 |
|
|
|
11,664 |
|
|
|
2,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
85,926 |
|
|
$ |
66,109 |
|
|
$ |
16,077 |
|
|
$ |
3,740 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In support of certain debt instruments and leases, as of March 31, 2008, we had $4.2 million
of cash restricted for payment of capital expenditures or repayments to lenders. In addition, as
described above, we have provided collateralized guarantees to secure the repayment of certain of
our subsidiaries credit facilities. Many of 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. 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, it may fail to comply with one or more of the
financial covenants required under its working capital line of credit. In such event, absent a
waiver, the working capital lender would be entitled to accelerate all amounts outstanding
thereunder and exercise all other rights and remedies, including sale of collateral and payment
under our parent guaranty. A requirement to accelerate the repayment of the credit facility
obligations would have a material adverse impact on our financial condition and results of
operations. We can provide no assurance that we will have the financial ability to repay all of
such obligations. As of March 31, 2008, we were in compliance with all debt covenants. We do not
have any other material financial commitments, although future client contracts may require capital
expenditures and lease commitments to support the services provided to such clients.
In the future, we may attempt to acquire other businesses or seek an equity or strategic
partner to generate capital or expand our services or capabilities in connection with our efforts
to grow our business. Acquisitions involve certain risks and uncertainties and may require
additional financing. Therefore, we can give no assurance with respect to whether we will be
successful in identifying businesses to acquire or an equity or strategic partner, whether we or
they will be able to obtain financing to complete a transaction, or whether we or they will be
successful in operating the acquired business.
To finance their distribution of 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 16.0 million Euros (approximately $25.3 million) with IBM Credit and IBM Belgium,
respectively. These agreements expire in March 2009.
Supplies Distributors also has a loan and security agreement with Wachovia Bank, N.A.
(Wachovia) to provide financing for up to $25 million of eligible accounts receivables in the
United States and Canada. The Wachovia facility expires on the earlier of March 29, 2009 or the
date on which the parties to the 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 $11.9
million) of eligible accounts receivables through March 2009.
These credit facilities contain cross default provisions, various restrictions upon the
ability of Supplies Distributors and its subsidiaries to, among other things, merge, consolidate,
sell assets, incur indebtedness, make loans and payments to related parties (including entities
directly or indirectly owned by PFSweb, Inc.), provide guarantees, make investments and loans,
pledge assets, make changes to capital stock ownership structure and pay dividends, as well as
financial covenants, such as cash flow from operations,
22
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 $5.5 million, maintain
restricted cash of less than $5.0 million, are restricted with regard to transactions with related
parties, indebtedness and changes to capital stock ownership structure and a minimum shareholders
equity of at least $18.0 million. Furthermore, we are obligated to repay any over-advance made to
Supplies Distributors or its subsidiaries under these facilities if they are unable to do so. We
have also provided a guarantee of the obligations of Supplies Distributors and its subsidiaries to
IBM and IPS, excluding the trade payables that are financed by IBM credit.
Our subsidiary, Priority Fulfillment Services, Inc. (PFS), has entered into a Loan and
Security Agreement with Comerica Bank (Comerica), which provides for up to $10.0 million of
eligible accounts receivable financing through March 2009. 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, and a minimum liquidity ratio, as defined. The agreement also
limits PFSs ability to increase the subordinated loan to Supplies Distributors to more than $6.5
million and provides the approval for PFS to advance an additional $3.3 million to certain of its
subsidiaries, including eCOST, with certain restrictions, if needed. 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 2009.
Borrowings under the facility are limited to a percentage of eligible accounts receivable and
letter of credit availability is limited to a percentage of accounts receivable and inventory. As
of March 31, 2008, eCOST had $1.6 million of letters of credit outstanding and $1.9 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 our 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 2009
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
March 31, 2008 was $3.2 million. PFSs
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.
In June 2006, we entered into a Securities Purchase Agreement with certain institutional
investors in a private placement transaction pursuant to which we issued and sold an aggregate of
5.0 million shares of our common stock, par value $.001 per share, at $1.00 per share, resulting in
gross proceeds of $5.0 million. After deducting expenses, the net proceeds were approximately $4.8
million. We have advanced the net proceeds to eCOST to support its operating requirements.
To the extent we fail to comply with the various debt covenants described above, and the
lenders accelerate the repayment of the credit facility obligations, we would be required to repay
all amounts
23
outstanding thereunder. Any requirement to accelerate the repayment of the credit facility
obligations would have a material adverse impact on our financial condition and results of
operations. We can provide no assurance that we will have the financial ability to repay all of
such obligations. As of March 31, 2008, we were in compliance with all debt covenants.
