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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
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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
(State or other jurisdiction of
incorporation or organization)
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75-2837058
(I.R.S. Employer
Identification Number) |
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500 North Central Expressway, Plano, Texas
(Address of principal executive offices)
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75074
(Zip code) |
Registrant’s telephone number, including area code:
972-881-2900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or 15(d) of the Act. Yes o No þ
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 checkmark whether the registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and
post such files). Yes
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer. See definition of “large accelerated filer”, “accelerated filer”
and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller Reporting Company þ |
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(Do not check if a Smaller reporting company) |
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Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
The aggregate market value of the voting stock held by non-affiliates of the registrant as of
June 30, 2010 (based on the closing price as reported by the National Association of Securities
Dealers Automated Quotation System) was $34,480,114.
At March 28, 2011, there were 12,295,597 shares of the registrant’s Common Stock issued, $.001
par value.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Annual Report, to the extent not set forth
herein, is incorporated herein by reference from the registrant’s definitive proxy statement
relating to the annual meeting of shareholders, which definitive proxy statement shall be filed
with the Securities and Exchange Commission within 120 days after the end of the fiscal year to
which this Annual Report relates.
INDEX
Unless otherwise indicated, all references to “PFSweb,” “the Company,” “we,” “us” and “our” refer
to PFSweb, Inc., a Delaware corporation, and its subsidiaries; references to “PFS’ refer to our
wholly-owned subsidiaries, Priority Fulfillment Services, Inc. PFS Canada and PFS Europe; and
references to “Supplies Distributors” refer to our wholly-owned subsidiary Supplies Distributors,
Inc. and its subsidiaries.
PART I
Item 1. Business
General
PFSweb is an international business process outsourcing provider of end-to-end eCommerce
solutions. PFSweb provides these solutions to major brand name companies seeking to optimize their
supply chain and to enhance their traditional and online business channels and initiatives. We
derive our revenues from a broad range of services as we process individual business transactions
on our clients’ behalf. Marketed as PFSweb’s End2End eCommerce® solution, the services
we offer are organized into the following categories:
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Digital Marketing |
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eCommerce Technologies |
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Order Management |
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Customer Care |
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Logistics and Fulfillment |
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Financial Management |
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Professional Consulting |
Our solutions support both direct-to-consumer (“DTC”) and business-to-business (“B2B”) sales
channels. The majority of our clients are the merchants of record for the orders we process
through our infrastructure on their behalf. For these clients, we do not own the inventory or the
resulting accounts receivable, but provide management services for these client-owned assets.
For some of our clients, we are the merchant of record for the orders we process through our
infrastructure on their behalf. Under these arrangements, we either record product revenue or a
net sale, own the accounts receivable and inventory and we may be paid for all or a portion of our
services through the resulting profit margin. In some cases, we purchase the inventory as the
product is delivered to our facility. In other situations, the client retains ownership of
inventory in our facility and we purchase the inventory immediately prior to each individual
customer sales transaction. In all cases, we seek inventory financing from our clients in the form
of extended terms, working capital programs or marketing funds to help offset the working capital
requirements that follow accounts receivable and inventory ownership.
We are headquartered in Plano, Texas where our executive and administrative offices and our
primary technology operations and hosting facilities are located. We operate state-of-the-art call
centers from our U.S. facilities located in Plano, Texas, and Memphis, Tennessee, and from our
international facilities located in Markham, Ontario, Canada, Liège, Belgium and Manila,
Philippines. We lease or manage warehouse facilities of approximately 1.3 million square feet, many
containing highly automated and state of the art material handling and communications equipment, in
Memphis, Tennessee, Southaven, Mississippi, Grapevine, Texas, Markham, Ontario, Canada and Liège,
Belgium, allowing us to provide global distribution solutions.
Recent Events
In February 2011 we sold substantially all of the inventory and certain intangible assets of
our eCOST.com® business unit, a multi-category online discount retailer of new, “close-out” and
recertified brand-name merchandise, for a cash purchase price of $2.3 million (before expenses of
approximately $0.2 million) and the assumption by the purchaser of certain limited liabilities of
eCOST. The purchase price represents approximately $1 million for inventory and the balance for
the intangible assets. In connection with the closing of this business unit, we currently expect to
incur exit costs of approximately $0.2 million to $0.4 million related to employee termination
costs and excess property and equipment and may incur additional costs, including excess facility
costs. In the fourth quarter of 2010, we have recorded a non-cash goodwill impairment charge of
approximately $2.8 million. For all periods presented, we have classified the operating results of
our former online discount retailer segment as discontinued operations. Unless otherwise indicated,
the following description of our business refers only to our continuing operations. See Note 12,
Discontinued Operations, of “Notes to Consolidated Financial Statements” for additional
information. In conjunction with this sale, we renamed our eCOST.com subsidiary in February 2011. The newly named subsidiary,
PFSweb Retail Connect, Inc., will service certain of our client relationships on an ongoing basis.
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PFSWEB’S END2END ECOMMERCE® SERVICES
PFSweb serves as the “brand behind the brand”® for companies seeking to increase
efficiencies, enter new markets or launch optimized sales channels. As an eCommerce and business
process outsourcer, we offer scalable and cost-effective solutions for brand manufacturers, online
retailers, and distributors across a wide range of industry segments. We provide our clients with
seamless and transparent solutions to support their business strategies, allowing them to focus on
their core competencies. Leveraging PFSweb’s technology, expertise and proven methodologies, we
enable client organizations to develop and deploy new products and implement new business
strategies or address new distribution channels rapidly and efficiently through our optimized
solutions. Our clients engage us both as a consulting partner to assist them in the design of a
business solution as well as a virtual and physical infrastructure partner providing the mission
critical operations required to build and manage their business solution. Together, we not only
help our clients define new ways of doing business, but also provide them the technology, physical
infrastructure and professional resources necessary to quickly implement this business model. We
allow our clients to quickly and dramatically change how they “go-to-market.”
Each client has a unique business model and unique strategic objectives that often requires
highly customized solutions. PFSweb supports clients in a wide array of industries including
fashion apparel and accessories, fragrance and beauty products, consumer packaged goods, home
furnishings and housewares, consumer electronics, office technology and network connectivity
products and aviation spare parts. These clients turn to PFSweb for help in addressing a variety
of business issues that include eCommerce, customer satisfaction and retention, time-definite
logistics, vendor managed inventory and integration, supply chain compression, cost model
realignments, transportation management and international expansion, among others. We also act as a
constructive agent of change, providing clients the ability to alter their current distribution
model, establish direct relationships with end-customers, and reduce the overall time and costs
associated with existing distribution channel strategies. Our clients are seeking solutions that
will provide them with dynamic supply chain and multi-channel marketing efficiencies, while
ultimately delivering a world-class customer service experience.
Our value proposition is to become a seamless, well integrated extension of our clients’
enterprises by delivering superior solutions that drive optimal customer experiences. On behalf of
the brands we serve, we wish to increase and enhance sales and market growth, bolster customer
satisfaction and customer retention, and drive costs out of the business through operations and
technology related efficiencies. As both a virtual and a physical infrastructure for our clients’
businesses, we embrace their brand values and strategic objectives. By utilizing our services, our
clients are able to:
Quickly Capitalize on Market Opportunities. Our solutions empower clients to rapidly
implement their supply chain and eCommerce strategies and to take advantage of opportunities
without lengthy integration and implementation efforts. We have readily available advanced
technology and physical infrastructure that is flexible in its design, which facilitates quick
integration and implementation. The PFSweb solution is designed to allow our clients to deliver
consistent quality service as transaction volumes grow and also to handle daily and seasonal peak
periods. Through our international locations, our clients can sell their products throughout the
world.
Improve the Customer Experience. We enable our clients to provide their customers with a
high-touch, positive buying experience thereby maintaining and promoting brand loyalty. Through our
use of advanced technology, we can respond directly to customer inquiries by e-mail, voice or data
communication and assist them with online ordering and product information. We believe we offer our
clients a “world-class” level of service, including 24-hour, seven-days-a-week, Web-enabled
customer care service centers, detailed Customer Relationship Management (“CRM”) reporting and
exceptional order accuracy. We have significant experience in the development of eCommerce
storefronts that allows us to recommend features and functions that are easily navigated and
understood by our client’s customers. Our technology platform is designed to ensure high levels of
reliability and fast response times for our clients’ customers. Because of our technology, our
clients benefit from being able to offer the latest in customer communication and response
conveniences to their customers.
Minimize Investment and Improve Operating Efficiencies. One of the most significant benefits
outsourcing provides is the ability to transform fixed costs into variable costs. By eliminating
the need to invest in a fixed capital infrastructure, our clients’ costs typically become directly
correlated with volume increases or declines. Further, as
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volume increases drive the demand for greater infrastructure or capacity, we are able to
quickly deploy additional resources. We provide services to multiple clients, which enables us to
offer our clients economies of scale, and resulting cost efficiency, that they may not have been
able to obtain on their own. Additionally, because of the large number of daily transactions we
process, we have been able to justify investments in levels of automation, security surveillance,
quality control processes and transportation carrier interfaces that are typically outside the
scale of investment that our clients might be able to cost justify on their own. These additional
capabilities can provide our clients the benefits of enhanced operating performance and efficiency,
reduced inventory shrinkage, and expanded customer service options.
Access a Sophisticated Technology Infrastructure. We provide our clients with ready access to
a sophisticated technology infrastructure that is designed to interface seamlessly with their
systems. We provide our clients with vital product and customer information that can be immediately
available to them on their own systems or through web based graphic user interfaces for use in data
mining, analyzing sales and marketing trends, monitoring inventory levels and performing other
management functions.
We believe our highest value proposition is achieved when our clients engage our full suite of
services from all of the categories included in PFSweb’s End2End eCommerce® solution.
However, we provide our clients with the opportunity to customize their solution by selecting only
certain services from our offering in à la carte fashion. We believe this flexibility and
willingness to create a customized solution for each client differentiates us from our competition.
Digital Marketing Services
Our team has extensive experience partnering with our clients to help grow their business. We
have expertise in developing strategies to attract new customers, converting website visitors into
actual buyers, and nurturing the relationships with current customers to increase their lifetime
value. We achieve this through the following services:
Search Engine Optimization (SEO). We combine knowledge of SEO best practices with a detailed
knowledge of the technology platform to maximize the programs’ performance. Our subject matter
experts achieve measurable results by using best-of-breed on-site page optimization tactics,
internal-linking strategies, back-linking strategies, and back-link building. We provide both the
strategies and the implementation to achieve top rankings in the search engines, increase
visibility of the brand and drive sales results.
Pay-Per-Click. We go beyond buying keywords. In addition to bid management we provide
effective copywriting as well as landing page recommendations, optimization, and creation to
increase conversion. Our strategic search engine marketing approach is proven to drive incremental
traffic, increase conversion, and lower ad spend.
Affiliate Marketing. We find the best affiliate partners that fit the brands, implement the
program, and manage the ongoing relationships. We develop strategies for the programs and nurture
the affiliate partnerships to ensure relevant traffic is driven to the website to convert into
sales.
Comparison Shopping Engines. We have experience creating and managing comparison shopping
feeds that will increase brand visibility in a competitive landscape while driving sales. We use
the comparison shopping engine channel to enhance the search engine marketing initiatives and power
mobile applications.
Merchandising. We combine industry expertise with best-in-breed technology to increase
conversion and increase average order size. Our team of experts offers services in on-site
merchandising, recommendations, personalization, on-site search, and promotion management and
support.
Web Analytics. All of our interactive marketing services are data driven; we look at how the
various channels are performing and determine where investments need to be made. We turn data into
knowledge and offer insight into the customers’ behavior and create strategies to provide
actionable results.
Customer Experience. We determine how to optimize the website to engage the customers with
the brand, drive sales conversion, and offer an ideal customer shopping experience. Our team makes
it their focus to understand the customer’s needs and offer site usability assessments that will
improve the customer experience, enhance the brand
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and support revenue goals.
Email Marketing. We provide a world class email platform to create and send dynamic 1-to-1
emails to achieve exceptional business results. We provide email delivery services to ensure email
is reaching the inbox and have proven methodologies to test content, design, and subject lines, as
well as drive email strategy to engage customers and increase revenue.
Social Media. Our customer-centric approach focuses on customer service first. We have the
tools to disposition customer comments, posts, replies, hash tags, etc. We also have the staff to
support the strategy and ongoing management of our client’s social initiatives. We provide
strategies to drive traffic and sales to client websites or on Facebook.
eCommerce Technology Services
Direct-to-Consumer eCommerce. PFSweb’s End2End eCommerce® solution for the DTC
online channel features Demandware eCommerce, a leading Software-as-a-Service (“SaaS”) eCommerce
platform. We have fully integrated Demandware with the rest of our world-class technology platform
including other best-of-breed technology partners to create a PFSweb reference application that
provides our clients with a very high-function DTC online store out-of-the-box. We are able to use
the PFSweb reference application as a starting point to very quickly create a completely customized
online store for our DTC clients. Designed specifically for DTC brands, our comprehensive offering
redefines end-to-end eCommerce by enabling retailers and branded consumer goods manufacturers with
the ability to employ a total outsourcing solution customized to their particular eCommerce
strategy, without the loss of site or brand control associated with earlier end-to-end outsourcing
solutions.
Business-to-Business eCommerce. PFSweb’s End2End eCommerce® solution for the B2B
online channel features our GlobalMerchant Commerceware® service that provides a complete eCommerce
website solution for our B2B clients. We engage collaboratively with our clients to design, build,
host, and manage fully branded, fully customized and fully integrated eCommerce web applications
for B2B channels. We offer a broad range of hosting and support plans that can be tailored to fit
the needs of each client. Utilizing Microsoft’s.NET Technologies and our proprietary GlobalMerchant
Commerceware platform, we maintain a robust hosting environment for our hosted client B2B web
sites.
Order Management Services
Order Management Interfaces. Our order management technology solutions provide us and our
clients with interfaces that allow for real-time information retrieval, including information on
inventory, sales orders, shipments, delivery, purchase orders, warehouse receipts, customer
history, accounts receivable and credit lines. These solutions are seamlessly integrated with our
web-enabled customer contact centers, allowing for the processing of orders through shopping cart,
phone, fax, mail, email, web chat, and other order receipt methods. As the information backbone for
our total supply chain solution, order management services can be used on a stand-alone basis or in
conjunction with our other business infrastructure offerings, including customer contact, financial
or distribution services. In addition, for the B2B market, our technology platform provides a
variety of order receipt methods that facilitate commerce within various stages of the supply
chain. Our systems provide the ability for both our clients and their customers to track the status
of orders at any time. Our services are transparent to our clients’ customers and are seamlessly
integrated with our clients’ internal systems platforms and web sites. By synchronizing these
activities, we can capture and provide critical customer information, including:
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Statistical measurements critical to creating a quality customer experience, containing
real-time order status, order exceptions, back order tracking, allocation of product based
on timing of online purchase and business rules, the ratio of customer inquiries to
purchases, average order sizes and order response time; |
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B2B supply chain management information critical to evaluating inventory positioning,
for the purpose of reducing inventory turns, and assessing product flow through and
end-consumer demand; |
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Reverse logistics information including customer response and reason for the return or
rotation of product and desired customer action; |
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Detailed marketing information about what was sold and to whom it was sold, by location
and preference; and |
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Web traffic reporting showing the number of visits (“hits”) received, areas visited,
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Technology Collaboration. We have created a suite of technology services that enable buyers
and suppliers to fully automate their business transactions within their supply chain using the
order management interfaces. Our collaboration technologies operate in an open systems environment
and feature the use of industry-standard XML and SOA web services, enabling customized eCommerce
solutions with minimal changes to a client’s systems or our Enterprise Resource Planning (“ERP”)
systems. The result is a faster implementation process. We also support information exchange
methods such as FTP, EDI, MQ Series, ALE, HTTP, and HTTPS.
Information Management. We have the ability to communicate with and transfer information to
and from our clients through a wide variety of technology services, including real-time web service
enabled data interfaces, file transfer methods and electronic data interchange. Our systems are
designed to capture, store and electronically forward to our clients critical information regarding
customer inquiries and orders, product shipments, inventory status (for example, levels of
inventory on hand, on backorder, on purchase order and inventory due dates to our warehouse),
product returns and other information. Our systems are capable of providing our clients with
customer inventory and order information for use in analyzing sales and marketing trends and
introducing new products. We also offer customized reports and data analyses based upon specific
client needs to assist them in their budgeting and business decision process.
Customer Care Services
Customer Relationship Management. We offer a completely customized CRM solution for clients.
Our CRM solution encompasses a full-scale customer contact management service offering, as well as
a fully integrated customer analysis program. All customer contacts are captured and customer
purchases are documented. Full-scale reporting on all customer transactions is available for
evaluation purposes. Through each of our customer touch-points, information can be analyzed and
processed for current or future use in business evaluation, product effectiveness and positioning,
and supply chain planning.
Customer Order Assistance. An important feature of evolving commerce is the ability for the
customer to speak with a live customer service representative. Our experience has been that a
majority of consumers tell us they visited the web location for information, but not all of those
consumers chose to place their order online. Our customer care services utilize features that
integrate voice, e-mail, standard mail, data and Internet chat communications to respond to and
handle customer inquiries. Our customer care representatives answer various questions, acting as
virtual representatives of our client’s organization, regarding order status, shipping, billing,
returns and product information and availability as well as a variety of other questions. For
certain clients, we handle Level I and Level II technical support. Level I technical support
involves assisting clients’ customers with basic technical issues, i.e. computer application
issues. Level II support may involve a more in-depth question and answer session with the
customer. Our web-enabled customer care technology identifies each customer contact automatically
and routes it to the available customer care representative who is individually trained in the
client’s business and products.
Our web-enabled customer care centers are designed so that our customer care representatives
can handle several different clients and products in a shared environment, thereby creating economy
of scale benefits for our clients as well as highly customized dedicated support models that
provide the ultimate customer experience and brand reinforcement. Our advanced technology also
enables our representatives to up-sell, cross-sell and inform customers of other products and sales
opportunities. The web-enabled customer care center is fully integrated into the data management
and order processing system, allowing full visibility into customer history and customer trends.
Through this fully integrated system, we are able to provide a complete customer care solution.
Customer Self-Help. With the need for efficiency and cost optimization for many of our
clients, we have integrated interactive voice response (“IVR”) as another option for customer
contacts. IVR creates an “electronic workforce” with virtual agents that can assist customers with
vital information at any time of the day or night. IVR allows for our clients’ customers to deal
interactively with our system to handle basic customer inquiries, such as
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account balance, order status, shipment status, catalog requests, product and price inquiries,
and routine order entry for established customers. The inclusion of IVR in our service offering
allows us to offer a cost effective way to handle high volume, low complexity calls.
Logistics and Fulfillment Services
Advanced Distribution Facilities and Infrastructure. An integral part of our solution is the
warehousing and distribution of inventory either owned by our clients or owned by us. We currently
have approximately 1.3 million square feet of leased or managed warehouse space domestically and
internationally to store and process our and our clients’ inventory. We receive inventory in our
distribution centers, verify shipment accuracy, unpack and audit packages (a process that includes
spot-checking a percentage of the inventory to validate piece counts and check for damages that may
have occurred during shipping, loading and unloading). Upon request, we inspect for other damages
or defects, which may include checking fabric, stitching and zippers for soft goods, or ‘testing’
power-up capabilities for electronic items as well as product specifications. We generally stock
for sale within one business day of unloading. On behalf of our clients, we pick, pack and ship
their customer orders and can provide customized packaging, capabilities of high volume shrink
packaging, inserts and promotional literature for distribution with customer orders. For many
clients, we provide gift-wrapping services including customized gift-wrapping paper, ribbon,
gift-box and gift-messaging.
Our distribution facilities contain computerized sortation equipment, highly mobile
pick-to-light carts, powered material handling equipment, scanning and bar-coding systems and
automated conveyors and in-line scales. Our distribution complexes include several advanced
technology enhancements, such as radio frequency technology in product receiving processing to
ensure accuracy, as well as an automated package routing and a pick-to-light paperless order
fulfillment system. Our advanced distribution systems provide us with the capability to warehouse
an extensive number of stock keeping units (SKUs), ranging from large high-end laser printers to
small cosmetic compacts. Our facilities are flexibly configured to process B2B and single pick DTC
orders from the same central location.
In addition to our advanced distribution systems, our pick-to-light carts, stationary
pick-to-light areas and conveyor system controls provide real time productivity reporting, thereby
providing our management team with the tools to implement productivity standards. This combination
of computer-controlled equipment provides the seamless integration of our pick-to-light systems and
mass sortation capabilities. This unique combination of technologies ensures high order accuracy
for each and every customer order.
We are able to take advantage of a variety of shipping and delivery options, which range from
next day service to zone skipping to optimize transportation costs. Our facilities and systems are
equipped with multi-carrier functionality, allowing us to integrate with all leading package
carriers and provide a comprehensive freight and transportation management offering. In addition,
an increasingly important service we provide is reverse logistics management. We offer a wide array
of product return services, including issuing return authorizations, receipt of product, crediting
customer accounts and disposition of returned product.
Our domestic clients enjoy the benefits of having their inventory assets secured by trained
law enforcement professionals from our security headquarters in Memphis, Tennessee and Southaven,
Mississippi. Continual validation ensures that we employ the latest in security processes and
procedures to further enhance our surveillance and detection capabilities. Our security program
continues to gain trust and confidence from our clients as we protect their products and assets.
Facility Operations and Management. Our facilities management service offering includes
distribution facility design and optimization, business process reengineering and ongoing staffing
and management. Along with our operations in Mississippi and Tennessee, we also manage an aircraft
parts distribution center in Grapevine, TX on behalf of one of our clients. Our expertise in supply
chain management, logistics and customer-centric fulfillment operations extends through our
management of client-owned facilities, resulting in cost reductions, process improvements and
technology-driven efficiencies.
Kitting and Assembly Services. Our expanded kitting and assembly services enable our clients
to reduce the time and costs associated with managing multiple suppliers, warehousing hubs, and
light manufacturing partners. As a
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single source provider, we provide the advantage of convenience, accountability and speed. Our
comprehensive kitting and assembly services provide a quality one-stop resource for any
international channel. Our kitting and assembly services include light assembly, specialized
kitting and supplier-consigned inventory hub either in our distribution facilities or co-located
elsewhere. We also offer customized light manufacturing and supplier relationship management
(“SRM”).