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 March 31, 2008, we have advanced
$13.1 million to eCOST to fund eCOSTs cash flow requirements and have lender approval to advance
an additional $3.3 million, with certain restrictions, to certain of our subsidiaries, 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 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.
If eCOST is unable to meet its requirements under its debt obligations and bank facility, the
guarantees referred to above could be called upon.
We receive municipal tax abatements in certain locations. During 2004 we received notice from
a municipality that we did not satisfy certain criteria necessary to maintain the abatements. 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.
On July 25, 2007 a purported class action lawsuit entitled Darral Frank and Joseph F. Keeley,
Jr. v. PC Mall, Inc. dba eCOST.com and eCOST.com, Inc. was filed in the Superior Court of
California, Los Angeles County. The purported class consists of all of current and former sales
representatives who worked for the defendants in California from July 24, 2003 through July 24,
2007. The lawsuit alleges that the defendants failed to pay overtime compensation and interest
thereon, failed to timely pay compensation to terminated employees and failed to provide meal and
rest periods, all in violation of the California Labor Code and Business and Professions Code. The
complaint seeks unpaid overtime, statutory penalties, interest, attorneys fees, punitive damages,
restitution and injunctive relief. We intend to vigorously contest this action and do not believe
the claims have any merit. The matter has been submitted to arbitration.
In February 2008, eCOST and the Company were served with a Complaint For Civil Penalties and
Injunctive Relief filed by Jamie Teo in the Superior Court of California, Alameda County, alleging
violation of California Proposition 65 arising from the sale by eCOST of certain computer
components. We intend to vigorously contest this action and do not believe the claims have any
merit. We may also seek indemnification for these claims from the manufacturers of these products.
Seasonality
The seasonality of our service fee business is dependent upon the seasonality of our clients
business and sales of their products. Accordingly, our management must rely upon the projections of
our clients in assessing quarterly variability. We believe that with our current client mix and
their current business volumes, our service fee business activity will be at it lowest in the
quarter ended March 31. We anticipate that our 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 that our historical revenue growth makes it difficult to predict the effect of
seasonality on our future revenues and results of operations.
We believe that results of operations for a quarterly period may not be indicative of the
results for any other quarter or for the full year.
24
Inflation
Management believes that inflation has not had a material effect on our operations.
Critical Accounting Policies
A description of critical accounting policies is included in Note 2 of the consolidated
financial statements in our December 31, 2007 Annual Report on Form 10-K.
25
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, loan and security agreements and factoring
agreement for the financing of inventory, accounts receivable and certain other receivables and
certain equipment, which amounted to $62.7 million at March 31, 2008. A 100 basis point movement in
interest rates would result in approximately $0.2 million annualized increase or decrease in
interest expense based on the outstanding balance of these agreements at March 31, 2008.
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.
26
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
On July 25, 2007 a purported class action lawsuit entitled Darral Frank and Joseph F. Keeley,
Jr. v. PC Mall, Inc. dba eCOST.com and eCOST.com, Inc. was filed in the Superior Court of
California, Los Angeles County. The purported class consists of all of current and former sales
representatives who worked for the defendants in California from July 24, 2003 through July 24,
2007. The lawsuit alleges that the defendants failed to pay overtime compensation and interest
thereon, failed to timely pay compensation to terminated employees and failed to provide meal and
rest periods, all in violation of the California Labor Code and Business and Professions Code. The
complaint seeks unpaid overtime, statutory penalties, interest, attorneys fees, punitive damages,
restitution and injunctive relief. We intend to vigorously contest this action and do not believe
the claims have any merit. The matter has been submitted to arbitration.
In February 2008, eCOST and the Company were served with a Complaint For Civil Penalties and
Injunctive Relief filed by Jamie Teo in the Superior Court of California, Alameda County, alleging
violation of California Proposition 65 arising from the sale by eCOST of certain computer
components. We intend to vigorously contest this action and do not believe the claims have any
merit. We may also seek indemnification for these claims from the manufacturers of these products.
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, 2007 filed
with the Securities and Exchange Commissions on March 31, 2008 other than those listed below.
Risks Related to Our PFS and Supplies Distributors Operating Segments
Our business is subject to the risk of customer and supplier concentration.
For the three months ended March 31, 2008 and 2007, a U.S. government agency with whom we have
a contractual relationship, a consumer products company and Xerox Corporation represented
approximately 39%, 7% and 10%, respectively, and approximately 24%, 13% and 13%, respectively of
our total service fee revenue, net of pass-through revenue. The loss of, or non-payment of invoices
by, any or all of such clients would have a material adverse effect upon our business. In
particular, the agreement under which we provide services to such clients are terminable at will
upon notice by such clients.
A substantial portion of our Supplies Distributors product revenue was generated by sales of
product purchased under master distributor agreements with the Printing System Division of IBM and
was dependent on IBMs business and the continuing market for IBM products. Supplies Distributors
does not have its own sales force and relies upon an outsourced sales force and product demand
generation services. In January 2007, IBM and Ricoh announced the planned formation of a joint
venture company to succeed the business of IBMs Printing Systems Division. Upon closing of the
agreement in June 2007, Ricoh acquired 51% of the joint venture, which is called InfoPrint
Solutions Company (IPS), and stated its intentions to progressively acquire the remaining 49%
over the next three years. IPS is expected to eventually become a fully owned subsidiary of Ricoh.
Although our prior master distributor agreements with IBM have been assigned to IPS, these
agreements are terminable at will and no assurance can be given that InfoPrint Solutions Company
will continue the master distributor agreements with Supplies Distributors. A termination of this
relationship or a decline in customer demand for these products 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 30% of Supplies
Distributors total product revenue for the three months ended March 31, 2008. Sales to the same
two customers accounted for approximately 26% of Supplies Distributors product revenue for the
three months ended March 31, 2007. The loss of any one or more of such customers, or non-payment of
any material amount by these or any other customer, would have a material adverse effect upon
Supplies Distributors business. Supplies Distributors also relies upon outsourced sales force and
product demand
27
generation services and the termination of such services would have a material
impact upon Supplies Distributors business.
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 57% of eCOSTs net revenues (13% of our consolidated net revenues) in the
three months ended March 31, 2008 and 51% of eCOSTs net revenues (11% of our consolidated net
revenues) in comparable period of 2007. 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.
Taxation Risks Could Cause Our Future Sales to Decrease
We do not collect sales or other taxes on shipments of most of our goods into most states in
the U.S. One or more states may seek to impose sales or other tax collection obligations on
out-of-jurisdiction e-commerce companies. A successful assertion by one or more states that we
should collect sales or other taxes on the sale of merchandise or services could result in
substantial tax liabilities for past sales, decrease our ability to compete with traditional
retailers or internet retailers who do not collect sales tax, and otherwise harm our business. For
example, New York State recently enacted legislation which, if not overturned, would impose sales
tax liability upon Internet retailers who pay commissions, such as click-through charges, to
independent third parties who are New York residents.
Risks Related to Our Stock
Our common stock could be delisted from the Nasdaq Capital Market.
Our common stock is currently listed on the Nasdaq Capital Market. Nasdaq has requirements
that a company must meet in order to remain listed on the Nasdaq Capital Market. These
requirements include maintaining a minimum closing bid price of $1.00. On April 7, 2008, we
received a Nasdaq Staff Deficiency Letter indicating that, based on a review of our closing bid
price for the previous 30 business days, we were not in compliance with the minimum $1.00 minimum
bid price requirement for continued listing on The Nasdaq Capital Market. We have been afforded a
180-day grace period to achieve compliance through achieving or exceeding the $1.00 minimum bid
price requirement for 10 consecutive business days. If necessary to maintain our listing, we may
effect a reverse stock split. As of May 15, 2008, we currently meet all the minimum continued
listing requirements for the Nasdaq Capital Market except for the $1.00 minimum bid price.
If we fail to maintain the standards necessary to be quoted on the Nasdaq Capital Market and our
common stock is delisted, trading in our common stock would be conducted on the OTC Bulletin Board
as long as we continue to file reports required by the Securities and Exchange Commission. The OTC
Bulletin Board is generally considered to be a less efficient market than the Nasdaq Capital
Market, and our stock price, as well as the liquidity of our Common Stock, may be adversely
impacted as a result.
Our reverse stock split could have an adverse impact on our common stock.
Our recently announced 1-for-4.7 reverse stock split could cause a reduction in the total
market value of our common stock and increase the volatility of our stock price. We cannot assure
you that the total market capitalization of our common stock after the reverse stock split will be
equal to or greater than the total market capitalization before the reverse stock split or that the
per share market price of our common stock following the reverse stock split will either exceed or
remain higher than the pre-split per share market price. Consequently, no assurance can be given
that we will not be at risk for delisting after the reverse split is effected. The reverse stock
split may reduce the liquidity of our common stock and thereby reduce the value of our common stock
and our ability to use our equity as consideration for an acquisition or other corporate
opportunity. In addition, the reverse split will decrease the number of shares outstanding, giving
individual orders the potential to create increased volatility in our stock price. As a result of
the reverse
28
stock split, we will be authorized to issue significantly more shares of our common
stock which could have a material adverse affect on the market price of our common stock.