We will work with clients to re-sequence certain supply chain activities to aid in an
inventory postponement strategy. We can provide kitting and assembly services and build-to-stock
thousands of units daily to stock in a Just-in-Time (“JIT”) environment. This service, for example,
can entail the procurement of packaging materials including retail boxes, foam inserts and
anti-static bags. These raw material components would be shipped to us from domestic or overseas
manufacturers, and we will build the finished SKUs to stock for the client. Also included is the
custom configuration of high-end printers and servers. This strategy allows manufacturers to make
a smaller investment in base unit inventory while meeting changing customer demand for highly
customizable products.
Combining our assembly services with our supplier-owned inventory hub services allows our
clients to reduce cycle times, to compress their supply chains and to consolidate their operations
and supplier management functions. We have supplier inventory management, assembly and fulfillment
services all in one place, providing greater flexibility in product line utilization, as well as
rapid response to change orders or packaging development. Our standard capabilities include:
build-to-order, build-to-stock, expedited orders, passive and active electrostatic discharge
(“ESD”) controls, product labeling, serial number generation, marking and/or capture, lot number
generation, asset tagging, bill of materials (“BOM”) or computer automated design (“CAD”)
engineering change processing, SKU-level pricing and billing, manufacturing and metrics reporting,
first article approval processes, and comprehensive quality controls.
Our kitting and assembly services also include procurement. We work directly with client
suppliers to make JIT inventory orders for each component in client packages, thereby ensuring we
receive the appropriate inventory quantities at just the right time and we then turn them around
JIT to customers.
Kitting and inventory hub services enable clients to collapse supply chains into the minimal
steps necessary to prepare product for distribution to any channel, including wholesale, mass
merchant retail, or direct to consumer. Clients no longer have to employ multiple providers or
require suppliers to consign multiple inventory caches for each channel. We offer our clients the
opportunity to consolidate operations from a channel standpoint, as well as from a geographic
perspective. Our integrated, global information systems and international locations support
business needs worldwide.
Product Management and Inspection Services. We also operate a coupon management system and
product management program. Coupons are managed and activated by a unique serial number thus
significantly reducing fraudulent activity. Our capabilities also extend into salvage operations,
allowing our clients to reclaim valuable raw materials and components from discontinued or obsolete
inventory.
We operate a test and repair center where we visually inspect items for cosmetic defects.
These items are put through rigorous testing that includes: functionality, durability, accessory
inspection and packaging. Items that pass the testing are repackaged and resold with a noted
exception of “open-box” merchandise. Items that fail the inspection are disassembled and working
spare parts are saved for future use in repairs.
Financial Management Services
Our financial services are divided into two major areas: 1) billing, credit, collection and
cash application services for B2B clients and 2) fraud review, chargeback management and processing
and settlement credit card services for DTC clients.
Business-to-Business Financial Management. For B2B clients, we offer full-service accounts
receivable management and collection capabilities, including the ability to generate customized
computer-generated invoices in our clients’ names. We assist clients in reducing accounts
receivable and days sales outstanding, while minimizing costs associated with maintaining an
in-house collections staff. We offer electronic credit services in the format of EDI and XML
communications direct from our clients to their vendors, suppliers and retailers.
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Direct-to-Consumer Financial Management. For DTC clients, we offer secure credit card
processing related services for orders made via a client web site or through our customer contact
center. We offer manual credit card order review as an additional level of fraud protection. We
also calculate sales taxes, goods and services taxes or value added taxes, if applicable, for
numerous taxing authorities and on a variety of products. Using third-party leading-edge fraud
protection services and risk management systems, we can offer high levels of security and reduce
the level of risk for client transactions.
Professional Consulting Services
As part of the tailored solution for our clients, we offer a full team of experts specifically
designated to focus on our clients’ businesses. Team members play a consultative role, providing
constructive evaluation, analysis and recommendations for the client’s business. This team creates
customized solutions and devises plans that will increase efficiencies and produce benefits for the
client when implemented.
Comprised of industry experts from top-tier consulting firms and industry market leaders, our
team of professional consultants provides client service focus and eCommerce, customer care,
logistics and distribution expertise. They have built solutions for Fortune 1000 and Global 2000
market leaders in a wide range of industries, including multi-channel retailers, apparel,
technology, telecommunications, cosmetics, aviation, housewares, high-value collectibles, sporting
goods, pharmaceuticals and several more. Focusing on the evolving infrastructure needs of major
corporations and their business initiatives, our team has a solid track record providing consulting
services in the areas of interactive marketing eCommerce, supply chain management, distribution and
fulfillment, technology interfacing, logistics and customer support.
SELLER SERVICES FINANCIAL MODELS
Enablement Financial Model
We refer to the standard PFS seller services financial model as the “Enablement” model. In
this model, our clients own the inventory and are the merchants of record and engage us to provide
various business outsourcing services in support of their business operations. We provide
ecommerce website services, inventory and order management, customer service, payment processing,
and operations reports such as product sales, sales tax, and inventory management reports. In this
model, we provide infrastructure and services and the clients are responsible for all financial
operations and reporting related to the sales transactions.
The Enablement model should generate net margins for our clients consistent with other
retailers in our clients’ product category and the bottom line financial results for our clients
should be similar to other retailers in their space. Service fee revenues in this model will be reported in our traditional PFSweb service fee segment.
Agent (Flash) Financial Model
As an additional service, we offer an “Agent” model, or “Flash” model, in which our clients
maintain ownership of the product inventory stored at PFSweb as in the Enablement model. When a
customer orders the product from our client, a “flash” sale transaction passes product ownership of
each order to a PFSweb subsidiary that, in turn, immediately re-sells the product to the customer.
The “flash” change in ownership establishes the PFSweb subsidiary as the merchant of record. This
enables us to use our existing merchant infrastructure to process sales to end customers, removing
the need for clients to establish these business processes internally, but permitting clients to
control the sales process to end customers. We accumulate the inventory ownership transactions and
settle them with clients on a mutually agreed upon schedule.
The costs of many of PFSweb services normally billed on a transaction basis under the
Enablement model as well as certain administrative fees and credit risks are covered by the selling
margin under the Agent model. The bottom line financial results for our clients should be similar
to the Enablement model. In this model, the selling margin for product sales will typically be reported in our traditional PFSweb service fee segment although in certain situations
the product revenues will be reported in our PFSweb Retail and Business Connect segment.
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Retail Financial Model
In addition to the Enablement and the Agent models, we also offer a “Retail” model. Under the
Retail model, a PFSweb subsidiary purchases inventory from the client just as any other client
reseller partner. In the Retail model, we place the initial and replenishment purchase orders with
the client and take ownership of the product upon delivery to our facility.
Because we are the product owner as well as the merchant of record, we work closely with the
client to plan sales and promotional activities. Under the Retail model, depending upon the
product category and sales characteristics, we may require the client to provide product price
protection as well as product purchase payment terms, right of return, and obsolescence protection
appropriate to the product sales profile. Since we purchase and own the inventory and accounts
receivable, this business model requires significant working capital requirements for which we have
senior credit facilities.
The costs of all standard PFSweb services normally billed on a transaction basis under the
Enablement model as well as certain credit risks may be covered by the selling margin under the
Retail model arrangement. The bottom line financial results for our client should be similar to
the financial benefits from the retail channel although unlike the traditional retail channel, our
client controls the presentation and branding of the web site and owns all the customer data from
the eCommerce activities.
We currently provide the Retail model for a portion of our Procter & Gamble engagement for DTC
sales through the P&G eStore. In addition, we use our Retail model to enable our Supplies
Distributors subsidiary to serve as a global master distributor for Ricoh Infoprint Solutions
(“IPS”) printer supplies. In this model, the product revenues will be reported in our PFSweb Retail and Business Connect segment.
INDUSTRY INFORMATION AND COMPETITIVE LANDSCAPE
Industry Overview
Business activities in the public and private sectors continue to operate in an environment of
rapid technological advancement, increasing competition and continuous pressure to improve
operating and supply chain efficiency while decreasing costs. We currently see the following trends
within the industry:
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Manufacturers strive to restructure their supply chains to maximize efficiency and
reduce costs in both B2B and DTC markets and to create a variable-cost supply chain able to
support the multiple, unique needs of each of their initiatives, including traditional and
electronic commerce. |
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Companies in a variety of industries seek outsourcing as a method to address one or
more business functions that are not within their core business competencies, to reduce
operating costs or to improve the speed or cost of implementation. |
Supply Chain Management Trend
As companies maintain focus on improving their businesses and balance sheet financial ratios,
significant efforts and investments continue to be made identifying ways to maximize supply chain
efficiency and extend supply chain processes. Working capital financing, vendor managed inventory,
supply chain visibility software solutions, distribution channel skipping, direct to consumer
eCommerce sales initiatives, and complex upstream supply chain collaborative technology are
products that manufacturers seek to help them achieve greater supply chain efficiency.
A key business challenge facing many manufacturers and retailers as they evaluate their supply
chain efficiency is in determining how the trend toward increased direct-to-customer business
activity will impact their traditional B2B and DTC commerce business models. Order management and
small package fulfillment and distribution capabilities are becoming increasingly important
processes as this trend evolves. We believe manufacturers will look to outsource their non-core
competency functions to support this modified business model. We believe that companies will
continue to strategically plan for the impact that eCommerce and other new technology advancements
will have on their traditional commerce business models and their existing technology and
infrastructure capabilities.
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Manufacturers, as buyers of materials, are also imposing new business practices and policies
on their supplier partners to shift the normal supply chain costs and risks associated with inventory ownership
away from their own balance sheets. Through techniques like Vendor Managed Inventory or Consigned
Inventory Programs (“CIP”), manufacturers are asking their suppliers, as a part of the supplier
selection process, to provide capabilities where the manufacturer need not own, or even possess,
inventory prior to the exact moment that unit of inventory is required as a raw material component
or for shipping to a customer. To be successful for all parties, business models such as these
often require a sophisticated collection of technological capabilities that allow for complete
integration and collaboration of the information technology environments of both the buyer and
supplier. For example, for an inventory unit to arrive at the precise required moment in the
manufacturing facility, it is necessary for the Manufacturing Resource Planning systems of the
manufacturer to integrate with the CRM systems of the supplier. When hundreds of supplier partners
are involved, this process can become quite complex and technologically challenging. Buyers and
suppliers are seeking solutions that utilize XML based protocols and traditional EDI standards to
ensure an open systems platform that promote easier technology integration in these collaborative
solutions.
Outsourcing Trend
In response to growing competitive pressures and technological innovations, we believe many
companies, both large and small, are focusing their critical resources on the core competencies of
their business and utilizing eCommerce and business process outsourcing to accelerate their
business plans in a cost-effective manner and perform non-core business functions. Outsourcing can
provide many key benefits, including the ability to:
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Enter new business markets or geographic areas rapidly; |
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Increase flexibility to meet changing business conditions and demand for products and
services; |
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Enhance customer satisfaction and gain competitive advantage; |
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Reduce capital and personnel investments and convert fixed investments to variable
costs; |
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Improve operating performance and efficiency; and |
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Capitalize on skills, expertise and technology infrastructure that would otherwise be
unavailable or expensive given the scale of the business. |
Typically, many outsourcing service providers are focused on a single function, such as
information technology, call center management, credit card processing, warehousing or package
delivery. This focus creates several challenges for companies looking to outsource more than one of
these functions, including the need to manage multiple outsourcing service providers, to share
information with service providers and to integrate that information into their internal systems.
Additionally, the delivery of these multiple services must be transparent to the customer and
enable the client to maintain brand recognition and customer loyalty. Furthermore, traditional
commerce outsourcers are frequently providers of domestic-only services versus international
solutions. As a result, companies requiring global solutions must establish additional
relationships with other outsourcing parties.
Another vital point for major brand name companies seeking to outsource is the protection of
their brand. When looking for an outsourcing partner to provide infrastructure solutions, brand
name companies must find a company that can ensure the same quality performance and superior
experience that their customers expect from their brands. Working with an outsourcing partner
requires finding a partner that can maintain the consistency of their brand image, which is one of
the most valuable intangible assets that recognized brand name companies possess.
Competition
We face competition from many different sources depending upon the type and range of services
requested by a potential client. Many other companies offer one or more of the same services we
provide on an individual basis. Our competitors include vertical outsourcers, which are companies
that offer a single function solution, such as call centers, public warehouses or credit card
processors. We occasionally compete with transportation logistics providers, known in the industry
as 3PL’s and 4PL’s (third or fourth party logistics providers), who offer product management
functions as an ancillary service to their primary transportation services. We also compete against
other eCommerce and business process outsourcing providers, who perform various services similar to
our solution offerings.
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In many instances, we compete with the in-house operations of our potential clients
themselves. Occasionally, the operations departments of potential clients believe they can perform the same services we
do, at similar quality levels and costs, while others are reluctant to outsource business functions
that involve direct customer contact. We cannot be certain we will be able to compete successfully
against these or other competitors in the future.
Although many of our competitors offer one or more of our services, we believe our primary
competitive advantage is our ability to offer a wide array of customized services marketed as
PFSweb’s End2End eCommerce® services, thereby eliminating any need for our clients to
coordinate these services from many different providers. We believe we can differentiate ourselves
by offering our clients a very broad range of eCommerce and business process services that address,
in many cases, the entire value chain, from demand to delivery.
We also compete on the basis of many other important additional factors, including:
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operating performance and reliability; |
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ease of implementation and integration; |
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experience of the people required to successfully and efficiently design and implement
solutions; |
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experience operating similar solutions dynamically; |
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leading edge technology capabilities; |
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global reach; and |
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price. |
We believe we can compete favorably with respect to many of these factors. However, the market
for our services is competitive and continually evolving, and we may not be able to compete
successfully against current and future competitors.
COMPANY INFORMATION
Clients and Marketing
Our target clients include online retailers as well as leading technology and consumer goods
brands looking to quickly and efficiently implement or enhance business initiatives, adapt their
go-to-market strategies, or introduce new products or programs, without the burden of modifying or
expanding their technology, customer care, supply chain and logistics infrastructure. Our solutions
are applicable to a multitude of industries and company types and we have provided solutions for
such companies as:
IPS (printer supplies in several geographic areas), Xerox (printers and printer supplies),
Roots Canada LTD. (apparel), Hawker
Beechcraft Corp. (facilities management and time-definite logistics supporting parts distribution),
Riverbed Technologies (technology products), LEGO Brand Retail (toys), Liz Claiborne brands
(fashion apparel and accessories), P&G (consumer products), AAFES (military exchange service) among
many others.
We target potential clients through an extensive integrated marketing program that is
comprised of a variety of direct marketing techniques, email marketing initiatives, trade event
participation, search engine marketing, public relations and a sophisticated outbound tele-sales
lead generation model. We have also developed an intricate messaging matrix that defines our
various eCommerce and business process outsourcing solutions and products, the vehicles we utilize
to deliver marketing communication on these solutions/products and the target audience segments
that display a demand for these solutions/products. This messaging matrix allows us to deploy
highly targeted solution messages to selected key vertical industry segments where we feel that we
are able to provide significant service differentiation and value. We also pursue strategic
marketing alliances with consulting firms, software manufacturers and other logistics providers to
increase market awareness and generate referrals and customer leads.
Because of the highly complex nature of the solutions we provide, our clients demand
significant competence and experience from a variety of different business disciplines during the
sales cycle. As such, we utilize a selected member of our senior executive team to lead the design
and proposal development of each potential new client we choose to pursue. The senior executive is
supported by a select group of highly experienced individuals from our professional services group
with specific industry knowledge or experience to the solutions development process. We employ a
team of highly trained implementation managers whose responsibilities include the oversight and
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supervision of client projects and maintaining high levels of client satisfaction during the
transition process between the various stages of the sales cycle and steady state operations.
Technology
We maintain advanced management information systems and have automated key business functions
using online, real-time or batch systems. These systems enable us to provide information concerning
sales, inventory status, customer payments and other operations that are essential for us and our
clients to efficiently manage electronic commerce and supply chain business programs. Our systems
are designed to scale rapidly to handle the transaction processing demands of our clients and our
growth.
We employ technology from a select group of vendors. For example, we deploy IBM e-servers and
network printers in appropriate models to run web site functions as well as order management and
distribution functions. We utilize Avaya Communication for telephone switch and call center
management functions and to interact with customers via voice, e-mail or chat. Avaya Communication
technology also allows us to share web pages between customers and our service representatives. We
have the ability to transmit and receive voice, data and video simultaneously on a single network
connection to a customer to more effectively serve that customer for our client. Clients’ interest
in using this technology stems from its ability to allow shoppers to consult with known experts in
a way that the customer chooses prior to purchasing. Our sophisticated computer-telephony
integration has been accomplished by combining systems software from IBM and Avaya Communication
together with our own application development. We use AT&T for our private enterprise network and
long distance carrier. We use Oracle’s J.D. Edwards as the software provider for the primary ERP
applications that we use in our operational areas and financial areas. We use Dematic/Rapistan
Materials Handling Automation for our automated order selection, automated conveyor and
“pick-to-light” (inventory retrieval) systems, and Symbol Technologies/Telxon for our warehouse
radio frequency applications. Our Warehouse Management System (“WMS”) and Distribution Requirements
Planning (“DRP”) system have been developed in-house to meet the varied unique requirements of our
vertical markets. Both the WMS and DRP are tightly integrated to both the North American and
European deployments of our J.D. Edwards’ system.
Many internal infrastructures are not sufficient to support the explosive growth in
e-business, e-marketplaces, supply chain compression, distribution channel realignment and the
corresponding demand for real-time information necessary for strategic decision-making and product
fulfillment. To address this need, we have created PFSweb’s End2End eCommerce® platform
to enable companies with little or no eCommerce infrastructure to speed their time to market and
minimize resource investment and risk, and allows all companies involved to improve the efficiency
of their supply chain.
Using the various components of our collaboration technology suite, we can assist our clients
in easily integrating their web sites or ERP systems to our systems for real-time web service
enabled transaction processing without regard for their hardware platform or operating system. This
high-level of systems integration allows our clients to automatically process orders, customer data
and other eCommerce information. We also can track information sent to us by the client as it moves
through our systems in the same manner a carrier would track a package throughout the delivery
process. Our systems enable us to track, at a detailed level, information received, transmission
timing, any errors or special processing required and information sent back to the client.
We provide technology interfaces to our back-office applications including our customized
Oracle J.D. Edwards order management and fulfillment application. We utilize Gentran Integration
Suite™ (“GIS”) as our technology platform for Enterprise Application Integration with our clients
and client’s trading partners. With GIS, we have greatly increased our ability to quickly design
and deploy customized B2B and DTC eCommerce solutions for our clients by utilizing a robust
business process modeling tool and a highly scalable operating infrastructure. This platform
facilitates the efficient and secure exchange of electronic business transactions/documents in a
wide variety of formats (i.e. XML, X.12 EDI, delimited text, IDOCS) and communication protocols
(i.e. FTP/SFTP, AS2/HTTP/HTTPS, AS1 SMTP, MQ Series and SOA Web Services).
We have invested in advanced telecommunications, computer telephony, electronic mail and
messaging, automated fax technology, IVR technology, barcode scanning, wireless technology, fiber
optic network communications and automated inventory management systems. We have also developed and
utilize
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telecommunications technology that provides for automatic customer call recognition and
customer profile recall for inbound customer service representatives.
The primary responsibility of our systems development team of IT professionals is directed at
implementing custom solutions for new clients and maintaining existing client relationships. Our
development team can also produce proprietary systems infrastructure to expand our capabilities in
circumstances where we cannot purchase standard solutions from commercial providers. We also
utilize temporary and/or contract resources when needed for additional capacity.
Our information technology operations and infrastructure are built on the premise of
reliability and scalability. We maintain diesel generators and un-interruptible power supply
equipment to provide constant availability to computer rooms, call centers and warehouses. Multiple
Internet service providers and redundant web servers provide for a high degree of availability to
web sites that interface with our systems. Capacity planning and upgrading is performed regularly
to allow for quick implementation of new clients and avoid time-consuming infrastructure upgrades
that could slow growth rates. In the event of a disastrous situation, we also have a Disaster
Recovery Plan that provides geographically separated and comparably equipped data centers that are
able to recover stored data in a reasonable and effective manner.
Strategy
We continue to maintain our simple but effective strategy statement to drive our actions, QGP.
This acronym stands for Quality, Growth and Profit. We believe that if we can achieve outstanding
performance on these three basic elements, they will provide for a stable foundation for our
future. As the evolution of our business model continues, we will remain focused on these three
fundamentals:
Quality: To exceed our client’s service level requirements and enhance the value of their
“brand” while providing their customers a positive, memorable and efficient experience.
Growth: To increase our revenue and gross profit from its current levels. To aggressively
market simplified product messages to drive new clients and revenue and profit growth. To become a
larger company and create career and additional employment opportunities. Embrace strategic
partnering to accentuate strengths and minimize weaknesses.
Profit: To generate positive cash flow and continue to strive for consistent profitable
results. To increase the value of our company for all of its stakeholders while rewarding our team
members with challenging, fun and memorable life experiences.
The successful balance of the execution of these fundamental strategies is targeted to result
in the formation of a solid strategic and financial foundation and provide us a sustainable and
profitable business model for the future.
See “Risk Factors” for a complete discussion of risk factors related to our ability to achieve
our objectives and fulfill our business strategies.
Employees
As of December 31, 2010, we had approximately 1,100 employees, of which approximately 900 were
located in the United States. We have never suffered an interruption of business as a result of a
labor dispute. We consider our relationship with our employees to be good. In the U.S., Canada and
Philippines, we are not a party to any collective bargaining agreements and while our European
subsidiaries are not a party to a collective-bargaining agreement, they are required to comply with
certain rules mentioned in collective bargaining agreements agreed upon by representatives of their
industry (logistics) and unions.
Our success in recruiting, hiring and training large numbers of skilled employees and
obtaining large numbers of hourly employees during peak periods for distribution and call center
operations is critical to our ability to provide high quality distribution and support services.
Call center representatives and distribution personnel receive feedback on their performance on a
regular basis and, as appropriate, are recognized for superior performance or
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given additional training. Generally, our clients provide specific product training for our
customer service representatives and, in certain instances, on-site client personnel to provide
specific technical support. To maintain good employee relations and to minimize employee turnover,
we strive to offer competitive pay, hire primarily full-time employees who are eligible to receive
a full range of employee benefits, and provide employees with clear, visible career paths.
Internet Access to Reports
We
maintain an Internet website, www.pfsweb.com. Our annual reports on Form 10-K, quarterly
reports on Form 10-Q, and current reports on Form 8-K (and amendments, if any, to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934) are
made available, free of charge, through the investor relations section of this website as soon as
reasonably practicable after we electronically file such material, or furnish it to the Securities
and Exchange Commission. The information on this website is not incorporated in this report.
Government Regulation
We are subject to federal, state, local and foreign consumer protection laws, including laws
protecting the privacy of our customers’ personally identifiable information and other non-public
information and regulations prohibiting unfair and deceptive trade practices. Furthermore, the
growth and demand for online commerce has and may continue to result in more stringent consumer
protection laws that impose additional compliance burdens and greater penalties on online
companies. Moreover, there is a trend toward regulations requiring companies to provide consumers
with greater information regarding, and greater control over, how their personal data is used, and
requiring notification where unauthorized access to such data occurs. For example, many states
currently require us to notify each of our customers who are affected by any data security breach
in which an unauthorized person, such as a computer hacker, obtains such customer’s name and one or
more of the customer’s social security number, driver’s license number, credit or debit card number
or other similar personal information. In addition, several jurisdictions, including foreign
countries, have adopted privacy-related laws that restrict or prohibit unsolicited email
promotions, commonly known as “spam,” and that impose significant monetary and other penalties for
violations. One such law, the “CAN-SPAM” Act of 2003, became effective in the United States on
January 1, 2004 and imposes complex, burdensome and often ambiguous requirements in connection with
our sending commercial email to our customers and potential customers. Moreover, in an effort to
comply with these laws, Internet service providers may increasingly block legitimate marketing
emails. These consumer protection laws may become more stringent in the future and could result in
substantial compliance costs and could interfere with the conduct of our business.
We collect sales or other similar taxes for shipments of goods in certain states. One or more
local, state or foreign jurisdictions may seek to impose sales tax collection obligations on us and
other out-of-state companies that engage in online commerce. If sales tax obligations are
successfully imposed upon us by a state or other jurisdiction, we could be exposed to substantial
tax liabilities for past sales and fines and penalties for failure to collect sales taxes and we
could suffer decreased sales in that state or jurisdiction as the effective cost of purchasing
goods from us increases for those residing in that state or jurisdiction. In addition, new
legislation or regulation, the application of laws and regulations from jurisdictions whose laws do
not currently apply to our business or the application of existing laws and regulations to the
Internet and commercial online services could result in significant additional taxes or regulatory
restrictions on our business. These taxes could have an adverse effect on our cash flows and
results of operations. Furthermore, there is a possibility that we may be subject to significant
fines or other payments for any past failures to comply with these requirements.
Item 1A. RISK FACTORS
Our business, financial condition and operating results could be adversely affected by any or
all of the following factors, in which event the trading price of our common stock could decline,
and you could lose part or all of your investment.
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General Risks Related to Our Business
Our business and future growth depend on our continued access to bank and commercial financing. An
uncertain or recessed economy may negatively impact our business, results of operations, financial
condition or liquidity.
During the past several years, the credit markets and the financial services industry have
been experiencing a period of unprecedented turmoil and upheaval characterized by the bankruptcy,
failure, collapse or sale of various financial institutions and an unprecedented level of
intervention from the United States and foreign governments. An uncertain or recessed economy could
also adversely impact our customers’ operations or ability to maintain liquidity, which may
negatively impact our business and results of operations.
Our business and future growth currently depend on our ability to access bank and commercial
lines of credit. We currently depend on an aggregate of approximately $108 million in line of
credit facilities provided by various banks and commercial lenders. These lines of credit currently
mature at various dates through March 2014 and are secured by substantially all our assets. Our
ability to renew our line of credit facilities depends upon various factors, including the
availability of bank loans and commercial credit in general, as well as our financial condition and
prospects. Therefore, we cannot guarantee that these credit facilities will continue to be
available beyond their current maturities on reasonable terms or at all. Our inability to renew or
replace our credit facilities or find alternative financing would materially adversely affect our
business, financial condition, operating results and cash flow.
Our clients and customers may be unable to pay us for our products and services
Our clients and customers include some companies that may from time to time encounter
financial difficulties, especially in light of the current economic environment and the turmoil in
the credit markets. If a client’s or customer’s financial difficulties become severe, they may be
unwilling or unable to pay our invoices in the ordinary course of business, which could adversely
affect collections of both our accounts receivable and unbilled services. The bankruptcy of a
client or customer with a substantial account receivable could have a material adverse effect on
our financial condition and results of operations. In addition, if a client or customer declares
bankruptcy after paying us certain invoices, a court may determine that we are not properly
entitled to that payment and may require repayment of some or all of the amounts we received, which
could adversely affect our financial condition and results of operations.
We anticipate incurring significant expenses in the foreseeable future, which may reduce our
ability to achieve or maintain profitability.
To reach our business growth objectives, we may increase our operating and marketing expenses,
as well as capital expenditures. To offset these expenses, we will need to generate additional
profitable business. If our revenue grows slower than either we anticipate or our clients’
projections indicate, or if our operating and marketing expenses exceed our expectations, we may
not generate sufficient revenue to be profitable or be able to sustain or increase profitability on
a quarterly or an annual basis in the future. Additionally, if our revenue grows slower than either
we anticipate or our clients’ projections indicate, we may incur unnecessary or redundant costs and
our operating results could be adversely affected.
Changes to financial accounting standards may affect our reported results of operations.
We prepare our financial statements to conform to United States generally accepted accounting
principles, or GAAP. GAAP is subject to interpretation by the Financial Accounting Standards Board,
the SEC and various bodies formed to interpret and create appropriate accounting policies. A change
in those policies can have a significant effect on our reported results and may even affect our
reporting of transactions that were completed before a change is announced. Accounting rules
affecting many aspects of our business, including rules relating to accounting for revenue
recognition, arrangements involving multiple deliverables and operating leases, have recently been
revised or are currently under review. Changes to those rules or current interpretation of those
rules may have a material adverse effect on our reported financial results or on the way we conduct
our business.
We operate with significant levels of indebtedness and are required to comply with certain
financial and non-financial covenants; we are required to maintain a minimum level of subordinated
loans to our subsidiary
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Supplies Distributors; and we have guaranteed certain indebtedness and obligations of our
subsidiaries Supplies Distributors and eCOST.
As of December 31, 2010, our total credit facilities outstanding, including debt, capital
lease obligations and our vendor accounts payable related to financing of IPS product inventory,
was approximately $48.2 million. Certain of the credit facilities have maturity dates in calendar
year 2012, but are classified as current liabilities in our consolidated financial statements given
the underlying nature of the credit facility. We cannot provide assurance that our credit
facilities will be renewed by the lending parties. Additionally, these credit facilities include
both financial and non-financial covenants, many of which also include cross default provisions
applicable to other agreements. These covenants also restrict our ability to transfer funds among
our various subsidiaries, which may adversely affect the ability of our subsidiaries to operate
their businesses or comply with their respective loan covenants. We cannot provide assurance that
we will be able to maintain compliance with these covenants. Any non-renewal or any default under
any of our credit facilities would have a material adverse impact upon our business and financial
condition. In addition we have provided $4.3 million of subordinated indebtedness to Supplies
Distributors as of December 31, 2010. The maximum level of this subordinated indebtedness to
Supplies Distributors that may be provided without approval from our
lenders is $5.0 million. The
restrictions on increasing this amount without lender approval may limit our ability to comply with
certain loan covenants or further grow and develop Supplies Distributors’ business. We have
guaranteed most of the indebtedness of Supplies Distributors. Furthermore, we are obligated to
repay any over-advance made to Supplies Distributors by its lenders to the extent Supplies
Distributors is unable to do so. We have also guaranteed our subsidiary eCOST’s $7.5 million credit line, as well
as certain of its vendor trade payables.
We are dependent on our key personnel, and we need to hire and retain skilled personnel to sustain
our business.
Our performance is highly dependent on the continued services of our executive officers and
other key personnel, the loss of any of whom could materially adversely affect our business. In
addition, we need to attract and retain other highly-skilled, technical and managerial personnel
for whom there is intense competition. We cannot assure you we will be able to attract and retain
the personnel necessary for the continuing growth of our business. Our inability to attract and
retain qualified technical and managerial personnel could materially adversely affect our ability
to maintain and grow our business significantly.
We are subject to risks associated with our international operations.
We currently operate a distribution center in Liège, Belgium with approximately 150,000 square
feet and a distribution center in Markham, Ontario, Canada with approximately 23,000 square feet.
We also operate a facility in the Philippines with approximately 7,000 square feet to provide call
center and customer service functions and technical support. We cannot assure you that we will be
successful in expanding in these or any additional international markets. In addition to the
uncertainty regarding our ability to generate revenue from foreign operations and expand our
international presence, there are risks inherent in doing business internationally, including:
| |
• |
|
changing regulatory requirements; |
| |
| |
• |
|
legal uncertainty regarding foreign laws, tariffs and other trade barriers; |
| |
| |
• |
|
political instability; |
| |
| |
• |
|
potentially adverse tax consequences; |
| |
| |
• |
|
foreign currency fluctuations; and |
| |
| |
• |
|
cultural differences. |
Any one or more of these factors could materially adversely affect our business in a number of
ways, such as increased costs, operational difficulties and reductions in revenue.
We are uncertain about our need for and the availability of additional funds.
Our future capital needs are difficult to predict. We may require additional capital to take
advantage of unanticipated opportunities, including strategic alliances and acquisitions and to
fund capital expenditures, or to respond to changing business conditions and unanticipated
competitive pressures. We may also require additional
16
funds to finance operating losses. Should these circumstances arise, our existing cash balance
and credit facilities may be insufficient and we may need to raise additional funds either by
borrowing money or issuing additional equity. We cannot assure you that such resources will be
adequate or available for all of our future financing needs. Our inability to finance our growth,
either internally or externally, may limit our growth potential and our ability to execute our
business strategy. If we are successful in completing an additional equity financing, this could
result in further dilution to our shareholders or reduce the market value of our common stock.
We may engage in future strategic alliances or acquisitions that could dilute our existing
shareholders, cause us to incur significant expenses or harm our business.
We may review strategic alliance or acquisition opportunities that would complement our
current business or enhance our technological capabilities. Integrating any newly acquired
businesses, technologies or services may be expensive and time-consuming. To finance any
acquisitions, it may be necessary for us to raise additional funds through borrowing money or
completing public or private financings. Additional funds may not be available on terms that are
favorable to us and, in the case of equity financings, may result in dilution to our shareholders.
We may not be able to operate any acquired businesses profitably or otherwise implement our growth
strategy successfully. If we are unable to integrate any newly acquired entities or technologies
effectively, our operating results could suffer. Future acquisitions could also result in
incremental expenses and the incurrence of debt and contingent liabilities, any of which could harm
our operating results.
If we fail to maintain an effective system of internal controls, we may not be able to accurately
report our financial results or prevent fraud. As a result, current and potential shareholders
could lose confidence in our financial reporting, which could harm our business and the trading
price of our common stock.
Based on the current requirements, and our public float, we are not required to comply with
the requirements of Section 404 of the Sarbanes-Oxley Act to obtain a report by our independent
auditors opining on the effectiveness of our internal controls over financial reporting. If we fail
to correct any issues in the design or operating effectiveness of internal controls over financial
reporting or fail to prevent fraud, current and potential shareholders could lose confidence in our
financial reporting, which could harm our business and the trading price of our common stock.
Delivery of our and our clients’ products could be delayed or disrupted by factors beyond our
control, and we could lose customers and clients as a result.
We rely upon third party carriers for timely delivery of our and our clients’ product
shipments. As a result, we are subject to carrier disruptions and increased costs due to factors
that are beyond our control, including employee strikes, inclement weather and increased fuel
costs. Any failure to deliver products to our and our clients’ customers in a timely and accurate
manner may damage our reputation and brand and could cause us to lose customers and clients. We
cannot be sure that our relationships with third party carriers will continue on terms favorable to
us, if at all. If our relationship with any of these third party carriers is terminated or impaired
or if any of these third parties is unable to deliver products, we would be required to use
alternative carriers for the shipment of our and our clients’ products to customers. We may be
unable to engage alternative carriers on a timely basis or on favorable terms, if at all. Potential
adverse consequences include:
| |
• |
|
reduced visibility of order status and package tracking; |
| |
| |
• |
|
delays in order processing and product delivery; |
| |
| |
• |
|
increased cost of delivery, resulting in reduced margins; and |
| |
| |
• |
|
reduced shipment quality, which may result in damaged products and customer
dissatisfaction. |
Our profitability could be adversely affected if the operation of our distribution or call center
facilities were interrupted or shut down as the result of a natural disaster.
We operate a majority of our distribution facilities in and around the Memphis, Tennessee area
and our call center operations are centered in Plano, Texas. Any natural disaster or other serious
disruption to these facilities due to fire, tornado, flood or any other cause would substantially
disrupt our operations and would impair our ability to adequately service our customers. In
addition, we could incur significantly higher costs during the time it takes for
17
us to reopen or replace any one or more of these facilities, which may or may not be
reimbursed by insurance. As a result, disruption at one or more of these facilities could adversely
affect our profitability.
We may be a party to litigation involving our eCommerce intellectual property rights. If third
parties claim we are infringing their intellectual property rights, we could incur significant
litigation costs, be required to pay damages, or change our business or incur licensing expenses.
In recent years, there has been significant litigation in the United States involving patent
and other intellectual property rights. We may be a party to intellectual property litigation in
the future to protect our trade secrets or know-how. United States patent applications are
confidential until a patent is issued and most technologies are developed in secret. Accordingly,
we are not, and cannot be, aware of all patents or other intellectual property rights of which our
services may pose a risk of infringement. Others asserting rights against us could force us to
defend ourselves or our customers against alleged infringement of intellectual property rights. We
could incur substantial costs to prosecute or defend any such litigation.
Third parties have asserted, and may in the future assert, that our business or the
technologies we use infringe on their intellectual property rights. As a result, we may be subject
to intellectual property legal proceedings and claims in the ordinary course of business. We cannot
predict whether third parties will assert claims of infringement in the future or whether any
future claims will prevent us from offering popular products or services. If we are found to
infringe, we may be required to pay monetary damages, which could include treble damages and
attorneys’ fees for any infringement that is found to be willful, and either be enjoined or
required to pay ongoing royalties with respect to any technologies found to infringe. Further, as a
result of infringement claims either against us or against those who license technology to us, we
may be required, or deem it advisable, to develop non-infringing technology, which could be costly
and time consuming, or enter into costly royalty or licensing agreements. Such royalty or licensing
agreements, if required, may be unavailable on terms that are acceptable, or at all. If a third
party successfully asserts an infringement claim against us and we are enjoined or required to pay
monetary damages or royalties or we are unable to develop suitable non-infringing alternatives or
license the infringed or similar technology on reasonable terms on a timely basis, our business,
results of operations and financial condition could be materially harmed.
A breach of our eCommerce security measures could reduce demand for our services. Credit card fraud
and other fraud could adversely affect our business.
A requirement of the continued growth of eCommerce is the secure transmission of confidential
information over public networks. A party who is able to circumvent our security measures could
misappropriate proprietary information or interrupt our operations. Any compromise or elimination
of our security could reduce demand for our services.
We may be required to expend significant capital and other resources to protect against
security breaches or to address any problem they may cause. Because our activities involve the
storage and transmission of proprietary information, such as credit card numbers, security breaches
could damage our reputation, cause us to lose clients, impact our ability to attract new clients
and we could be exposed to litigation and possible liability. Our security measures may not prevent
security breaches, and failure to prevent security breaches may disrupt our operations. In certain
circumstances, we do not carry insurance against the risk of credit card fraud and other fraud, so
the failure to adequately control fraudulent transactions on either our behalf or our client’s
behalf could increase our expenses.
We may be liable for misappropriation of our customers’ and our clients’ customers’ personal
information.
Data security laws are becoming more stringent in the United States and abroad. Third parties
are engaging in increased cyber attacks against companies doing business on the Internet and
individuals are increasingly subjected to identity and credit card theft on the Internet. If third
parties or unauthorized employees are able to penetrate our network security or otherwise
misappropriate our or our clients’ customers’ personal information or credit card information, or
if we give third parties or our employees improper access to customers’ personal information or
credit card information, we could be subject to liability. This liability could include claims for
unauthorized purchases with credit card information, impersonation or other similar fraud claims.
This liability could also include
18
claims for other misuses of personal information, including unauthorized marketing purposes.
Liability for misappropriation of this information could decrease our profitability. In such
circumstances, we also could be liable for failing to provide timely notice of a data security
breach affecting certain types of personal information. In addition, the Federal Trade Commission
and state agencies have brought numerous enforcement actions against Internet companies for alleged
deficiencies in those companies’ privacy and data security practices, and they may continue to
bring such actions. We could incur additional expenses if new regulations regarding the collection,
use or storage of personal information are introduced or if government agencies investigate our
privacy or security practices.
We rely on encryption and authentication technology licensed from third parties to provide the
security and authentication necessary to effect secure transmission of sensitive customer
information such as customer credit card numbers. Advances in computer capabilities, new
discoveries in the field of cryptography or other events or developments may result in a compromise
or breach of the algorithms that we use to protect customer transaction data. If any such
compromise of security were to occur, it could subject us to liability, damage our reputation and
diminish the value of our brand-name. A party who is able to circumvent the security measures could
misappropriate proprietary information or cause interruptions in operations. We may be required to
expend significant capital and other resources to protect against such security breaches or to
alleviate problems caused by such breaches. Our security measures are designed to prevent security
breaches, but our failure to prevent such security breaches could subject us to liability, damage
our reputation and diminish the value of our brand-name.
We also may provide non-secured channels for customers to communicate. Despite the increased
security risks, customers may use such channels to send personal information and other sensitive
data. In addition, “phishing” incidents are on the rise. Phishing involves an online company’s
customers being tricked into providing their credit card numbers or account information to someone
pretending to be the online company’s representative. Such incidents have recently given rise to
litigation against online companies for failing to take sufficient steps to police against such
activities by third parties, and may discourage customers from using online services.
Specific Risks Related to Our Business Process Outsourcing Business
Our service fee revenue and gross margin is dependent upon our clients’ business and transaction
volumes and our costs; many of our client service agreements are terminable by the client at will;
we may incur financial penalties if we fail to meet contractual service levels under certain client
service agreements.
Our service fee revenue is primarily transaction based and fluctuates with the volume of
transactions or level of sales of the products by our clients for whom we provide transaction
management services. If we are unable to retain existing clients or attract new clients or if we
dedicate significant resources to clients whose business does not generate sufficient revenue or
whose products do not generate substantial customer sales, our business may be materially adversely
affected. Moreover, our ability to estimate service fee revenue for future periods is substantially
dependent upon our clients’ and our own projections, the accuracy of which has been, and will
continue to be, unpredictable. Therefore, our planning for client activity and targeted goals for
service fee revenue and gross margin may be materially adversely affected by incomplete, delayed or
inaccurate projections. In addition, many of our service agreements with our clients are terminable
by the client at will. Therefore, we cannot assure you that any of our clients will continue to use
our services for any period of time. The loss of a significant amount of service fee revenue due to
client terminations could have a material adverse effect on our ability to cover our costs and thus
on our profitability. Certain of our client service agreements contain minimum service level
requirements and impose financial penalties if we fail to meet such requirements. The imposition of
a substantial amount of such penalties could have a material adverse effect on our business and
operations.
We subcontract a portion of our client services to third parties, and we are subject to various
risks and liabilities if such subcontractors do not provide the subcontracted services or provide
them in a manner that does not meet required service levels.
We currently, and may in the future, subcontract to one or more third parties a portion of our
end-to-end solution service offering. Although our end-to-end solution service clients generally
approve in advance the designation of the subcontractor and its provision of the subcontracted
services, under the terms of our contracts with our end-to-end solution service clients, we remain
liable to provide such subcontracted services and may be liable for the
19
actions and omissions of such subcontractors. In certain instances, our end-to-end solution
service clients prepay in advance a portion of the service fees payable in respect of the
subcontracted services, and, under certain circumstances, including our breach or the breach by our
subcontractor of our or their respective obligations, we are liable to refund all or a portion of
such prepaid fees. Consequently, in the event our subcontractor fails to provide the subcontracted
services in compliance with required services levels, or otherwise breaches its obligations, or
discontinues its business, whether as the result of bankruptcy, insolvency or otherwise, we may be
required to provide such services at a higher cost to us and may otherwise be liable for various
costs and expenses related to such event. In addition, any such failure may damage our reputation
and otherwise result in a material adverse affect upon our business and financial condition.
Our business is subject to the risk of customer and supplier concentration.
For fiscal year 2010, four clients represented approximately 33% of our service fee revenue
(excluding pass-through revenue). The loss of any one or more of these clients may have a material
adverse effect upon our business and financial condition.
The majority of our Supplies Distributors product revenue is generated by sales of product
purchased under master distributor agreements with InfoPrint Solutions Company (“IPS”). These
agreements are terminable at will and no assurance can be given that IPS will continue the master
distributor agreements with Supplies Distributors. Supplies Distributors does not have its own
sales force and relies upon IPS’s sales force and product demand generation activities for its sale
of IPS product. Discontinuance of such activities would have a material adverse effect on Supplies
Distributors’ business and our overall financial condition.
Sales by Supplies Distributors to three customers in the aggregate accounted for approximately
37% and 40% of Supplies Distributors’ total product revenue for each of the years ended December
31, 2010 and 2009, respectively (24% and 27% of our consolidated net revenues for the years ended
December 31, 2010 and 2009, respectively). The loss of any one or more of such customers, or
non-payment of any material amount by these or any other customer, would have a material adverse
effect upon Supplies Distributors’ business.
Our operating results are materially impacted by our client mix and the seasonality of their
business.
Our business is materially impacted by our client mix and the seasonality of their business.
Based upon our current client mix and their current projected business volumes, we anticipate our
revenue will be at its lowest in the first quarter of our fiscal year and at its highest in the
fourth quarter of our fiscal year. We are unable to predict how the seasonality of future clients’
business may affect our quarterly revenue and whether the seasonality may change due to
modifications to a client’s business. As such, we believe that results of operations for a
quarterly period may not be indicative of the results for any other quarter or for the full year.