As
a result of the reverse split, effective as of June 2, 2008, the
number of shares of our Common Stock issued and outstanding will be
reduced form 46,499,880 to approximately 9,893,591. The reverse split
will not affect the number of authorized shares of Common Stock which
will remain at 75,000,000. Therefore, as the result of the reverse
split, the number of authorized and unissued and unreserved shares of
our Common Stock will increase from 28,500,120 to approximately
65,106,409 and the number of authorized and reserved shares of our
Common Stock will decrease from 6,118,417 to approximately 1,301,790.
We presently have no plans, proposals or arrangements for the
issuance of any such authorized, unreserved and unissued shares.
Potential
Anti-Takeover Effect
Although
the reverse stock split was not effected in response to any effort of
which we are aware to accumulate shares of our Common Stock or obtain
control of the Company, nor is it part of a plan by management to
recommend a series of similar amendments to our Board of Directors
and stockholders or take any other actions that could be construed to
affect the ability of third parties to take over or change control of
the Company, the increased proportion of unissued authorized shares
to issued shares could, under certain circumstances, have an
anti-takeover effect (for example, by permitting issuances that would
dilute the stock ownership of a person seeking to effect a change in
the composition of our Board of Directors or contemplating a tender
offer or other transaction for the combination of the Company with
another company).
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
ITEM 6. Exhibits
a) Exhibits:
|
|
|
Exhibit |
|
|
No. |
|
Description of Exhibits |
3.1(1)
|
|
Amended and Restated Certificate of Incorporation |
|
|
|
3.2(1)
|
|
Amended and Restated Bylaws |
|
|
|
10.82*
|
|
Sixth Amended and Restated Notes Payable Subordination Agreement
by and between Priority Fulfillment Services, Inc., Supplies
Distributors, Inc. and IBM Credit Corporation |
|
|
|
10.83*
|
|
Amendment 9 to Agreement for Inventory Financing |
|
|
|
10.84*
|
|
Amendment 8 to Amended and Restated Platinum Plan Agreement |
|
|
|
10.85*
|
|
Agreement for IBM Global Financing Platinum Plan Invoice
Discounting Schedule |
|
|
|
10.86*
|
|
Sixth Amendment to First Amended and Restated Loan and Security
Agreement by and between Comerica Bank and Priority Fulfillment
Services, Inc. |
|
|
|
10.87*
|
|
2008 Management Bonus Plan |
|
|
|
31.1*
|
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
31.2*
|
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
32.1*
|
|
Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
(1) |
|
Incorporated by reference from PFSweb, Inc. Registration Statement on Form S-1 (Commission
File No. 333-87657) and Annual Report on Form 10-K for the Fiscal Year ended December 31, 2005
filed on March 31, 2006. |
|
* |
|
Filed herewith |
29
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: May 15, 2008
|
|
|
|
|
|
PFSweb, Inc.
|
|
|
By: |
/s/ Thomas J. Madden
|
|
|
|
Thomas J. Madden |
|
|
|
Chief Financial Officer,
Chief Accounting Officer,
Executive Vice President |
|
30
INDEX TO EXHIBITS
|
|
|
Exhibit |
|
|
No. |
|
Description of Exhibits |
3.1(1)
|
|
Amended and Restated Certificate of Incorporation |
|
|
|
3.2(1)
|
|
Amended and Restated Bylaws |
|
|
|
10.82*
|
|
Sixth Amended and Restated Notes Payable Subordination Agreement
by and between Priority Fulfillment Services, Inc., Supplies
Distributors, Inc. and IBM Credit Corporation |
|
|
|
10.83*
|
|
Amendment 9 to Agreement for Inventory Financing |
|
|
|
10.84*
|
|
Amendment 8 to Amended and Restated Platinum Plan Agreement |
|
|
|
10.85*
|
|
Agreement for IBM Global Financing Platinum Plan Invoice
Discounting Schedule |
|
|
|
10.86*
|
|
Sixth Amendment to First Amended and Restated Loan and Security
Agreement by and between Comerica Bank and Priority Fulfillment
Services, Inc. |
|
|
|
10.87*
|
|
2008 Management Bonus Plan |
|
|
|
31.1*
|
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
31.2*
|
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
32.1*
|
|
Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
(1) |
|
Incorporated by reference from PFSweb, Inc. 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 |