Our systems may not accommodate significant growth in our number of clients.
Our success depends on our ability to handle a large number of transactions for many different
clients in various product categories. We expect that the volume of transactions will increase
significantly as we expand our operations. If this occurs, additional stress will be placed upon
the network hardware and software that manages our operations. We cannot assure you of our ability
to efficiently manage a large number of transactions. If we are not able to maintain an appropriate
level of operating performance, we may develop a negative reputation, and impair existing and
prospective client relationships and our business would be materially adversely affected.
We may not be able to recover all or a portion of our start-up costs associated with one or more of
our clients.
We generally incur start-up costs in connection with the planning and implementation of
business process solutions for our clients. Although we generally attempt to recover these costs
from the client in the early stages of the client relationship, or upon contract termination if the
client terminates without cause prior to full amortization of these costs, there is a risk that the
client contract may not fully cover the start-up costs. To the extent start-up costs exceed the
start-up fees received, certain excess costs will be expensed as incurred. Additionally, in
connection with new client contracts we generally incur capital expenditures associated with assets
whose primary use is related to the client solution. There is a risk that the contract may end
before expected and we may not recover the full amount of our capital costs.
20
Our revenue and margins may be materially impacted by client transaction volumes that differ from
client projections and business assumptions.
Our pricing for client transaction services, such as call center and fulfillment, is often
based upon volume projections and business assumptions provided by the client and our anticipated
costs to perform such work. In the event the actual level of activity or cost is substantially
different from the projections or assumptions, we may have insufficient or excess staffing,
incremental costs or other assets dedicated for such client that may negatively impact our margins
and business relationship with such client. In the event we are unable to meet the service levels
expected by the client, our relationship with the client will suffer and may result in financial
penalties and/or the termination of the client contract.
We face competition from many sources that could adversely affect our business.
Many companies offer, on an individual basis, one or more of the same services we do, and we
face competition from many different sources depending upon the type and range of services
requested by a potential client. Our competitors include vertical outsourcers, which are companies
that offer a single function, such as call centers, public warehouses or credit card processors. We
compete against transportation logistics providers who offer product management functions as an
ancillary service to their primary transportation services. We also compete against other business
process outsourcing providers, who perform many similar services as us. Many of these companies
have greater capabilities than we do for the single or multiple functions they provide. In many
instances, our competition is the in-house operations of its potential clients themselves. The
in-house operations of potential clients often believe that they can perform the same services we
do, while others are reluctant to outsource business functions that involve direct customer
contact. We cannot be certain that we will be able to compete successfully against these or other
competitors in the future.
Our sales and implementation cycles are highly variable and our ability to finalize pending
contracts may cause our operating results to vary widely.
The sales cycle for our services is variable, typically ranging between several months to up
to a year or longer from initial contact with the potential client to the signing of a contract.
Occasionally the sales cycle requires substantially more time. Delays in signing and executing
client contracts may affect our revenue and cause our operating results to vary widely. A potential
client’s decision to purchase our services is discretionary, involves a significant commitment of
the client’s resources and is influenced by intense internal and external pricing and operating
comparisons. To successfully sell our services, we generally must educate our potential clients
regarding the use and benefit of our services, which can require significant time and resources.
Consequently, the period between initial contact and the purchase of our services is often long and
subject to delays associated with the lengthy approval and competitive evaluation processes that
typically accompany significant operational decisions. Additionally, the time required to finalize
pending contracts and to implement our systems and integrate a new client can range from several
weeks to many months. Delays in signing and integrating new clients may affect our revenue and
cause our operating results to vary widely.
Our business could be adversely affected by a systems or equipment failure, whether that of us or
our clients.
Our operations are dependent upon our ability to protect our distribution facilities, customer
service centers, computer and telecommunications equipment and software systems against damage and
failures. Damage or failures could result from fire, power loss, equipment malfunctions, system
failures, natural disasters and other causes. If our business is interrupted either from accidents
or the intentional acts of others, our business could be materially adversely affected. In
addition, in the event of widespread damage or failures at our facilities, our short-term disaster
recovery and contingency plans and insurance coverage may not be sufficient.
Our clients’ businesses may also be harmed from any system or equipment failures we
experience. In that event, our relationship with these clients may be adversely affected, we may
lose these clients, our ability to attract new clients may be adversely affected and we could be
exposed to liability.
21
Interruptions could also result from the intentional acts of others, like “hackers.” If our
systems are penetrated by computer hackers, or if computer viruses infect our systems, our computers could fail or
proprietary information could be misappropriated.
If our clients suffer similar interruptions in their operations, for any of the reasons
discussed above or for others, our business could also be adversely affected. Many of our clients’
computer systems interface with our systems. If our clients suffer interruptions in their systems,
the link to our systems could be severed and sales of the client’s products could be slowed or
stopped.
Risks Related to the Business Process Outsourcing Industry
If the trend toward outsourcing does not continue, our business could be adversely affected.
Our business could be materially adversely affected if the trend toward outsourcing declines
or reverses, or if corporations bring previously outsourced functions back in-house. Particularly
during general economic downturns, businesses may bring in-house previously outsourced functions to
avoid or delay layoffs.
Our market is subject to rapid technological change and to compete we must continually enhance our
systems to comply with evolving standards.
To remain competitive, we must continue to enhance and improve the responsiveness,
functionality and features of our services and the underlying network infrastructure. If we are
unable to adapt to changing market conditions, client requirements or emerging industry standards,
our business could be adversely affected. The internet and eCommerce environments are characterized
by rapid technological change, changes in user requirements and preferences, frequent new product
and service introductions embodying new technologies and the emergence of new industry standards
and practices that could render our technology and systems obsolete. Our success will depend, in
part, on our ability to both internally develop and license leading technologies to enhance our
existing services and develop new services. We must continue to address the increasingly
sophisticated and varied needs of our clients and respond to technological advances and emerging
industry standards and practices on a cost-effective and timely basis. The development of
proprietary technology involves significant technical and business risks. We may fail to develop
new technologies effectively or to adapt our proprietary technology and systems to client
requirements or emerging industry standards.
Risks Related to Our Stock
The market price of our common stock may be volatile. You may not be able to sell your shares at or
above the price at which you purchased such shares.
The trading price of our common stock may be subject to wide fluctuations in response to
quarter-to-quarter fluctuations in operating results, announcements of material adverse events,
general conditions in our industry or the public marketplace and other events or factors. In
addition, stock markets have experienced extreme price and trading volume volatility in recent
years. This volatility has had a substantial effect on the market prices of securities of many
technology related companies for reasons frequently unrelated to the operating performance of the
specific companies. These broad market fluctuations may adversely affect the market price of our
common stock. In addition, if our operating results differ from our announced guidance or the
expectations of equity research analysts or investors, the price of our common stock could decrease
significantly.
Our stock price could decline if a significant number of shares become available for sale.
As of December 31, 2010, we have an aggregate of 2.3 million stock options outstanding to
employees, directors and others with a weighted average exercise price of $4.28 per share. The
shares of common stock that may be issued upon exercise of these options may be resold into the
public market. Sales of substantial amounts of common stock in the public market as a result of the
exercise of these options, or the perception that future sales of these shares could occur, could
reduce the market price of our common stock and make it more difficult to sell equity securities in
the future.
Our certificate of incorporation, our bylaws, our shareholder rights plan and Delaware law make it
difficult for a third party to acquire us, despite the possible benefit to our shareholders.
22
Provisions of our certificate of incorporation, our bylaws, our shareholder rights plan and
Delaware law could make it more difficult for a third party to acquire us, even if doing so would
be beneficial to our shareholders. For example, our certificate of incorporation provides for a
classified board of directors, meaning that only approximately one-third of our directors may be
subject to re-election at each annual shareholder meeting. Our certificate of incorporation also
permits our Board of Directors to issue one or more series of preferred stock, which may have
rights and preferences superior to those of the common stock. The ability to issue preferred stock
could have the effect of delaying or preventing a third party from acquiring us. We have also
adopted a shareholder rights plan. These provisions could discourage takeover attempts and could
materially adversely affect the price of our stock. In addition, because we are incorporated in
Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law,
which may prohibit large shareholders from consummating a merger with, or acquisition of us. These
provisions may prevent a merger or acquisition that would be attractive to shareholders and could
limit the price that investors would be willing to pay in the future for our common stock.
There are limitations on the liabilities of our directors and executive officers.
Pursuant to our bylaws and under Delaware law, our directors are not liable to us or our
shareholders for monetary damages for breach of fiduciary duty, except for liability for breach of
a director’s duty of loyalty, acts or omissions by a director not in good faith or which involve
intentional misconduct or a knowing violation of law, or any transaction in which a director has
derived an improper personal benefit.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our headquarters are located in Plano, Texas, a Dallas suburb.
In the U.S., we operate a distribution facility in Memphis, Tennessee, with aggregate space of
more than 440,000 square feet. We also operate approximately 435,000 square feet of distribution
facility in Southaven, Mississippi. Both of these facilities are located approximately five miles
from the Memphis International Airport. We also manage a distribution facility in Grapevine, Texas
with approximately 200,000 square feet.
We operate a distribution center in Liège, Belgium with approximately 150,000 square feet,
which contains advanced distribution systems and equipment. We operate a distribution center in
Markham, Ontario, Canada with approximately 23,000 square feet. We also operate a facility in the
Philippines with approximately 7,000 square feet to provide call center and customer service
functions and technical support. We operate customer service centers in our facilities in
Tennessee, Texas, Belgium, Markham, Canada and the Philippines. Our call center technology permits
the automatic routing of calls to available customer service representatives in several of our call
centers.
Except for the Grapevine, Texas facility, which we manage on our client’s behalf, all of our
facilities are leased and the material lease agreements contain one or more renewal options.
Item 3. Legal Proceedings
We are not party to any legal proceedings other than routine claims and lawsuits arising in
the ordinary course of our business. We do not believe such claims and lawsuits, individually or
in the aggregate, will have a material adverse effect on our business.
Item 4. Reserved
23
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities
Our common stock is listed and currently trades on the NASDAQ Capital Market under the symbol
“PFSW.” The following table sets forth for the period indicated the high and low sale price for
the common stock as reported by NASDAQ:
| |
|
|
|
|
|
|
|
|
| |
|
Price |
|
| |
|
High |
|
|
Low |
|
Year Ended December 31, 2009
First Quarter |
|
$ |
1.90 |
|
|
$ |
0.70 |
|
Second Quarter |
|
$ |
1.74 |
|
|
$ |
0.90 |
|
Third Quarter |
|
$ |
1.90 |
|
|
$ |
1.11 |
|
Fourth Quarter |
|
$ |
1.83 |
|
|
$ |
1.22 |
|
Year Ended December 31, 2010
First Quarter |
|
$ |
4.70 |
|
|
$ |
1.48 |
|
Second Quarter |
|
$ |
5.23 |
|
|
$ |
2.73 |
|
Third Quarter |
|
$ |
3.57 |
|
|
$ |
2.21 |
|
Fourth Quarter |
|
$ |
4.19 |
|
|
$ |
3.05 |
|
As of March 7, 2011, there were approximately 4,400 shareholders of which approximately 125
were record holders of the common stock.
We have never declared or paid cash dividends on our common stock and do not anticipate the
payment of cash dividends on our common stock in the foreseeable future. We are also restricted
from paying dividends under our debt agreements, without the prior approval of our lenders. We
currently intend to retain all earnings to finance the further development of our business. The
payment of any future cash dividends will be at the discretion of our Board of Directors and will
depend upon, among other things, future earnings, operations, capital requirements, the general
financial condition of the Company and general business conditions and the approval of our lenders.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations —
Liquidity and Capital Resources.”
The following table summarizes information with respect to equity compensation plans under
which equity securities of the Company are authorized for issuance as of December 31, 2010:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Number of |
|
|
|
|
|
|
|
| |
|
securities to be |
|
|
|
|
|
|
|
| |
|
issued upon |
|
|
Weighted-average |
|
|
Number of |
|
| |
|
exercise of |
|
|
exercise price of |
|
|
securities |
|
| |
|
outstanding options |
|
|
outstanding options |
|
|
remaining available |
|
| Plan category (1) |
|
and warrants |
|
|
and warrants |
|
|
for future issuance |
|
Equity
compensation plans
approved by security
holders |
|
|
2,193,673 |
|
|
$ |
4.28 |
|
|
|
845,443 |
|
Equity compensation
plans not approved
by security holders |
|
|
88,719 |
|
|
$ |
4.28 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,282,392 |
|
|
|
|
|
|
|
845,443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
See Note 5 to the Consolidated Financial Statements for more detailed information
regarding the Company’s equity compensation plans. |
Item 6. Selected Consolidated Financial Data
None
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
We believe the following discussion and analysis provides information that is relevant to an
assessment and understanding of our consolidated results of operations and financial condition. The
discussion and analysis should be read in conjunction with the consolidated financial statements
and related notes thereto appearing elsewhere in this Form 10-K. This Management’s Discussion and
Analysis will help you understand:
24
| |
• |
|
The impact of forward looking statements; |
| |
| |
• |
|
Our financial structure, including our historical financial presentation; |
| |
| |
• |
|
Our results of operations for the previous two years; |
| |
| |
• |
|
Certain of our relationships with our subsidiaries; |
| |
| |
• |
|
Our liquidity and capital resources; |
| |
| |
• |
|
The impact of seasonality, inflation and recently issued accounting standards
on our financial statements; and |
| |
| |
• |
|
Our critical accounting policies and estimates. |
Forward-Looking Information
We have made forward-looking statements in this Report on Form 10-K. These statements are
subject to risks and uncertainties, and there can be no guarantee that these statements will prove
to be correct. Forward-looking statements include assumptions as to how we may perform in the
future. When we use words like “seek,” “strive,” “believe,” “expect,” “anticipate,” “predict,”
“potential,” “continue,” “will,” “may,” “could,” “intend,” “plan,” “target” and “estimate” or
similar expressions, we are making forward-looking statements. You should understand that the
following important factors, in addition to the Risk Factors set forth above or elsewhere in this
Report on Form 10-K, could cause our results to differ materially from those expressed in our
forward-looking statements. These factors include:
| |
• |
|
our ability to retain and expand relationships with existing clients and attract and
implement new clients; |
| |
| |
• |
|
our reliance on the fees generated by the transaction volume or product sales of our
clients; |
| |
| |
• |
|
our reliance on our clients’ projections or transaction volume or product sales; |
| |
| |
• |
|
our dependence upon our agreements with International Business Machines Corporation
(“IBM”) and InfoPrint Solutions Company (“IPS”); |
| |
| |
• |
|
our dependence upon our agreements with our major clients; |
| |
| |
• |
|
our client mix, their business volumes and the seasonality of their business; |
| |
| |
• |
|
our ability to finalize pending contracts; |
| |
| |
• |
|
the impact of strategic alliances and acquisitions; |
| |
| |
• |
|
trends in eCommerce, outsourcing, government regulation both foreign and domestic and
the market for our services; |
| |
| |
• |
|
whether we can continue and manage growth; |
| |
| |
• |
|
increased competition; |
| |
| |
• |
|
our ability to generate more revenue and achieve sustainable profitability; |
| |
| |
• |
|
effects of changes in profit margins; |
| |
| |
• |
|
the customer and supplier concentration of our business; |
| |
| |
• |
|
the reliance on third-party subcontracted services; |
| |
| |
• |
|
the unknown effects of possible system failures and rapid changes in technology; |
| |
| |
• |
|
foreign currency risks and other risks of operating in foreign countries; |
| |
| |
• |
|
potential litigation; |
| |
| |
• |
|
our dependency on key personnel; |
| |
| |
• |
|
the impact of new accounting standards, and changes in existing accounting rules or the
interpretations of those rules; |
| |
| |
• |
|
our ability to raise additional capital or obtain additional financing; |
| |
| |
• |
|
our ability and the ability of our subsidiaries to borrow under current financing
arrangements and maintain compliance with debt covenants; |
| |
| |
• |
|
relationship with and our guarantees of certain of the liabilities and indebtedness of
our subsidiaries; and |
| |
| |
• |
|
taxation on the sale of our products. |
We have based these statements on our current expectations about future events. Although we
believe the expectations reflected in our forward-looking statements are reasonable, we cannot
guarantee these expectations will actually be achieved. In addition, some forward-looking
statements are based upon assumptions as to future events that may not prove to be accurate.
Therefore, actual outcomes and results may differ materially from what is expected or forecasted in
such forward-looking statements. We undertake no obligation to update publicly any forward-looking
statement for any reason, even if new information becomes available or other events occur in the
future. There may be additional risks we do not currently view as material or that are not
presently known. In
25
evaluating these statements, you should consider various factors, including the risks set
forth in the section entitled “Risk Factors.”
Overview
We are an international business process outsourcing provider of end-to-end eCommerce
solutions. We provide these solutions to major brand name companies seeking to optimize their
supply chain and to enhance their traditional and online business channels and initiatives. We
derive our revenues from providing a broad range of services as we process individual business
transactions on our clients’ behalf using three different seller services financial models: 1) the
Enablement model, 2) the Agent (or Flash) model and 3) the Retail model.
We refer to the standard PFSweb seller services financial model as the Enablement model. In
this model, our clients own the inventory and are the merchants of record and engage us to provide
various business outsourcing services in support of their business operations. We derive our
service fee revenues from a broad range of service offerings that include digital marketing,
eCommerce technologies, order management, customer care, logistics and fulfillment, financial
management and professional consulting. 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 we lease or
manage. We currently provide infrastructure and distribution solutions to clients that operate in a
range of vertical markets, including technology manufacturing, computer products, cosmetics,
fragile goods, contemporary home furnishings, apparel, aviation, telecommunications, consumer
electronics and consumer packaged goods, among others.
In this model, we typically charge for our services 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 costs and other
‘out-of-pocket’ expenses include travel, shipping and handling costs and telecommunication charges
and are included in pass-through revenue.
As an additional service, we offer our second model, the Agent, or Flash, financial model, in which
our clients maintain ownership of the product inventory stored at our locations as in the
Enablement model. When a customer orders the product from our clients, a “flash” sale transaction
passes product ownership to us for each order and we, in turn, immediately re-sell the product to
the customer. The “flash” ownership exchange establishes us as the merchant of record, which
enables us to use our existing merchant infrastructure to process sales to end customers, removing
the need for the clients to establish these business processes internally, but permitting them to
control the sales process to end customers. In this model, we record product revenue either on a
gross or net basis depending on the underlying contract terms.
Finally, our Retail model allows us to purchase inventory from the client just as any other
client reseller partner. In this model, we place the initial and replenishment purchase orders
with the client and take ownership of the product upon delivery to our facility. Consequently, in
this model, we generate product revenue as we own the inventory and the accounts receivable arising
from our product sales. Under the Retail model, depending upon the product category and sales
characteristics, we may require the client to provide product price protection as well as product
purchase payment terms, right of return, and obsolescence protection appropriate to the product
sales profile. In this model we recognize product revenue for customer sales. Freight costs billed
to customers are reflected as components of product revenue. This business model requires
significant working capital requirements, for which we have credit available either through credit
terms provided by our client or under senior credit facilities.
In general, we provide the Enablement model through our PFS and Supplies Distributors
subsidiaries, the Agent or Flash model through our PFS and Supplies Distributors subsidiaries and
the Retail model through our Supplies Distributors subsidiaries and
our PFSweb Retail Connect subsidiary (formerly eCOST.com).
26
Growth is a key element to achieving our future goals, including achieving and maintaining
sustainable profitability. Growth in our Enablement and Agent models 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, online
brands and retailers and technology manufacturers, which, by nature, require a longer duration to
close but also have the potential to be higher quality and longer duration engagements.
Growth within our Retail model currently 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.
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) selling, general and administrative
expenses.
Cost of product revenue —consists of the purchase price of product sold and freight costs,
which are reduced by certain reimbursable expenses. These reimbursable expenses include
pass-through customer marketing programs, direct costs incurred in passing on any price decreases
offered by 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.
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.
Selling, General and Administrative expenses — consist of expenses such as compensation and
related expenses for sales and marketing staff, distribution costs (excluding freight) applicable
to the Supplies Distributors business and the Retail model, 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 and our expenses 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. To aid this, in May 2010, we completed a public
offering of 2.3 million shares of our common stock that provided net proceeds of $7.3 million.
27
Results of Operations
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
The results of operations related to the eCOST.com business unit that was sold in February
2011 have been reported as discontinued operations for both periods presented below. The following
table discloses certain financial information for the periods presented, expressed in terms of
dollars, dollar change, percentage change and as a percentage of total revenue (in millions).
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total |
|
| |
|
|
|
|
|
|
|
|
|
Change |
|
|
Revenue |
|
| |
|
2010 |
|
|
2009 |
|
|
$ |
|
|
% |
|
|
2010 |
|
|
2009 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue, net |
|
$ |
174.6 |
|
|
$ |
183.0 |
|
|
$ |
(8.4 |
) |
|
|
(4.6 |
)% |
|
|
63.6 |
% |
|
|
68.3 |
% |
Service fee revenue |
|
|
70.6 |
|
|
|
58.6 |
|
|
|
12.0 |
|
|
|
20.5 |
% |
|
|
25.7 |
% |
|
|
21.9 |
% |
Pass-through revenue |
|
|
29.3 |
|
|
|
26.3 |
|
|
|
3.0 |
|
|
|
11.4 |
% |
|
|
10.7 |
% |
|
|
9.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
274.5 |
|
|
|
267.9 |
|
|
|
6.6 |
|
|
|
2.5 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue |
|
|
162.5 |
|
|
|
168.8 |
|
|
|
(6.3 |
) |
|
|
(3.8 |
)% |
|
|
93.1 |
%(1) |
|
|
92.3 |
% |
Cost of service fee revenue |
|
|
51.1 |
|
|
|
41.9 |
|
|
|
9.2 |
|
|
|
22.1 |
% |
|
|
72.4 |
%(2) |
|
|
71.5 |
% |
Pass-through cost of revenue |
|
|
29.3 |
|
|
|
26.3 |
|
|
|
3.0 |
|
|
|
11.4 |
% |
|
|
100.0 |
%(3) |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
|
242.9 |
|
|
|
237.0 |
|
|
|
5.9 |
|
|
|
2.5 |
% |
|
|
88.5 |
% |
|
|
88.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue gross profit |
|
|
12.1 |
|
|
|
14.2 |
|
|
|
(2.1 |
) |
|
|
(14.3 |
)% |
|
|
6.9 |
%(1) |
|
|
7.7 |
% |
Service fee gross profit |
|
|
19.5 |
|
|
|
16.7 |
|
|
|
2.8 |
|
|
|
16.6 |
% |
|
|
27.6 |
%(2) |
|
|
28.5 |
% |
Pass-through gross profit |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit |
|
|
31.6 |
|
|
|
30.9 |
|
|
|
0.7 |
|
|
|
2.4 |
% |
|
|
11.5 |
% |
|
|
11.5 |
% |
Selling, General and Administrative
Expenses |
|
|
33.6 |
|
|
|
34.3 |
|
|
|
(0.7 |
) |
|
|
(1.9) |
% |
|
|
12.2 |
% |
|
|
12.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(2.0 |
) |
|
|
(3.4 |
) |
|
|
1.4 |
|
|
|
41.5 |
% |
|
|
(0.7 |
)% |
|
|
(1.3 |
)% |
Interest expense, net |
|
|
0.9 |
|
|
|
1.2 |
|
|
|
(0.3 |
) |
|
|
(20.6 |
)% |
|
|
0.3 |
% |
|
|
0.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing
operations
before income taxes |
|
|
(2.9 |
) |
|
|
(4.6 |
) |
|
|
1.7 |
|
|
|
36.1 |
% |
|
|
(1.0 |
)% |
|
|
(1.7 |
)% |
Income tax expense, net |
|
|
0.5 |
|
|
|
0.3 |
|
|
|
0.2 |
|
|
|
44.2 |
% |
|
|
0.2 |
% |
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(3.4 |
) |
|
|
(4.9 |
) |
|
|
1.5 |
|
|
|
30.9 |
% |
|
|
(1.2) |
% |
|
|
(1.8) |
% |
Income (loss) from
discontinued operations, net
of tax |
|
|
(4.0 |
)(4) |
|
|
0.3 |
|
|
|
(4.3 |
) |
|
|
(1262.3) |
% |
|
|
(1.4) |
% |
|
|
(0.1) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(7.4 |
) |
|
$ |
(4.6 |
) |
|
$ |
(2.8 |
) |
|
|
(61.3 |
)% |
|
|
(2.6 |
)% |
|
|
(1.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Represents the percent of Product revenue, net. |
| |
| (2) |
|
Represents the percent of Service fee revenue. |
| |
| (3) |
|
Represents the percent of Pass-through revenue. |
| |
| (4) |
|
Includes a $2.8 million goodwill impairment charge. |
Product Revenue, net. Product revenue of $174.6 million decreased $8.4 million, or 4.6%
in 2010 as compared to the prior year. This decrease was primarily due to decreased sales volumes as a result of
reduced IBM and IPS printer installations in certain categories as well as temporary inventory
supply shortages resulting from our largest supplier in this segment transitioning to a new systems
platform in 2010 and
the negative impact of foreign exchange rates compared to the same period in the prior year.
We currently expect our total 2011 annual product revenue to remain relatively stable as
compared to 2010 levels.
Service Fee Revenue. The increase in service fee revenue for the year ended December 31, 2010
was primarily due to the growth in existing clients as well as new client relationships that were
added during 2009 and 2010,
28
including incremental project work, partially offset by the non-renewal of certain service
contract relationships, including the non-renewal of a U.S. government agency client relationship,
which ended in early 2009. The change in service fee revenue, excluding pass-through revenue, is
shown below ($ millions):
| |
|
|
|
|
|
Year ended December 31, 2009 |
|
$ |
58.6 |
|
New service contract relationships |
|
|
10.3 |
|
Change in existing client service fees including clients
implemented during 2009 |
|
|
10.1 |
|
Terminated clients not included in 2010 revenue |
|
|
(8.4 |
) |
|
|
|
|
Year ended December 31, 2010 |
|
$ |
70.6 |
|
|
|
|
|
The service fee revenue for 2010 includes approximately $6.1 million of revenue generated from
clients who terminated their contractual relationships with the Company during 2010. However,
based on historical activity and current projection of existing clients, including new clients
signed in 2010, net of the impact from the non-renewal of certain clients, we currently anticipate
that 2011 service fee revenue will increase from 2010 service fee revenue levels.
Cost of Product Revenue. Cost of product revenue decreased by $6.3 million, or 3.8%, to $162.5
million in 2010, primarily as a result of decreased product sales. The resulting gross profit
margin was $12.1 million or 6.9% of product revenue for the year ended December 31, 2010 and $14.2
million or 7.7% of product revenue for 2009. The gross profit margin for 2010 and 2009 includes
the impact of certain incremental gross margins earned on product sales; however, the impact of
these amounts was higher in the 2009 period and is not expected to continue at that same rate.
Cost of Service Fee Revenue. Gross profit as a percentage of service fees was 27.6% in 2010
and 28.5% in 2009. The 2010 period includes the margin impact of new client relationships that
began in late 2009 and throughout 2010. The 2009 margins include the benefit of higher margin
incremental project work associated with a U.S. government contract relationship that was not
renewed and was completed in the second quarter of 2009.
We target to earn an overall 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.
Selling, General and Administrative Expenses. Selling, general and administrative expenses
were $33.6 million, or 12.2% of total net revenues in the 2010 period and $34.3 million, or 12.8%
of total net revenues in the prior year. The 2010 period includes the impact of certain executive
disability benefit costs as well as distribution facility relocation expenses that did not occur in
2009. These incremental expenses were more than offset by decreases in depreciation and
amortization, information technology services and personnel related expenses.
Income Taxes. We recorded a tax provision associated primarily with state income taxes and our
subsidiary Supplies Distributors’ Canadian and European operations as well as our
Philippines operation. A valuation allowance has been provided for the majority of our net
deferred tax assets, which are primarily related to our net operating loss carryforwards and
certain foreign deferred tax assets. We expect that we will continue to record an income tax
provision associated with state income taxes and Supplies Distributors’ Canadian and European
results of operations.
Income (Loss) from Discontinued Operations, Net of Tax. Discontinued operations generated a
loss of approximately $4.0 million in 2010 and income of approximately $0.3 million in 2009. In
February 2011, we sold substantially all of the inventory and certain intangible assets applicable
to our eCOST.com business unit for a total aggregate cash purchase price of approximately $2.3
million. For both 2010 and 2009, we have classified the operating results of this business unit,
excluding costs expected to continue to occur in the future, as discontinued operations. A goodwill
impairment charge of approximately $2.8 million is included in the 2010 loss from discontinued
operations.
29
Supplies Distributors and its Subsidiaries
We conduct a portion of our Retail model business services through Supplies Distributors and
its subsidiaries, which act as master distributors of various IPS and other products. We conduct a
portion of our Retail model business services through transaction management services agreement
under which PFS provides transaction management and fulfillment services to Supplies Distributors
and its subsidiaries. In addition to our equity investment in Supplies Distributors, we have also
provided Supplies Distributors with a subordinated loan that, as of December 31, 2010, had an
outstanding balance of $4.3 million.
Supplies Distributors paid us dividends of $2.9 million and $2.1 million in 2010 and 2009,
respectively. Supplies Distributors has received lender approval to pay dividends of approximately
$1.9 million in 2011, and to reduce its subordinated debt to us by $0.8 million, but pursuant to
the terms of its amended credit agreements, is restricted from paying further cash dividends
without the prior approval of its lenders. In addition, no distribution may be made if, after
giving effect thereto, Supplies Distributors or its subsidiaries be in noncompliance with its
financial covenants under its current facilities.
Liquidity and Capital Resources
Net cash provided by operating activities from continuing operations was $2.8 million for the
year ended December 31, 2010 and primarily resulted from cash income from continuing operations
before working capital changes of $3.8 million and an increase in accounts payable, deferred
revenue, accrued expenses and other liabilities of $6.1 million, partially offset by an increase in
accounts receivable of $3.0 million, an increase in inventories of $2.7 million and an increase in
prepaid expenses, other receivables and other assets of $1.5 million. Net cash provided by
operating activities from discontinued operations was $0.7 million in 2010.
Net cash provided by operating activities from continuing operations was $6.0 million for the
year ended December 31, 2009 and primarily resulted from a decrease in inventories of $8.2 million,
a decrease in accounts receivable of $5.0 million and cash income from continuing operations before
working capital changes of $2.3 million partially offset by a decrease in accounts payable,
deferred revenue, accrued expenses and other liabilities of $9.5 million. Net cash provided by
operating activities from discontinued operations was $2.1 million in 2009.
Net cash used in investing activities for the years ended December 31, 2010 and 2009 totaled
$3.8 million and $4.4 million, respectively, resulting from capital expenditures.
Capital expenditures have historically consisted primarily of additions to upgrade our
management information systems, development of customized technology solutions to support and
integrate with our service fee clients and general expansion and upgrades to our facilities, both
domestic and foreign. We expect to incur capital expenditures to support new contracts and
anticipated future growth opportunities. Based on our current client business activity and our
targeted growth plans, we anticipate our total investment in upgrades and additions to facilities
and information technology services for the upcoming twelve months, including costs to implement
new clients, will be approximately $6 million to $9 million, although additional capital
expenditures may be necessary to support the infrastructure requirements of new clients. To
maintain our current operating cash position, a portion of these expenditures may be financed
through client reimbursements, debt, operating or capital leases or additional equity. We may
elect to modify or defer a portion of such anticipated investments in the event that we do not
obtain the financing or achieve the financial results necessary to support such investments.
Net cash provided by financing activities was approximately $4.3 million for the year ended
December 2010, primarily representing net proceeds of $7.3 million from the issuance of common
stock pursuant to a public offering offset by payments on debt and capital leases.
Net cash used in financing activities was approximately $5.4 million for the year ended
December 31, 2009, primarily representing payments on debt and capital leases.
During the year ended December 31, 2010, our working capital increased to $22.6 million from
$19.3 million at December 31, 2009, primarily due to net proceeds from an equity offering in May
2010 partially offset by the pay-
30
down of debt facilities along with the impact of certain technology and development costs
incurred during 2010 that were prepaid by certain clients in 2009. 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 we will be
successful in obtaining any additional financing or the terms thereof. We currently believe our
cash position, financing available under our credit facilities and funds generated from operations
will satisfy our presently known operating cash needs, our working capital and capital expenditure
requirements, our current debt and lease obligations, and additional loans to our subsidiaries, if necessary, for at least the next twelve months.
During the past few years, the credit markets and the financial services industry have been
experiencing a period of unprecedented turmoil and upheaval characterized by the bankruptcy,
failure, collapse or sale of various financial institutions and an unprecedented level of
intervention from the United States and foreign governments. While the ultimate outcome of these
events cannot be predicted, they may have a material adverse effect on our liquidity, financial
condition, results of operations and our ability to renew our credit facilities.
In support of certain debt instruments and leases, as of December 31, 2010, we had $1.9
million of cash restricted for repayment to lenders. In addition, as described above, we have
provided collateralized guarantees to secure the repayment of certain of our subsidiaries’ credit
facilities. Many of these facilities include both financial and non-financial covenants, and also
include cross default provisions applicable to other credit facilities and agreements. These
covenants include minimum levels of net worth for the individual borrower subsidiaries and the
restrictions on the ability of the borrower subsidiaries to advance funds to other borrower
subsidiaries. As a result, it is possible for one or more of these borrower subsidiaries to fail to
meet their respective covenants even if another borrower subsidiary otherwise has available excess
funds which, if not restricted, could be used to cure the default. To the extent we fail to comply
with our debt covenants, including the monthly financial covenant requirements and our required
level of shareholders’ equity, and the lenders accelerate the repayment of the credit facility
obligations, we would be required to repay all amounts outstanding thereunder. In particular, if
PFS service fee revenue declines from expected levels and it is unable to reduce costs to
correspond to such reduced revenue levels or if Supplies Distributors revenue or gross profit
declines from expected levels, such events may result in a breach of one or more of the financial
covenants required under their working capital lines 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 we will have the financial ability to repay all of such obligations. As of December 31,
2010, we were in compliance with all debt covenants. Further, any non-renewal of any of our credit
facilities would have a material adverse impact on our business and financial condition. We do not
have any other material financial commitments, although future client contracts may require capital
expenditures and lease commitments to support the services provided to such clients.
In the future, we may attempt to acquire other businesses or seek an equity or strategic
partner to generate capital or expand our services or capabilities in connection with our efforts
to grow our business. Acquisitions involve certain risks and uncertainties and may require
additional financing. Therefore, we can give no assurance with respect to whether we will be
successful in identifying businesses to acquire or an equity or strategic partner, whether we or
they will be able to obtain financing to complete a transaction, or whether we or they will be
successful in operating the acquired business.
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 disputed the adjustment and such dispute has been settled with the municipality.
However, the amount of additional property taxes to be assessed against us and the timing of the
related payments has not been finalized. As of December 31, 2010, we believe we have adequately
accrued for the expected assessment.
31
In April 2010, a sales employee of eCOST was charged with violating various federal criminal
statues in
connection with the sales of eCOST products to certain customers, and approximately $620,000
held in an eCOST deposit account was seized and turned over to the Office of the U.S. Attorney in
connection with such activity. We received subpoenas from the Office of the U.S. Attorney
requesting information regarding the employee and other matters, and have responded to such
subpoenas and are fully cooperating with the Office of the U.S. Attorney. We have commenced our
own investigation into the actions of the employee. Neither the Company nor eCOST have been
charged with any criminal activity, and we intend to seek the recovery or reimbursement of the
funds, which are currently classified as other receivables in the December 31, 2010 financial
statements. Based on the information available to date, we are unable to determine the amount of
the loss, if any, relating to the seizure of such funds. No assurance can be given, however, that
the seizure of such funds, or our inability to recover such funds or any significant portion
thereof, or any costs and expenses we may incur in connection with such matter will not have a
material adverse effect upon our financial condition or results of operations.
Supplies Distributors Financing
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 $25.0 million
and up to 16 million Euros (approximately $21.4 million at December 31, 2010) with IBM Credit and
IBM Belgium, respectively. These agreements expire in March 2012.
Supplies Distributors also has a loan and security agreement with Wells Fargo Bank, National
Association (“Wells Fargo”) to provide financing for up to $25 million of eligible accounts
receivables in the United States and Canada. The Wells Fargo facility expires on the earlier of
March 2014 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 $10.0
million at December 31, 2010) of eligible accounts receivables through March 2011. This subsidiary
has entered into a new factoring agreement with BNP Paribas Fortis effective April 1, 2011 to
replace the previous factoring agreement under similar terms through April 1, 2014.
These credit facilities contain cross default provisions, various restrictions upon the
ability of Supplies Distributors and its subsidiaries to, among other things, merge, consolidate,
sell assets, incur indebtedness, make loans, investments and payments to related parties (including
entities directly or indirectly owned by PFSweb), provide guarantees, make investments and loans,
pledge assets, make changes to capital stock ownership structure and pay dividends, as well as
financial covenants, such as cash flow from operations, annualized revenue to working capital, net
profit after tax to revenue, minimum net worth and total liabilities to tangible net worth, as
defined, and are secured by all of the assets of Supplies Distributors, as well as a collateralized
guaranty of PFSweb. Additionally, we are required to maintain a subordinated loan to Supplies
Distributors of no less than $3.5 million, not maintain restricted cash of more 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.
PFS Financing
Our PFS subsidiary has a Loan and Security Agreement (“Agreement”) with Comerica Bank
(“Comerica”), which provides for up to $10.0 million of eligible accounts receivable financing
through September 30, 2012. The Agreement allows for up to $12.5 million of eligible accounts
receivable financing during certain seasonal peak months. 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), make capital expenditures, make investments and loans, pledge assets, make
changes to capital stock
32
ownership structure, as well as financial covenants of a minimum tangible net worth of $20.0
million, as defined, a minimum earnings before interest and taxes, plus depreciation, amortization
and non-cash compensation accruals, if any, as defined, and a minimum liquidity ratio, as defined.
The Agreement also limits PFS’ ability to increase the subordinated loan to Supplies Distributors
to more than $5.0 million and permits PFS to advance incremental amounts subject to certain cash
inflows to PFS, as defined, to certain of its subsidiaries and/or affiliates. The Agreement is
secured by all of the assets of PFS, as well as a guarantee of PFSweb.
PFS financed certain capital expenditures through a Loan Agreement with the Mississippi
Business Finance Corporation (the “MBFC”) pursuant to which the MBFC issued 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 to support incremental
business from a Southaven, Mississippi distribution facility. The primary source of repayment of
the Bonds is a letter of credit (the “Letter of Credit”) 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
2012 at which time, if not renewed or replaced, will result in a draw on the undrawn face amount
thereof. The amount outstanding on the Loan Agreement as of December 31, 2010 was $1.6 million.
PFS’ obligations under the Reimbursement Agreement are secured by substantially all of its assets,
including restricted cash of $0.8 million as of December 31, 2010 and a PFSweb parent company
guarantee.
eCOST Financing
eCOST (renamed PFSweb Retail Connect in February 2011) has an asset-based line of credit
facility of up to $7.5 million with Wachovia, which is collateralized by substantially all of
eCOST’s assets and expires in May 2011. Borrowings under the facility and letter of credit
availability are limited to a percentage of accounts receivable and inventory, up to specified
maximums. As of December 31, 2010, eCOST had $0.9 million of letters of credit outstanding and $0.6
million of available credit under this facility. As of March 31, 2011, amounts available under the
outstanding letters of credit are currently secured by restricted cash in equivalent amounts. The
credit facility restricts eCOST’s ability to, among other things, merge, consolidate, sell assets,
incur indebtedness, make loans, investments and payments to subsidiaries, affiliates and related
parties, make investments and loans, pledge assets, make changes to capital stock ownership
structure, as well as a minimum tangible net worth of $0, as defined. PFSweb has guaranteed all
current and future obligations of eCOST under this line of credit.
In February 2011 we sold substantially all of the inventory and certain intangible assets of
eCOST for a cash purchase price of $2.3 million (before expenses of approximately $0.2 million) and
the assumption by the purchaser of certain limited liabilities of eCOST. In connection with the
closing of this business unit, we currently expect to incur exit costs of approximately $0.2
million to $0.4 million related to employee termination costs and excess property and equipment and
may incur additional costs, including excess facility costs. During 2010 we recorded a non-cash
goodwill impairment charge of approximately $2.8 million.
Public Offering
In May 2010, we completed a public offering of our common stock pursuant to which we issued
and sold an aggregate of 2.3 million shares of our common stock, par value $.001 per share, at
$3.50 per share, resulting in net proceeds after deducting offering expenses of approximately $7.3
million.
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital resources that is
material to investors.
Inventory Management
In our Retail model, we manage our inventories held for sale by maintaining sufficient
quantities of product to achieve high order fill rates while at the same time maximizing inventory
turnover rates. Inventory balances will
33
fluctuate as we add new product lines. To reduce the risk of loss due to supplier price
reductions, Supplies Distributors’ master distributor agreement provides for price protection under
which it receives credits if the supplier lowers prices on previously purchased inventory.
Seasonality
The seasonality of our service fee business is dependent upon the seasonality of our clients’
business and sales of their products. Accordingly, we 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 run rate service fee business activity will be at its lowest in the quarter
ended March 31 and highest in the quarter ended December 31. We anticipate our product revenue
will be highest during the quarter ended December 31. We believe our historical revenue pattern
makes it difficult to predict the effect of seasonality on our future revenues and results of
operations.
We believe that results of operations for a quarterly period may not be indicative of the
results for any other quarter or for the full year.
Inflation
Management believes inflation has not had a material effect on our operations.
Impact of Recently Issued Accounting Standards
In October 2009, the FASB issued Accounting Standards Update (ASU) 2009-13,
Multiple-Deliverable Revenue Arrangements — a consensus of the FASB Emerging Issues Task Force to
amend certain guidance in FASB Accounting Standards CodificationTM (ASC) 605, Revenue
Recognition, 25, “Multiple-Element Arrangements.” The amended guidance in ASC 605-25 (1) modifies
the separation criteria by eliminating the criterion that requires objective and reliable evidence
of fair value for the undelivered item(s), and (2) eliminates the use of the residual method of
allocation and instead requires that arrangement consideration be allocated, at the inception of
the arrangement, to all deliverables based on their relative selling price.
The FASB also issued ASU 2009-14, Certain Revenue Arrangements That Include Software Elements
— a consensus of the FASB Emerging Issues Task Force, to amend the scope of arrangements under ASC
985, Software, 605, “Revenue Recognition” to exclude tangible products containing software
components and non-software components that function together to deliver a product’s essential
functionality.
The amended guidance in ASC 605-25 and ASC 985-605 is effective prospectively for revenue
arrangements entered into or materially modified in fiscal years beginning on or after June 15,
2010, with early application and retrospective application permitted. The amendments to ASC 605-25
and ASC 985-605 did not have a material impact on our consolidated financial statements.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in conformity with accounting
principles generally accepted in the U.S. These accounting principles require us to make estimates
and assumptions that affect the reported amounts of assets and liabilities at the date of our
financial statements and the reported amounts of revenues and expenses during the reporting period.
While we do not believe the reported amounts would be materially different, application of these
policies involves the exercise of judgment and the use of assumptions as to future uncertainties
and, as a result, actual results could differ from these estimates. If there is a significant
unfavorable change to current conditions, it would likely result in a material adverse impact to
our business, operating results and financial condition. We evaluate our estimates and assumptions
on an ongoing basis. We base our estimates on experience and on various other assumptions that we
believe to be reasonable under the circumstances. All of our significant accounting policies are
disclosed in the notes to our consolidated financial statements.
We have defined a critical accounting estimate as one that is both important to the portrayal
of our financial condition and results of operations and requires us to make difficult, subjective
or complex judgments or estimates
34
about matters that are uncertain. During the past three fiscal years, we have not made any
material changes in accounting methodology used to establish the critical accounting estimates
discussed below. The following represent certain critical accounting policies that require us to
exercise our business judgment or make significant estimates. In addition, there are other items
within our consolidated financial statements that require estimation but are not deemed critical as
defined above.
Product Revenue Recognition
Sales are recognized when the title and risk of loss are passed to the customer, there is
persuasive evidence of an arrangement for the sale, delivery has occurred and/or services have been
rendered, the sales price is fixed or determinable and collectability is reasonably assured.
Sales are reported net of estimated returns and allowances which are estimated based upon
historical return information. Management also considers any other current information and trends
in making estimates. If actual sales returns, allowances and discounts are greater than estimated
by management, additional expense may be incurred.
Cost of Service Fee Revenue
Our service fee revenue primarily relates to our distribution services and order
management/customer care services. Distribution services relate primarily to inventory management,
product receiving, warehousing and fulfillment (i.e., picking, packing and shipping product on our
clients’ behalf). Order management/customer care services relate primarily to taking customer
orders for our clients’ products via various channels such as telephone call-center, electronic or
facsimile. These services also entail addressing customer questions related to orders, as well as
cross-selling/up-selling activities.
Our cost of service fee revenue represents the cost to provide the services described above,
primarily compensation and related expenses and other fixed and variable expenses directly related
to providing the services. These include certain occupancy and information technology costs and
depreciation and amortization expenses. Certain of these costs are allocated from general and
administrative expenses. For these allocations, we estimate the amount of direct expenses based on
client-specific information, such as the number of transactions processed. We believe our
allocation methodology is reasonable, however a change in assumptions would result in a different
gross profit in our statement of operations, yet no change to the resulting net income or loss.
Allowance for Doubtful Accounts
The determination of the collectability of amounts due from our customers requires us to use
estimates and make judgments regarding future events and trends, including monitoring our
customers’ payment history and current credit worthiness to determine that collectability is
reasonably assured, as well as consideration of the overall business climate in which our clients
and customers operate. Inherently, these uncertainties require us to make frequent judgments and
estimates regarding our clients and customers’ ability to pay amounts due us to determine the
appropriate amount of valuation allowances required for doubtful accounts. Provisions for doubtful
accounts are recorded when it becomes evident that the client or customer will not make the
required payments at either contractual due dates or in the future.
In our Retail model, we also maintain an allowance for uncollectible vendor receivables, which
arise from inventory returns to vendors, vendor rebates, price protections and other promotions.
We determine the sufficiency of the vendor receivable allowance based upon various factors,
including payment history. Amounts received from vendors may vary from amounts recorded because of
potential non-compliance with certain elements of vendor programs. If our estimated allowances for
uncollectible accounts or vendor receivables subsequently prove insufficient, additional allowance
maybe required.
Allowances for doubtful accounts totaled $0.8 million and $1.0 million at December 31, 2010
and 2009, respectively. We believe our allowances for doubtful accounts are adequate to cover
anticipated losses under current conditions; however, uncertainties regarding changes in the
financial condition of our clients and customers, either adverse or positive, could impact the
amount and timing of any additional provisions for doubtful accounts that may be required.
35
Inventory Reserves
Inventories (merchandise, held for resale, all of which are finished goods) are stated at the
lower of weighted average cost or market. Supplies Distributors and its subsidiaries assume
responsibility for slow-moving inventory under certain master distributor agreements, subject to
certain termination rights, but have the right to return product rendered obsolete by engineering
changes, as defined. We review inventories for impairment on a periodic basis, but at a minimum,
annually. Recoverability of the inventory on hand is measured by comparisons of the carrying value
to the fair value of the inventory. This requires us to record provisions and maintain reserves for
excess or obsolete inventory. If write-downs of inventories are necessary, the cost basis of that
inventory is adjusted. To determine these reserve amounts, we regularly review inventory quantities
on hand and compare them to estimates of future product demand and market conditions. These
estimates and forecasts inherently include uncertainties and require us to make judgments regarding
potential outcomes. At December 31, 2010 and 2009, our allowance for slow moving inventory was $1.6
million and $1.8 million, respectively. We believe our reserves are adequate to cover anticipated
losses under current conditions. Significant or unanticipated changes to our estimates and
forecasts, either adverse or positive, could impact the amount and timing of any additional
provisions for excess or obsolete inventory that may be required.
Income Taxes
The liability method is used for determining our income taxes, under which current and
deferred tax liabilities and assets are recorded in accordance with enacted tax laws and rates.
Under this method, the amounts of deferred tax liabilities and assets at the end of each period are
determined using the tax rate expected to be in effect when taxes are actually paid or recovered.
Valuation allowances are established to reduce deferred tax assets when it is more likely than not
that some portion or all of the deferred tax assets will not be realized. In determining the need
for valuation allowances, we have considered and made judgments and estimates regarding estimated
future taxable income. These estimates and judgments include some degree of uncertainty and changes
in these estimates and assumptions could require us to adjust the valuation allowances for our
deferred tax assets. The ultimate realization of our deferred tax assets depends on the generation
of sufficient taxable income in the applicable taxing jurisdictions. Although we believe our
estimates and judgments are reasonable, actual results may differ, which could be material.
As we operate in multiple countries, we are subject to the jurisdiction of multiple domestic
and foreign tax authorities. Determination of taxable income in any jurisdiction requires the
interpretation of the related tax laws and regulations and the use of estimates and assumptions
regarding significant future events such as the amount, timing and character of deductions,
permissible revenue recognition methods under the tax law and the sources and character of income
and tax credits. Changes in tax laws, regulations, foreign currency exchange restrictions or our
level of operations or profitability in each taxing jurisdiction could have an impact on the amount
of income taxes that we provide during any given year.
36
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
| |
|
|
|
|
| |
|
Page |
|
PFSweb, Inc. and Subsidiaries |
|
|
|
|
|
|
|
38 |
|
|
|
|
39 |
|
|
|
|
40 |
|
|
|
|
41 |
|
|
|
|
42 |
|
|
|
|
43 |
|
Supplementary Data |
|
|
|
|
|
|
|
70 |
|
|
|
|
73 |
|
37
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
PFSweb, Inc.:
We have audited the accompanying consolidated balance sheets of PFSweb, Inc. (a Delaware
corporation) and subsidiaries as of December 31, 2010 and 2009, and the related consolidated
statements of operations, shareholders’ equity and comprehensive loss, and cash flows for the years
then ended. Our audits of the basic financial statements included the financial statement schedules
listed in the index appearing under Item 15(a) (1). These financial statements and the financial
statement schedules are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements and financial statement schedules based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform an audit of its internal control
over financial reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of PFSweb, Inc. and subsidiaries as of December 31, 2010
and 2009, and the results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of America. Also in
our opinion, the related financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects, the information
set forth therein.
/s/ GRANT THORNTON LLP
Dallas, Texas
March 31, 2011
38
PFSWEB, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
ASSETS |
|
|
|
|
|
|
|
|
CURRENT ASSETS: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
18,430 |
|
|
$ |
14,812 |
|
Restricted cash |
|
|
1,853 |
|
|
|
2,096 |
|
Accounts receivable, net of allowance for doubtful accounts of $754
and $973 at December 31, 2010 and 2009, respectively |
|
|
41,438 |
|
|
|
39,861 |
|
Inventories, net of reserves of $1,561 and $1,760 at December 31,
2010 and 2009, respectively |
|
|
35,161 |
|
|
|
33,577 |
|
Assets of discontinued operations |
|
|
2,776 |
|
|
|
4,372 |
|
Other receivables |
|
|
14,539 |
|
|
|
11,605 |
|
Prepaid expenses and other current assets |
|
|
3,580 |
|
|
|
4,170 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
117,777 |
|
|
|
110,493 |
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, net |
|
|
9,124 |
|
|
|
10,314 |
|
ASSETS OF DISCONTINUED OPERATIONS |
|
|
1,126 |
|
|
|
4,024 |
|
OTHER ASSETS |
|
|
2,203 |
|
|
|
2,938 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
130,230 |
|
|
$ |
127,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
Current portion of long-term debt and capital lease obligations |
|
$ |
18,320 |
|
|
$ |
19,179 |
|
Trade accounts payable |
|
|
55,692 |
|
|
|
53,642 |
|
Deferred revenue |
|
|
5,254 |
|
|
|
5,164 |
|
Accrued expenses |
|
|
15,870 |
|
|
|
13,180 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
95,136 |
|
|
|
91,165 |
|
|
|
|
|
|
|
|
|
|
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current
portion |
|
|
2,136 |
|
|
|
3,348 |
|
OTHER LIABILITIES |
|
|
3,608 |
|
|
|
3,903 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
100,880 |
|
|
|
98,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY: |
|
|
|
|
|
|
|
|
Preferred stock, $1.00 par value; 1,000,000 shares authorized;
none issued and outstanding |
|
|
— |
|
|
|
— |
|
Common stock, $0.001 par value; 35,000,000 shares authorized; |
|
|
|
|
|
|
|
|
12,255,064 and 9,952,164 shares issued at December 31, 2010
and 2009, respectively; and 12,236,703 and 9,933,803
outstanding at December 31, 2010 and 2009, respectively |
|
|
12 |
|
|
|
10 |
|
Additional paid-in capital |
|
|
101,229 |
|
|
|
93,152 |
|
Accumulated deficit |
|
|
(73,332 |
) |
|
|
(65,963 |
) |
Accumulated other comprehensive income |
|
|
1,526 |
|
|
|
2,239 |
|
Treasury stock at cost, 18,361 shares |
|
|
(85 |
) |
|
|
(85 |
) |
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
29,350 |
|
|
|
29,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
130,230 |
|
|
$ |
127,769 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
39
PFSWEB, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31
(In thousands, except per share data)
| |
|
|
|
|
|
|
|
|
| |
|
2010 |
|
|
2009 |
|
REVENUES: |
|
|
|
|
|
|
|
|
Product revenue, net |
|
$ |
174,613 |
|
|
$ |
183,008 |
|
Service fee revenue |
|
|
70,636 |
|
|
|
58,619 |
|
Pass-through revenue |
|
|
29,267 |
|
|
|
26,265 |
|
|
|
|
|
|
|
|
Total revenues |
|
|
274,516 |
|
|
|
267,892 |
|
|
|
|
|
|
|
|
COSTS OF REVENUES: |
|
|
|
|
|
|
|
|
Cost of product revenue |
|
|
162,485 |
|
|
|
168,864 |
|
Cost of service fee revenue |
|
|
51,144 |
|
|
|
41,898 |
|
Cost of pass-through revenue |
|
|
29,267 |
|
|
|
26,265 |
|
|
|
|
|
|
|
|
Total costs of revenues |
|
|
242,896 |
|
|
|
237,027 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
31,620 |
|
|
|
30,865 |
|
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES, including
stock based compensation expense of $809 and $407 in the
years ended December 31, 2010 and 2009, respectively |
|
|
33,611 |
|
|
|
34,270 |
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(1,991 |
) |
|
|
(3,405 |
) |
INTEREST EXPENSE, net |
|
|
940 |
|
|
|
1,186 |
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes |
|
|
(2,931 |
) |
|
|
(4,591 |
) |
INCOME TAX EXPENSE |
|
|
463 |
|
|
|
321 |
|
|
|
|
|
|
|
|
LOSS FROM CONTINUING OPERATIONS |
|
|
(3,394 |
) |
|
|
(4,912 |
) |
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF
TAX |
|
|
(3,975 |
) |
|
|
342 |
|
|
|
|
|
|
|
|
NET LOSS |
|
$ |
(7,369 |
) |
|
$ |
(4,570 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS PER SHARE FROM CONTINUING OPERATIONS: |
|
|
|
|
|
|
|
|
Basic and Diluted |
|
$ |
(0.30 |
) |
|
$ |
(0.49 |
) |
|
|
|
|
|
|
|
LOSS PER SHARE INCLUDING DISCONTINUED OPERATIONS: |
|
|
|
|
|
|
|
|
Basic and Diluted |
|
$ |
(0.65 |
) |
|
$ |
(0.46 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: |
|
|
|
|
|
|
|
|
Basic and Diluted |
|
|
11,310 |
|
|
|
9,929 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
40
PFSWEB, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND
COMPREHENSIVE LOSS
(In thousands, except share data)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Comprehensive |
|
| |
|
Common Stock |
|
|
Paid-In |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Treasury Stock |
|
|
Shareholders’ |
|
|
Income |
|
| |
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Income (Loss) |
|
|
Shares |
|
|
Amount |
|
|
Equity |
|
|
(Loss) |
|
Balance, January 1, 2009 |
|
|
9,935,095 |
|
|
$ |
10 |
|
|
$ |
92,728 |
|
|
$ |
(61,393 |
) |
|
$ |
1,825 |
|
|
|
18,361 |
|
|
$ |
(85 |
) |
|
$ |
33,085 |
|
|
|
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,570 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,570 |
) |
|
$ |
(4,570 |
) |
Stock-based
compensation expense |
|
|
— |
|
|
|
— |
|
|
|
407 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
407 |
|
|
|
|
|
Employee stock purchase plan |
|
|
17,069 |
|
|
|
— |
|
|
|
17 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
17 |
|
|
|
|
|
Other comprehensive
income— foreign
currency translation
adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
414 |
|
|
|
— |
|
|
|
— |
|
|
|
414 |
|
|
|
414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(4,156 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009 |
|
|
9,952,164 |
|
|
$ |
10 |
|
|
$ |
93,152 |
|
|
$ |
(65,963 |
) |
|
$ |
2,239 |
|
|
|
18,361 |
|
|
$ |
(85 |
) |
|
$ |
29,353 |
|
|
|
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7,369 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7,369 |
) |
|
$ |
(7,369 |
) |
Stock-based
compensation expense |
|
|
— |
|
|
|
— |
|
|
|
809 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
809 |
|
|
|
|
|
Employee stock purchase plan |
|
|
2,900 |
|
|
|
— |
|
|
|
4 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4 |
|
|
|
|
|
Issuance of common stock |
|
|
2,300,000 |
|
|
|
2 |
|
|
|
7,264 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7,266 |
|
|
|
|
|
Other comprehensive loss—
foreign currency
translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(713 |
) |
|
|
— |
|
|
|
— |
|
|
|
(713 |
) |
|
|
(713 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(8,082 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010 |
|
|
12,255,064 |
|
|
$ |
12 |
|
|
$ |
101,229 |
|
|
$ |
(73,332 |
) |
|
$ |
1,526 |
|
|
|
18,361 |
|
|
$ |
(85 |
) |
|
$ |
29,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
41
PFSWEB, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
(In thousands)
| |
|
|
|
|
|
|
|
|
| |
|
2010 |
|
|
2009 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(7,369 |
) |
|
$ |
(4,570 |
) |
Income (Loss) from discontinued operations |
|
|
(3,975 |
) |
|
|
342 |
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(3,394 |
) |
|
|
(4,912 |
) |
Adjustments to reconcile net loss to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
6,060 |
|
|
|
6,544 |
|
Provision for doubtful accounts |
|
|
156 |
|
|
|
147 |
|
Provision for excess and obsolete inventory |
|
|
233 |
|
|
|
174 |
|
Deferred income taxes |
|
|
(33 |
) |
|
|
(65 |
) |
Stock-based compensation expense |
|
|
809 |
|
|
|
407 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Restricted cash |
|
|
35 |
|
|
|
(11 |
) |
Accounts receivable |
|
|
(2,984 |
) |
|
|
4,982 |
|
Inventories, net |
|
|
(2,709 |
) |
|
|
8,189 |
|
Prepaid expenses, other receivables and other assets |
|
|
(1,545 |
) |
|
|
75 |
|
Accounts payable, deferred revenue, accrued expenses
and other liabilities |
|
|
6,128 |
|
|
|
(9,485 |
) |
|
|
|
|
|
|
|
Net cash provided by continuing operating activities |
|
|
2,756 |
|
|
|
6,045 |
|
Net cash provided by discontinued operating activities |
|
|
715 |
|
|
|
2,081 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
3,471 |
|
|
|
8,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(3,774 |
) |
|
|
(4,440 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(3,774 |
) |
|
|
(4,440 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net proceeds from issuance of common stock |
|
|
7,270 |
|
|
|
17 |
|
Decrease (increase) in restricted cash |
|
|
208 |
|
|
|
(77 |
) |
Payments on capital lease obligations |
|
|
(1,215 |
) |
|
|
(1,680 |
) |
Payments on debt, net |
|
|
(1,987 |
) |
|
|
(3,642 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
4,276 |
|
|
|
(5,382 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS |
|
|
(355 |
) |
|
|
458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
3,618 |
|
|
|
(1,238 |
) |
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, beginning of year |
|
|
14,812 |
|
|
|
16,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of year |
|
$ |
18,430 |
|
|
$ |
14,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
Property and equipment acquired under debt and capital leases |
|
$ |
1,258 |
|
|
$ |
412 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
42
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Overview
PFSweb, Inc. and its subsidiaries, including Supplies Distributors, Inc., and eCOST.com, Inc.,
are collectively referred to as the “Company;” “Supplies Distributors” refers to Supplies
Distributors, Inc. and its subsidiaries; “eCOST” refers to eCOST.com, Inc.; and “PFSweb” refers to
PFSweb, Inc. and its subsidiaries excluding Supplies Distributors and eCOST.
PFSweb Overview
PFSweb is an international business process outsourcing provider of end-to-end eCommerce
solutions to major brand name companies seeking to optimize their supply chain and to enhance their
traditional and online business channels and initiatives in the United States, Canada, and Europe.
PFSweb offers a broad range of service offerings that include digital marketing, eCommerce
technologies, order management, customer care, logistics and fulfillment, financial management and
professional consulting
Supplies Distributors Overview
Supplies Distributors, PFSweb and InfoPrint Solutions Company (“IPS”) 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 (see Notes 3 and 4) that allows it to
fund the working capital requirements for the sale of primarily IPS products. Pursuant to the
transaction management services agreements between PFSweb and Supplies Distributors, PFSweb
provides to Supplies Distributors transaction management and fulfillment services, such as managed
web hosting and maintenance, procurement support, web-enabled customer contact center services,
customer relationship management, financial services including billing and collection services,
information management, and international distribution services. Supplies Distributors does not
have its own sales force and relies upon IPS’s sales force and product demand generation activities
for its sale of IPS products. Supplies Distributors sells its products in the United States,
Canada and Europe.
All of the agreements between PFSweb and Supplies Distributors were made in the context of a
related party relationship and were negotiated in the overall context of PFSweb’s 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
Until February 2011 the Company operated eCOST as a multi-category online discount retailer of
new, “close-out” and recertified brand-name merchandise, which sold products primarily to customers
in the United States. In February 2011 the Company sold substantially all of the inventory and
certain intangible assets of the eCOST business unit for a cash purchase price of $2.3 million
(before expenses of approximately $0.2 million) and the assumption by the purchaser of certain
limited liabilities of eCOST. The purchase price represented approximately $1 million for
inventory and the balance for the intangible assets. In connection with the closing of this
business unit, the Company currently expects to incur exit costs of approximately $0.2 million to
$0.4 million related to employee termination costs and excess property and equipment and may incur
additional costs, including excess facility costs. In December 2010, the Company recorded a
non-cash goodwill impairment charge of approximately $2.8 million as a result of this sale. For
all periods presented, the Company has reported the operating results of the eCOST segment,
excluding costs expected to continue to occur in the future, as discontinued operations (see Note
12). In conjunction with this sale, the Company renamed its eCOST.com subsidiary in February 2011.
The newly named subsidiary, PFSweb Retail Connect, Inc., will
service certain of the Company’s client relationships on an ongoing basis.
43
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
2. Significant Accounting Policies
Principles of Consolidation
All intercompany accounts and transactions have been eliminated in consolidation.
Investment in Affiliates
Priority Fulfillment Services, Inc. (“PFS”), a wholly-owned subsidiary of PFSweb, has made
advances to Supplies Distributors that are evidenced by a Subordinated Demand Note (the
“Subordinated Note”). Under the terms of certain of the Company’s debt facilities, the outstanding
balance of the Subordinated Note cannot be increased to more than $5.0 million or decreased to less
than $3.5 million without prior approval of the Company’s lenders (see Notes 3 and 4). As of
December 31, 2010 and 2009, the outstanding balance of the Subordinated Note was $4.3 million and
$5.0 million, respectively. The Subordinate Note is eliminated in the Company’s consolidated
financial statements.
PFS has also made advances to eCOST, which aggregated $11.1 million and $10.9 million as of
December 31, 2010 and 2009, respectively. Certain terms of the Company’s debt facilities provide
that the total advances to eCOST may not be less than $2.0 million without prior approval of
eCOST’s lender, if needed. PFS has received the approval of its lender to advance incremental
amounts to certain of its subsidiaries and/or affiliates, including eCOST, if needed, subject to
certain cash inflows to PFS, as defined. PFSweb, Inc. has also advanced to eCOST an additional
$7.4 million and $5.0 million as of December 31, 2010 and 2009, respectively. As of December 31,
2010, PFSweb, Inc. has approximately $5.0 million available to be advanced to eCOST and/or other
affiliates.
Use of Estimates
The preparation of consolidated financial statements and related disclosures in conformity
with generally accepted accounting principles requires management to make judgments, estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and
disclosure of contingent assets and liabilities. The recognition and allocation of certain revenues
and selling, general and administrative expenses in these consolidated financial statements also
require management estimates and assumptions. The Company’s estimates and assumptions are
continually evaluated based on available information and experience. Because the use of estimates
is inherent in the financial reporting process, actual results could differ from estimates.
Revenue and Cost Recognition
Depending on the terms of the customer arrangement, Supplies Distributors recognizes product
revenue and product cost either upon the shipment of product to customers or when the customer
receives the product. Supplies Distributors permits its customers to return product for credit
against other purchases, which include returns for defective products (that Supplies Distributors
then returns to the manufacturer) and incorrect shipments. Supplies Distributors provides a reserve
for estimated returns and allowances and offers terms to its customers that it believes are
standard for its industry.
Freight costs billed to customers are reflected as components of product revenue. Freight
costs incurred are recorded as a component of cost of goods sold.
Under its master distributor agreements (see Note 6), Supplies Distributors bills IPS for
reimbursements of certain expenses, including: pass through customer marketing programs, including
rebates and coop funds; certain freight costs; direct costs incurred in passing on any price
decreases offered by IPS to Supplies Distributors or its customers to cover price protection and
certain special bids; the cost of products provided to replace defective product returned by
customers; and certain other expenses as defined. Supplies Distributors includes these reimbursable
amounts as they are incurred with a corresponding reduction in either inventory or cost of product
revenue. Supplies Distributors also reflects pass through customer marketing programs as a
reduction of both product revenue and cost of product revenue.
44
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
The Company’s service fee revenue primarily relates to its (1) distribution services, (2)
order management/customer care services and (3) the reimbursement of out-of-pocket and third-party
expenses. The Company typically charges its service fee revenue on a cost-plus basis, a percent of
shipped revenue basis or a per transaction basis, such as a per item basis for fulfillment services
or a per minute basis for web-enabled customer contact center services. Additional fees are billed
for other services.
Distribution services relate primarily to inventory management, product receiving, warehousing
and fulfillment (i.e., picking, packing and shipping) and facilities and operations management.
Service fee revenue for these activities is recognized as earned, which is either (i) on a per
transaction basis or (ii) at the time of product fulfillment, which occurs at the completion of the
distribution services.
Order management/customer care services relate primarily to taking customer orders for the
Company’s clients’ products via various channels such as telephone call-center, electronic or
facsimile. These services also entail addressing customer questions related to orders, as well as
cross-selling/up-selling activities. Service fee revenue for this activity is recognized as the
services are rendered. Fees charged to the client are on a per transaction basis based on either
(i) a pre-determined fee per order or fee per telephone minutes incurred, (ii) a per dedicated
agent fee, or (iii) are included in the product fulfillment service fees that are recognized on
product shipment.
The Company’s billings for reimbursement of out-of-pocket expenses, including travel and
certain third-party vendor expenses such as shipping and handling costs and telecommunication
charges are included in pass-through revenue. The related reimbursable costs are reflected as cost
of pass-through revenue.
The Company’s cost of service fee revenue, representing the cost to provide the services
described above, is recognized as incurred. Cost of service fee revenue also includes certain costs
associated with technology collaboration and ongoing technology support that include maintenance,
web hosting and other ongoing programming activities. These activities are primarily performed to
support the distribution and order management/customer care services and are recognized as
incurred.
The Company recognizes revenue and records trade accounts receivables, pursuant to the methods
described above, when collectability is reasonably assured. Collectability is evaluated in the
aggregate and on an individual customer basis taking into consideration payment due date,
historical payment trends, current financial position, results of independent credit evaluations
and payment terms. Related reserves are determined by either using percentages applied to certain
aged receivable categories based on historical results and are reevaluated and adjusted as
additional information is received or a specific identification method. After all attempts to
collect a receivable have failed, the receivable is written off against the allowance for doubtful
accounts.
The Company primarily performs its services under one to three-year contracts that can
generally be terminated by either party. In conjunction with these long-term contracts, the Company
sometimes receives start-up fees to cover its implementation costs, including certain technology
infrastructure and development costs. The Company defers the fees received, and the related costs,
and amortizes them over the life of the contract. The amortization of deferred revenue is included
as a component of service fee revenue. The amortization of deferred implementation costs is
included as a cost of service fee revenue. To the extent implementation costs for non-technology
infrastructure and development exceed the fees received, the excess costs are expensed as incurred.
The following summarizes the deferred implementation revenues and costs, excluding technology and
development costs that are included in property and equipment (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
Deferred implementation revenues |
|
|
|
|
|
|
|
|
Current |
|
$ |
4,487 |
|
|
$ |
3,948 |
|
Non-current |
|
|
3,258 |
|
|
|
3,680 |
|
|
|
|
|
|
|
|
|
|
$ |
7,745 |
|
|
$ |
7,628 |
|
|
|
|
|
|
|
|
Deferred implementation costs
|
|
|
|
|
|
|
|
|
Current |
|
$ |
1,515 |
|
|
$ |
1,621 |
|
Non-current |
|
|
1,076 |
|
|
|
1,394 |
|
|
|
|
|
|
|
|
|
|
$ |
2,591 |
|
|
$ |
3,015 |
|
|
|
|
|
|
|
|
45
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
Current and non-current deferred implementation costs, excluding technology and development
costs, are a component of prepaid expenses and other assets, respectively. Current and non-current
deferred implementation revenues, which may precede the timing of when the related implementation
costs are incurred and thus deferred, are a component of deferred revenue and other liabilities,
respectively.
Concentration of Business and Credit Risk
The Company’s service fee revenue is generated under contractual service fee relationships
with multiple client relationships. One product revenue customer represented 11% of the Company’s
consolidated total net revenue during each of the years ended December 31, 2010 and 2009. A
summary of the customer and client concentrations is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
Product Revenue (as a percentage of
Product Revenue): |
|
|
|
|
|
|
|
|
Customer 1 |
|
|
10 |
% |
|
|
14 |
% |
Customer 2 |
|
|
17 |
% |
|
|
17 |
% |
|
|
|
|
|
|
|
|
|
Service Fee Revenue (as a percentage of
Service Fee Revenue): |
|
|
|
|
|
|
|
|
Client 1 |
|
|
7 |
% |
|
|
15 |
% |
Client 2 |
|
|
7 |
% |
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
Accounts Receivable: |
|
|
|
|
|
|
|
|
Customer/Client 1 |
|
|
7 |
% |
|
|
11 |
% |
PFS previously operated three distinct geographical contract arrangements with Client 1, which
are aggregated in the service fee revenue percentages reflected above. As of December 31, 2010,
substantially all of Client 1’s contracts with PFS had expired in accordance with their terms and
were not renewed.
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 International Business Machines Corporation (“IBM”)
and IPS and is dependent upon the continuation of such arrangements. These arrangements, which are
critical to the Company’s ongoing operations, include Supplies Distributors’ master distributor
agreements and certain of Supplies Distributors’ working capital financing agreements.
Substantially all of the Supplies Distributors’ revenue is generated by its sale of product
purchased from IPS. Supplies Distributors also relies upon IPS’s sales force and product demand
generation activities and the discontinuance of such services would have a material impact upon
Supplies Distributors’ business. In addition, Supplies Distributors has product sales to IBM and
IPS business units and the Company has an IBM term master lease agreement applicable to its
financing of certain property and equipment.
Cash and Cash Equivalents
Cash equivalents are defined as short-term highly liquid investments with original maturities,
when acquired, of three months or less.
46
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
Restricted Cash
Restricted cash includes the following items (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
Customer remittances |
|
$ |
1,076 |
|
|
$ |
1,364 |
|
Bond financing (see Note 4) |
|
|
777 |
|
|
|
732 |
|
|
|
|
|
|
|
|
Total restricted cash |
|
$ |
1,853 |
|
|
$ |
2,096 |
|
|
|
|
|
|
|
|
In conjunction with certain of its financing agreements, Supplies Distributors has granted to
its lenders a security interest in certain customer remittances received in specified bank accounts
(see Note 4). At December 31, 2010 and 2009, these bank accounts held $0.9 million and $1.2
million, respectively, which was restricted and can only be used to reduce the outstanding debt.
Other Receivables
Other receivables include $11.3 million and $8.0 million as of December 31, 2010 and 2009,
respectively, primarily for amounts due from IPS and IBM for costs incurred by the Company under
the master distributor agreements (see Note 6). In addition, other receivables include $2.5
million and $3.6 million as of December 31, 2010 and 2009, respectively, applicable to value added
tax receivables.
Inventories
Inventories (all of which are finished goods) are stated at the lower of weighted average cost
or market. The Company establishes inventory reserves based upon estimates of declines in values
due to inventories that are slow moving or obsolete, excess levels of inventory or values assessed
at lower than cost.
Supplies Distributors assumes responsibility for slow-moving inventory under its IPS master
distributor agreements, subject to certain termination rights, but has the right to return product
rendered obsolete by engineering changes, as defined (see Note 6). In the event PFSweb, Supplies
Distributors and 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.
Supplies Distributors’ inventories include merchandise in-transit that has not been received
by the Company but that has been shipped and invoiced by Supplies Distributors’ vendors. The
corresponding payable for inventories in-transit is included in accounts payable in the
accompanying consolidated financial statements.
The Company reviews inventory for impairment on a periodic basis, but at a minimum, annually.
Recoverability of the inventory on hand is measured by comparison of the carrying value of the
inventory to the fair value of the inventory. The allowance for slow moving inventory was $1.6
million and $1.8 million as of December 31, 2010 and 2009, respectively.
Property and Equipment
The components of property and equipment as of December 31, 2010 and 2009 are as follows (in
thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
December 31, |
|
|
|
|
| |
|
2010 |
|
|
2009 |
|
|
Depreciable Life |
|
Furniture and fixtures |
|
$ |
19,036 |
|
|
$ |
19,552 |
|
|
2-10 years |
Purchased and capitalized software costs |
|
|
22,478 |
|
|
|
19,311 |
|
|
3-5 years |
Computer equipment |
|
|
9,894 |
|
|
|
11,887 |
|
|
3-5 years |
Leasehold improvements |
|
|
7,217 |
|
|
|
7,838 |
|
|
3-5 years |
Other |
|
|
901 |
|
|
|
1,003 |
|
|
3-5 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,526 |
|
|
|
59,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less-accumulated depreciation and
amortization |
|
|
(50,402 |
) |
|
|
(49,277 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
9,124 |
|
|
$ |
10,314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
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. Additionally, the Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The
Company records impairment losses, if any, in the period in which the Company determines that the
carrying amount is not recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected to be generated by
the asset. This may require the Company to make judgments regarding long-term forecasts of future
revenues and costs related to the assets subject to review. During 2010 and 2009, no impairment of
property and equipment was identified or recorded.
Property and equipment are stated at cost and are depreciated using the straight-line method
over the estimated useful lives of the respective assets. Capitalized implementation costs are
depreciated over the respective client contract periods. Leasehold improvements are amortized over
the shorter of the useful life of the related asset or the remaining lease term. Depreciation and
amortization expense related to property and equipment, excluding capital leases and amounts
included in discontinued operations, during 2010 and 2009 was $4.6 million and $5.0 million,
respectively.
The Company’s property held under capital leases amount to approximately $1.5 million and $2.1
million, net of accumulated amortization, of approximately $2.8 million and $3.7 million, at
December 31, 2010 and 2009, respectively. Depreciation and amortization expense related to capital
leases during 2010 and 2009 was $1.5 million and $1.7 million, respectively.
Foreign Currency Translation and Transactions
For the Company’s Canadian and European operations, the local currency is the functional
currency. All assets and liabilities are translated at exchange rates in effect at the end of the
period, and income and expense items are translated at the average exchange rates for the period.
The Company includes currency gains and losses on short-term intercompany advances in the
determination of net income and loss. Currency gains and losses, including transaction gains and
losses and those on short-term intercompany advances, included in net loss were a currency net loss
of approximately $0.1 million for in the year ended December 31, 2010 and a currency net gain of
$0.1 million in the year ended December 31, 2009. The Company reports gains and losses on
intercompany foreign currency transactions that are of a long-term investment nature as a separate
component of shareholders’ equity.
Impact of Recently Issued Accounting Standards
In October 2009, the FASB issued Accounting Standards Update (ASU) 2009-13,
Multiple-Deliverable Revenue Arrangements — a consensus of the FASB Emerging Issues Task Force to
amend certain guidance in FASB Accounting Standards CodificationTM (ASC) 605, Revenue
Recognition, 25, “Multiple-Element Arrangements.” The amended guidance in ASC 605-25 (1) modifies
the separation criteria by eliminating the criterion that requires objective and reliable evidence
of fair value for the undelivered item(s), and (2) eliminates the use of the residual method of
allocation and instead requires that arrangement consideration be allocated, at the inception of
the arrangement, to all deliverables based on their relative selling price.
The FASB also issued ASU 2009-14, Certain Revenue Arrangements That Include Software Elements
— a consensus of the FASB Emerging Issues Task Force, to amend the scope of arrangements under ASC
985, Software, 605, “Revenue Recognition” to exclude tangible products containing software
components and non-software components that function together to deliver a product’s essential
functionality.
The amended guidance in ASC 605-25 and ASC 985-605 is effective prospectively for revenue
arrangements entered into or materially modified in fiscal years beginning on or after June 15,
2010, with early application and retrospective application permitted. The adoption of ASC 605-25
and ASC 985-605, and the related amendments, did not have a material impact on the Company’s
consolidated financial statements.
48
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
Income Taxes
For federal income tax purposes, tax years that remain subject to examination include years
2006 through 2010. However, the utilization of net operating loss (“NOL”) carryforwards that arose
prior to 2006 remain subject to examination through the years such carryforwards are utilized. For
Europe, tax years that remain subject to examination include years 2007 to 2010. However, the
utilization of NOL carryforwards that arose prior to 2007 remain subject to examination through the
years such carryforwards are utilized. For Canada, tax years that remain subject to examination
include years 2003 to 2010, depending on the subsidiary. For state income tax purposes, the tax
years that remain subject to examination include years 2005 to 2010, depending upon the
jurisdiction in which the Company files tax returns. The Company and its subsidiaries have various
income tax returns in the process of examination or administrative appeals. The Company does not
expect that these examinations will result in unrecognized tax benefits.
Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date. Valuation allowances are established when necessary to reduce deferred tax assets
to the amount more likely than not to be realized.
The Company recognizes interest and penalties related to certain tax positions in income tax
expense.
Self Insurance
The Company is self-insured for medical insurance benefits up to certain stop-loss limits.
Such costs are accrued based on known claims and an estimate of incurred, but not reported (“IBNR”)
claims. IBNR claims are estimated using historical lag information and other data provided by
claims administrators.
Fair Value of Financial Instruments
The carrying value of the Company’s financial instruments, which include cash and cash
equivalents, accounts receivable, accounts payable and debt and capital lease obligations,
approximate their fair values based on short terms to maturity or current market prices and
interest rates.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity (net assets) of a business
enterprise during a period from transactions and other events and circumstances from non-owner
sources. Comprehensive income (loss) consists of net income (loss) and foreign currency translation
adjustments.
Net Loss Per Common Share
Basic and diluted net loss per share are computed by dividing net loss by the weighted-average
number of common shares outstanding for the reporting period. Stock options not included in the
calculation of diluted net loss per share for the years ended December 31, 2010 and 2009, were 2.3
million and 1.8 million, respectively, as the effect would be anti-dilutive.
Cash Paid For Interest and Taxes During Year
The Company made payments for interest of approximately $1.0 million and $1.3 million and
income taxes of
approximately $0.4 million and $0.7 million during the years ended December 31, 2010 and 2009,
respectively (see Notes 3, 4 and 8).
49
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
Reclassifications
Prior year data related to discontinued operations have been reclassified to conform to
current period presentation. These reclassifications had no effect on previously reported net
income (loss) or shareholders’ equity.
3. Vendor Financing
Outstanding obligations under vendor financing arrangements consist of the following (in
thousands):
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
Inventory and working capital financing agreements: |
|
|
|
|
|
|
|
|
United States |
|
$ |
16,472 |
|
|
$ |
16,073 |
|
Europe |
|
|
11,318 |
|
|
|
15,649 |
|
|
|
|
|
|
|
|
Total |
|
$ |
27,790 |
|
|
$ |
31,722 |
|
|
|
|
|
|
|
|
Inventory and Working Capital Financing Agreement, United States
Supplies Distributors has a short-term credit facility with IBM Credit LLC to finance its
distribution of IPS products in the United States, providing financing for eligible IPS inventory
and certain receivables up to $30.5 million through its expiration in March 2011. As of December
31, 2010, Supplies Distributors had $2.9 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 $3.5 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% (3.75% as of both December 31, 2010 and 2009). The
facility also includes a monthly service fee.
On
March 30, 2011, Supplies Distributors entered into an amended credit facility with IBM
Credit LLC, which reduces the financing maximum to $25.0 million and extends the termination date
through March 2012. Given the structure of this facility and as outstanding balances, which
represent inventory purchases, are repaid within twelve months, the Company has classified the
outstanding amounts under this facility as accounts payable in the consolidated balance sheets.
Inventory and Working Capital Financing Agreement, Europe
Supplies Distributors’ European subsidiary has a short-term credit facility with IBM Belgium
Financial Services S.A. (“IBM Belgium”) to finance its distribution of IPS products in Europe. The
asset based credit facility with IBM Belgium provides up to 16.0 million Euros (approximately $21.4
million as of December 31, 2010) in inventory financing and cash advances based on eligible
inventory and accounts receivable through its expiration in March 2011. As of December 31, 2010,
Supplies Distributors’ European subsidiaries had 7.4 million Euros (approximately $9.9 million at
December 31, 2010) of available credit. The credit facility contains cross default provisions,
various restrictions upon the ability of Supplies Distributors and its European subsidiary to,
among others, merge, consolidate, sell assets, incur indebtedness, make loans and payments to
related parties (including entities directly or indirectly owned by PFSweb, Inc.), provide
guarantees, make investments and loans, pledge assets, make changes to capital stock ownership
structure and pay dividends, as well as financial covenants, such as annualized revenue to working
capital, net profit after tax to revenue, and total liabilities to tangible net worth, as defined,
and are secured by certain of the assets of Supplies Distributors’ European subsidiary, as well as
collateralized guaranties of Supplies Distributors and PFSweb. Additionally, PFS is required
to maintain a minimum Subordinated Note receivable balance from Supplies Distributors of $3.5
million and the Company is required to maintain a minimum shareholders’ equity of $18.0 million.
Borrowings under the credit facility accrue interest at
50
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
Euribor
plus 1.82% for cash advances, and,
after a defined free financing period, at Euribor plus 4.13% for inventory financings. As of
December 31, 2010 there were $0.1 million of outstanding cash advances and the interest rate was 4.9% on the
$11.3 million of outstanding inventory financings. As of December 31, 2009 the interest rate was
4.7%. Supplies Distributors’ European subsidiary pays a monthly service fee on the commitment.
On March 31, 2011, Supplies Distributors’ European subsidiaries entered into an amended credit
facility with IBM Belgium, which extends the termination date through March 2012 and modifies
certain financial covenants. Given the structure of this facility and as outstanding inventory
financing balances are repaid within twelve months, the Company has classified the outstanding
inventory financing amounts under this facility as accounts payable in the consolidated balance
sheets.
4. Debt and Capital Lease Obligations:
Outstanding debt and capital lease obligations consist of the following (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
Loan and security agreements, United States: |
|
|
|
|
|
|
|
|
Supplies Distributors |
|
$ |
7,220 |
|
|
$ |
8,921 |
|
PFS |
|
|
6,000 |
|
|
|
6,000 |
|
Credit facility — eCOST |
|
|
— |
|
|
|
— |
|
Factoring agreement, Europe |
|
|
2,302 |
|
|
|
1,074 |
|
Taxable revenue bonds |
|
|
1,600 |
|
|
|
2,400 |
|
Master lease agreements |
|
|
2,660 |
|
|
|
3,467 |
|
Other |
|
|
674 |
|
|
|
665 |
|
|
|
|
|
|
|
|
Total |
|
|
20,456 |
|
|
|
22,527 |
|
Less current portion of long-term debt |
|
|
18,320 |
|
|
|
19,179 |
|
|
|
|
|
|
|
|
Long-term debt, less current portion |
|
$ |
2,136 |
|
|
$ |
3,348 |
|
|
|
|
|
|
|
|
Loan and Security Agreement — Supplies Distributors
Supplies Distributors has a loan and security agreement with Wells Fargo Bank, National
Association (“Wells Fargo”) to provide financing for up to $25 million of eligible accounts
receivable in the United States and Canada. As of December 31, 2010, Supplies Distributors had $1.4
million of available credit under this agreement. The Wells Fargo facility expires on the earlier
of March 2011 or the date on which the parties to the IPS master distributor agreement (see Note 6)
no longer operate under the terms of such agreement and/or IPS no longer supplies products pursuant
to such agreement. Borrowings under the Wells Fargo facility accrue interest at prime rate plus
0.25% to 0.75% (3.75% as of December 31, 2010) or Eurodollar rate plus 2.5% to 3.0%, dependent on
excess availability and subject to a minimum of 3.0%, as defined. The interest rate as of December
31, 2010 was 3.75% for $7.2 million of outstanding borrowings. As of December 31, 2009, the
interest rate was 3.75% for $5.9 million of outstanding borrowings and 2.2% for $3.0 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, PFS is required to
maintain a Subordinated Note receivable balance from Supplies Distributors of no less than $4.3
million and may not maintain restricted cash of more than $5.0 million, and is restricted with
regard to transactions with related parties, indebtedness and changes to capital stock ownership
structure. Supplies Distributors has entered into blocked account agreements with its banks and
Wells Fargo pursuant to which a security interest was granted to Wells Fargo for all U.S. and
Canadian customer remittances received in specified bank accounts. At December 31, 2010 and
December 31, 2009, these bank accounts held $0.8 million and $1.0 million, respectively, which was
restricted for payment to Wells Fargo.
On March 29, 2011, Supplies Distributors entered into an amended loan and security agreement
with Wells
Fargo, which extends the termination date through March 2014 and reduces the minimum
Subordinate Note balance to $3.5 million.
51
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
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
through March 2011. As of December 31, 2010, PFS had $3.9 million of available credit under this
facility. Borrowings under the Comerica Agreement accrue interest at a defined rate, which will
generally be prime rate plus 2%, with a minimum of 4.5% (5.25% at both December, 31, 2010 and
2009). 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 $5.0 million. Comerica has provided approval for PFS to advance
incremental amounts subject to certain cash inflows to PFS, as defined, to certain of its
subsidiaries and/or affiliates, including eCOST, if needed. The Comerica Agreement is secured by
all of the assets of PFS, as well as a guarantee of PFSweb, Inc.
On
March 31, 2011, PFS entered into an amended agreement with Comerica, which extends the
termination date through September 2012, allows for up to $12.5 million of eligible accounts
receivable financing during certain seasonal peak months and provides the approval for PFS to
advance incremental amounts subject to certain cash inflows to PFS, as defined, to its subsidiaries
and/or affiliates, if needed.
Credit Facility — eCOST
eCOST has an asset-based line of credit facility of up to $7.5 million from Wachovia, through
May 2011, which is collateralized by substantially all of eCOST’s assets. Borrowings under the
facility are limited to a percentage of eligible accounts receivable and inventory. Outstanding
borrowings under the facility bear interest at rates ranging from prime rate plus 0.75% to 1.25% or
Eurodollar rate plus 3.0% to 4.0%, depending on eCOST’s financial results. There were no
outstanding borrowings as of December 31, 2010 or 2009. As of December 31, 2010, eCOST had $0.9
million of letters of credit outstanding and $0.6 million of available credit under this facility.
Subsequent to the sale of certain assets in February 2011 (see Note 12), amounts available under
the outstanding letters of credit are secured by restricted cash in equivalent amounts until
expiration. In connection with the line of credit, eCOST entered into a cash management
arrangement whereby eCOST’s operating amounts are considered restricted and swept and used to repay
outstanding amounts under the line of credit. As of December 31, 2010 and December 31, 2009, the
restricted cash amount was $0.2 million for both periods. The credit facility restricts eCOST’s
ability to, among other things, merge, consolidate, sell assets, incur indebtedness, make loans,
investments and payments to subsidiaries, affiliates and related parties (including entities
directly or indirectly owned by PFSweb, Inc.), make investments and loans, pledge assets, make
changes to capital stock ownership structure, and requires a minimum tangible net worth of $0, as
defined. PFSweb has guaranteed all current and future obligations of eCOST under this line of
credit.
Factoring Agreement
Supplies Distributors’ European subsidiary has a factoring agreement with Fortis Commercial
Finance N.V. (“Fortis”) to provide factoring for up to 7.5 million Euros (approximately $10.0
million at December 31, 2010) of eligible accounts receivables through March 2011. This factoring
agreement is accounted for as a secured borrowing. As of December 31, 2010, Supplies Distributors’
European subsidiary had approximately 0.7 million Euros ($0.9 million) of available credit under
this agreement. Borrowings accrue interest at Euribor plus 1.2% (2.0% and 1.6% at December 31, 2010
and 2009, respectively). 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.
52
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
Supplies Distributors’ European subsidiary has entered into a new factoring agreement with BNP
Paribas Fortis effective April 1, 2011 that provides factoring under similar terms as the Fortis
agreement through April 1, 2014 for up to 7.5 million Euros (approximately $10.0 million at
December 31, 2010). Borrowings under the new agreement will accrue interest at Euribor plus 0.7%.
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 MBFC Taxable Variable Rate Demand Limited Obligation
Revenue Bonds, Series 2004 (Priority Fulfillment Services, Inc. Project) (the “Bonds”). The MBFC
loaned the proceeds of the Bonds to PFS for the purpose of financing the acquisition and
installation of equipment, machinery and related assets located in the Company’s Southaven,
Mississippi distribution facility. The Bonds bear interest at a variable rate (0.4% as of December
31, 2010), as determined by Comerica Securities, as Remarketing Agent. PFS, at its option, may
convert the Bonds to a fixed rate, to be determined by the Remarketing Agent at the time of
conversion.
The primary source of repayment of the Bonds is a letter of credit (the “Letter of Credit”)
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 2012 at which time, if not renewed or replaced, will result in a draw
on the undrawn face amount thereof. The Bonds require future annual principal repayments of
$800,000 in January of 2011 and 2012. PFS’ obligations under the Reimbursement Agreement are
secured by substantially all of the assets of PFS, including restricted cash of $0.8 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, if PFS service fee revenue declines from
expected levels and it is unable to reduce costs to correspond to such reduced revenue levels or if
Supplies Distributors revenue or gross profit declines from expected levels, such events may result
in a breach of one or more of the financial covenants required under its working capital line of
credit. In such event, absent a waiver, the working capital lender would be entitled to accelerate
all amounts outstanding thereunder and exercise all other rights and remedies, including sale of
collateral and demand for payment under the Company parent guaranty. Any acceleration of the
repayment of the credit facilities would have a material adverse impact on the Company’s financial
condition and results of operations and no assurance can be given that the Company would have the
financial ability to repay all of such obligations. As of December 31, 2010, the Company was in
compliance with all debt covenants.
Master Lease Agreements
The Company has a Term Lease Master Agreement with IBM Credit Corporation (“Master Lease
Agreement”) that provides for leasing or financing transactions of equipment and other assets,
which generally have terms of three years. The amounts outstanding under this Master Lease
Agreement were $1.0 million and $1.6 million as of December 31, 2010 and 2009, respectively, which
are secured by the related equipment (see Note 2).
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.
53
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
Debt and Capital Lease Maturities
The Company’s aggregate maturities of debt subsequent to December 31, 2010 are as follows (in
thousands):
| |
|
|
|
|
Fiscal year ended December 31, |
|
|
|
|
2011 |
|
$ |
17,515 |
|
2012 |
|
|
1,229 |
|
2013 |
|
|
242 |
|
2014 |
|
|
35 |
|
Thereafter |
|
|
— |
|
|
|
|
|
Total |
|
$ |
19,021 |
|
|
|
|
|
The following is a schedule of the Company’s future minimum lease payments under the capital
leases together with the present value of the net minimum lease payments as of December 31, 2010
(in thousands):
| |
|
|
|
|
Fiscal year ended December 31, |
|
|
|
|
2011 |
|
$ |
866 |
|
2012 |
|
|
439 |
|
2013 |
|
|
217 |
|
Thereafter |
|
|
— |
|
|
|
|
|
Total minimum lease payments |
|
$ |
1,522 |
|
Less amount representing interest at rates ranging from 4.7%
to 12.0% |
|
|
(87 |
) |
|
|
|
|
Present value of net minimum lease payments |
|
|
1,435 |
|
Less: Current portion |
|
|
(805 |
) |
|
|
|
|
Long-term capital lease obligations |
|
$ |
630 |
|
|
|
|
|
5. Stock and Stock Options
Preferred Stock Purchase Rights
On June 8, 2000, and as amended, the Company’s Board of Directors declared a dividend
distribution of one preferred stock purchase right (a “Right”) for each share of the Company’s
common stock outstanding on July 6, 2000 and each share of common stock issued thereafter. Each
Right entitles the registered shareholders to purchase from the Company one one-thousandth of a
share of preferred stock at an exercise price of $314.90, subject to adjustment. The Rights are not
currently exercisable, but would become exercisable if certain events occurred relating to a person
or group acquiring or attempting to acquire 23 percent or more of the Company’s outstanding shares
of common stock. The Rights expire on July 6, 2015, unless redeemed, exchanged or extended by the
Company.
Employee Stock Purchase Plan
The Company offered the PFSweb Employee Stock Purchase Plan (the “Stock Purchase Plan”) that
was qualified under Section 423 of the Internal Revenue Code of 1986, to provide employees of the
Company an opportunity to acquire a proprietary interest in the Company. The Stock Purchase Plan
permitted each U.S. employee who completed 90 days of service to elect to participate in the plan.
Eligible employees could elect to contribute with after-tax dollars up to a maximum annual
contribution of $25,000. The Stock Purchase Plan provided for acquisition of the Company’s common
stock at a 5% discount to the market value on the date of purchase. During the years ended
December 31, 2010 and 2009, the Company issued 2,793 and 17,070 shares under the Stock Purchase
Plan, respectively. The 2,793 shares issued in 2010 related to 2009 contributions. The Company
terminated the Stock Purchase Plan effective January 1, 2010.
Stock Options and Stock Option Plans
The Company recognizes compensation cost for all share-based payments based on the grant date
fair value. Compensation cost is recognized on a straight-line basis, net of estimated forfeitures,
over the requisite service period of each award.
54
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
Stock-based compensation charged against income was $0.8 million and $0.4 million for the
years ended
December 31, 2010 and 2009, respectively. As of December 31, 2010, there was $1.5 million of
total unrecognized compensation costs related to unvested stock options, which is expected to be
recognized over a weighted average period of approximately 1.7 years.
As of December 31, 2010, the Company had the following share-based compensation plans:
PFSweb Plan Options
The Company has an Employee Stock and Incentive Plan and an Outside Director Stock Option and
Retainer Plan under which an aggregate of 3,192,341 shares of common stock have been authorized for
issuance (the “Stock Options Plans”) and an outstanding stock option agreement under which 7,446
shares were originally authorized for issuance. The Stock Option Plans provide for the granting of
incentive awards in the form of stock options to directors, executive management, key employees,
and outside consultants of the Company. The rights to purchase shares under the employee stock
option agreements typically vest over a three-year period, one-twelfth each quarter. Stock options
must be exercised within 10 years from the date of grant. Stock options are generally issued such
that the exercise price is equal to the market value of the Company’s common stock at the date of
grant.
As of December 31, 2010, there were 845,443 shares available for future grants under the Stock
Option Plans.
The following table summarizes stock option activity under the Stock Option Plans:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
Aggregate |
|
| |
|
|
|
|
|
|
|
|
|
Average |
|
|
Contractual |
|
|
Intrinsic |
|
| |
|
|
|
|
|
|
|
|
|
Exercise |
|
|
Life (in |
|
|
Value (in |
|
| |
|
Shares |
|
|
Price Per Share |
|
|
Price |
|
|
years) |
|
|
millions) |
|
Outstanding, December 31, 2009 |
|
|
1,666,258 |
|
|
$ |
1.01—$13.91 |
|
|
$ |
4.77 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
653,500 |
|
|
$ |
2.39—$4.00 |
|
|
$ |
3.95 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(107 |
) |
|
$ |
1.01 |
|
|
$ |
1.01 |
|
|
|
|
|
|
|
|
|
Canceled |
|
|
(125,978 |
) |
|
$ |
1.01—$12.64 |
|
|
$ |
8.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2010 |
|
|
2,193,673 |
|
|
$ |
1.01—$13.91 |
|
|
$ |
4.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2010 |
|
|
1,453,788 |
|
|
$ |
1.01—$13.91 |
|
|
$ |
4.73 |
|
|
|
4.4 |
|
|
$ |
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable and expected to vest,
December 31, 2010 |
|
|
2,059,155 |
|
|
$ |
1.01—$13.91 |
|
|
$ |
4.34 |
|
|
|
3.9 |
|
|
$ |
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average fair value per share of options granted during the years ended December
31, 2010 and 2009 was $2.82 and $1.04, respectively.
PFSweb Non-plan Options
Prior to the Company’s initial public offering, certain of the Company’s employees were
holders of stock options of the Company’s former parent company, Daisytek International Corporation
(“Daisytek”), issued under Daisytek’s stock option plans.
In connection with the completion of the Company’s spin-off from Daisytek on July 6, 2000 (the
“Spin-off”), all outstanding Daisytek stock options were replaced with substitute stock options.
Daisytek options held by PFSweb employees were replaced (at the option holder’s election made prior
to the Spin-off) with either options to acquire shares of PFSweb common stock or options to acquire
shares of both Daisytek common stock and PFSweb common stock (that may be exercised separately)
(the “Unstapled Options”). Options held by Daisytek employees were replaced (at the option holder’s
election made prior to the Spin-off) with either options to acquire shares of Daisytek common stock
or Unstapled Options.
As a result of the stock option replacement process described above, in conjunction with the
Spin-off, PFSweb stock options (the “Non-plan Options”) were issued to PFSweb and Daisytek
officers, directors and employees. These options were issued as one-time grants and were not issued
under the Stock Option Plans. The terms and provisions of the Non-plan Options are substantially
the same as options issued under the Stock Option Plans.
55
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
The following table summarizes stock option activity under the Non-plan Options:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
Aggregate |
|
| |
|
|
|
|
|
|
|
|
|
Average |
|
|
Contractual |
|
|
Intrinsic |
|
| |
|
|
|
|
|
|
|
|
|
Exercise |
|
|
Life (in |
|
|
Value (in |
|
| |
|
Shares |
|
|
Price Per Share |
|
|
Price |
|
|
years) |
|
|
millions) |
|
Outstanding, December 31, 2009 |
|
|
91,022 |
|
|
$ |
4.28 |
|
|
$ |
4.28 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
Canceled |
|
|
(2,303 |
) |
|
$ |
4.28 |
|
|
$ |
4.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2010 |
|
|
88,719 |
|
|
$ |
4.28 |
|
|
$ |
4.28 |
|
|
|
0.9 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2010 |
|
|
88,719 |
|
|
$ |
4.28 |
|
|
$ |
4.28 |
|
|
|
0.9 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions used for grants of options under the Stock
Option Plans:
| |
|
|
|
|
| |
|
Year Ended |
|
Year Ended |
| |
|
December 31, 2010 |
|
December 31, 2009 |
Expected dividend yield |
|
— |
|
— |
Expected stock price volatility |
|
82% - 84% |
|
77% - 82% |
Weighted average stock price volatility |
|
83% |
|
81% |
Risk-free interest rate |
|
1.7% - 2.9% |
|
2.0% - 3.2% |
Expected life of options (years) |
|
6 |
|
6 |
The Black-Scholes option valuation model requires the input of highly subjective assumptions,
including the expected life of the stock-based award and stock-price volatility. The assumptions
listed above represent management’s best estimates, but these estimates involve inherent
uncertainties and the application of management judgment. As a result, if other assumptions had
been used, the Company’s recorded and pro forma stock-based compensation expense could have been
different. In addition, the Company is required to estimate the expected forfeiture rate and only
recognize expense for those shares expected to vest. If the Company’s actual forfeiture rate is
materially different from its estimate, the share-based compensation expense could be materially
different. The expected life of options has been computed using the simplified method.
6. Master Distributor Agreements
Supplies Distributors, PFSweb and IPS have entered into master distributor agreements under
which Supplies Distributors acts as a master distributor of various products, primarily IPS
product, and PFSweb provides transaction management and fulfillment services to Supplies
Distributors. The master distributor agreements are subject to periodic renewals, the next of which
is in December 2011. Under the master distributor agreements, IPS sells product to Supplies
Distributors and reimburses Supplies Distributors for certain freight costs, direct costs incurred
in passing on any price decreases offered by IPS to Supplies Distributors or its customers to cover
price protection and certain special bids, the cost of products provided to replace defective
product returned by customers and other certain expenses as defined. Supplies Distributors can
return to IPS product rendered obsolete by IPS engineering changes after customer demand ends. IPS
determines when a product is obsolete. IPS and Supplies Distributors also have agreements under
which IPS reimburses or collects from Supplies Distributors amounts calculated in certain inventory
cost adjustments.
Supplies Distributors passes through to customers marketing programs specified by IPS and
administers, along with a party performing product demand generation for the IPS products, such
programs according to IPS guidelines.
56
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
7. Supplies Distributors
Pursuant to a credit agreement, Supplies Distributors is restricted from making any
distributions to PFSweb if,
after giving affect thereto, Supplies Distributors’ would be in noncompliance with its
financial covenants. Under the terms of its amended credit agreements, Supplies Distributors is
restricted from paying annual cash dividends without the prior approval of its lenders (see Notes 3
and 4). Supplies Distributors has received lender approval to pay approximately $1.9 million of
dividends in 2011. Supplies Distributors paid dividends to PFSweb of $2.9 million and $2.1 million
in 2010 and 2009, respectively.
8. Income Taxes
The consolidated income (loss) from continuing operations before income taxes, by domestic and
foreign entities, is as follows (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended |
|
|
Year Ended |
|
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
Domestic |
|
$ |
(4,402 |
) |
|
$ |
(7,073 |
) |
Foreign |
|
|
1,471 |
|
|
|
2,482 |
|
|
|
|
|
|
|
|
Total |
|
$ |
(2,931 |
) |
|
$ |
(4,591 |
) |
|
|
|
|
|
|
|
A reconciliation of the difference between the expected income tax expense from continuing
operations at the U.S. federal statutory corporate tax rate of 34%, and the Company’s effective tax
rate is as follows (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended |
|
|
Year Ended |
|
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
Income tax benefit computed at statutory rate |
|
$ |
(997 |
) |
|
$ |
(1,561 |
) |
Impact of foreign taxation |
|
|
4 |
|
|
|
2 |
|
Foreign dividends received |
|
|
893 |
|
|
|
1,187 |
|
Items not deductible for tax purposes |
|
|
462 |
|
|
|
232 |
|
Change in valuation reserve |
|
|
(123 |
) |
|
|
1,285 |
|
Other |
|
|
224 |
|
|
|
(824 |
) |
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
463 |
|
|
$ |
321 |
|
|
|
|
|
|
|
|
Current and deferred income tax expense (benefit) is summarized as follows (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended |
|
|
Year Ended |
|
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
Current |
|
|
|
|
|
|
|
|
Domestic |
|
$ |
— |
|
|
$ |
13 |
|
State |
|
|
45 |
|
|
|
195 |
|
Foreign |
|
|
451 |
|
|
|
178 |
|
|
|
|
|
|
|
|
Total current |
|
|
496 |
|
|
|
386 |
|
Deferred |
|
|
|
|
|
|
|
|
Domestic |
|
|
— |
|
|
|
— |
|
State |
|
|
15 |
|
|
|
(41 |
) |
Foreign |
|
|
(48 |
) |
|
|
(24 |
) |
|
|
|
|
|
|
|
Total deferred |
|
|
(33 |
) |
|
|
(65 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
463 |
|
|
$ |
321 |
|
|
|
|
|
|
|
|
57
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
The components of the deferred tax asset (liability) are as follows (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
757 |
|
|
$ |
797 |
|
Inventory reserve |
|
|
630 |
|
|
|
713 |
|
Property and equipment |
|
|
1,336 |
|
|
|
1,071 |
|
Net operating loss carryforwards |
|
|
19,569 |
|
|
|
20,066 |
|
Other |
|
|
1,476 |
|
|
|
1,326 |
|
|
|
|
|
|
|
|
|
|
|
23,768 |
|
|
|
23,973 |
|
Less — Valuation allowance |
|
|
23,203 |
|
|
|
23,326 |
|
|
|
|
|
|
|
|
Total deferred tax asset |
|
|
565 |
|
|
|
647 |
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Intangible assets |
|
|
(108 |
) |
|
|
(143 |
) |
Other |
|
|
(48 |
) |
|
|
(107 |
) |
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(156 |
) |
|
|
(250 |
) |
|
|
|
|
|
|
|
Deferred tax assets, net |
|
$ |
409 |
|
|
$ |
397 |
|
|
|
|
|
|
|
|
Management believes that PFSweb has not established a sufficient history of earnings, on a
stand-alone basis, to support the more likely than not realization of certain deferred tax assets
in excess of existing taxable temporary differences. A valuation allowance has been provided for
the majority of these net deferred income tax assets as of December 31, 2010 and 2009. At December
31, 2010, net operating loss carryforwards relate to taxable losses of PFSweb’s European subsidiary
totaling approximately $5.3 million, PFSweb’s Canadian subsidiary totaling approximately $5.0
million and PFSweb’s U.S. subsidiaries totaling approximately $47.4 million that expire at various
dates from 2011 through 2030. The U.S. NOL carryforward includes $4.6 million relating to tax
benefits of stock option exercises and, if utilized, will be recorded against additional
paid-in-capital upon utilization rather than as an adjustment to income tax expense from continuing
operations. The U.S. NOL also includes approximately $21.0 million of NOL acquired in 2006, which
is subject to annual limits of $1.2 million under IRS Section 382.
The Company evaluates its tax positions for potential liabilities associated with unrecognized
tax benefits. As of December 31, 2010 and 2009, no unrecognized tax benefits, penalties or
interest were identified or recorded. The Company does not expect to record unrecognized tax
benefits in the next twelve months.
9. Commitments and Contingencies
The Company leases facilities, warehouse, office, transportation and other equipment under
operating leases expiring in various years through December 31, 2015. In most cases, management
expects that, in the normal course of business, leases will be renewed or replaced by other leases.
The Company’s facility leases generally contain one or more renewal options.
Minimum future annual rental payments under non-cancelable operating leases having original
terms in excess of one year are as follows (in thousands):
| |
|
|
|
|
| |
|
Operating |
|
| |
|
Lease |
|
| |
|
Payments |
|
Fiscal year ended December 31, |
|
|
|
|
2011 |
|
$ |
5,725 |
|
2012 |
|
|
4,170 |
|
2013 |
|
|
3,319 |
|
2014 |
|
|
1,978 |
|
2015 |
|
|
433 |
|
Thereafter |
|
|
— |
|
|
|
|
|
Total |
|
$ |
15,625 |
|
|
|
|
|
Minimum rental payments under operating leases are recognized on a straight-line basis over
the term of the lease including any periods of free rent. Total rental expense under operating
leases approximated $7.9 million and $10.2 million for the years ended December 31, 2010 and 2009,
respectively. Certain landlord required deposits are secured by letters of credit.
58
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
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
Company’s tax abatement. The Company disputed the adjustment and such dispute has been settled
with the municipality. However, the amount of additional property taxes to be assessed against the
Company and the timing of the related payments has not been finalized. As of December 31, 2010,
the Company believes it has adequately accrued for the expected assessment.
In April 2010, a sales employee of eCOST was charged with violating various federal criminal
statues in connection with the sales of eCOST products to certain customers, and approximately
$620,000 held in an eCOST bank account was seized and turned over to the Office of the U.S.
Attorney in connection with such activity. The Company received subpoenas from the Office of the
U.S. Attorney requesting information regarding the employee and other matters, and the Company has
responded to the subpoenas and is fully cooperating with the Office of the U.S. Attorney. The
Company has commenced its own investigation into the actions of the employee. Neither the Company
nor eCOST have been charged with any criminal activity, and the Company intends to seek the
recovery or reimbursement of the funds which are currently classified as other receivables on the
December 31, 2010 financial statements. Based on the information available to date, the Company is
unable to determine the amount of the loss, if any, relating to the seizure of such funds. No
assurance can be given, however, that the seizure of such funds, or the inability of the Company to
recover such funds or any significant portion thereof, or any costs and expenses incurred by the
Company in connection with this matter will not have a material adverse effect upon the Company’s
financial condition or results of operations.
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. PFS is generally required to indemnify its service
fee clients against any third party claims alleging infringement by PFS of the patents, trademarks
and other intellectual property rights of third parties.
10. Segment and Geographic Information
The Company is currently organized into two primary operating segments, which generally align
with the corporate organization structure. In the first segment, PFSweb is an international
provider of various business process outsourcing solutions and operates as a service fee business.
In the second operating segment, subsidiaries of the Company purchase inventory from clients and
resell the inventory to client customers. In this segment, the Company recognizes product revenue.
Currently, Supplies Distributors is the primary subsidiary in this segment.
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended |
|
|
Year Ended |
|
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
Revenues (in thousands): |
|
|
|
|
|
|
|
|
PFSweb |
|
$ |
106,552 |
|
|
$ |
92,047 |
|
Supplies Distributors |
|
|
174,613 |
|
|
|
183,008 |
|
Eliminations |
|
|
(6,649 |
) |
|
|
(7,163 |
) |
|
|
|
|
|
|
|
|
|
$ |
274,516 |
|
|
$ |
267,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations (in thousands): |
|
|
|
|
|
|
|
|
PFSweb |
|
$ |
(5,442 |
) |
|
$ |
(8,770 |
) |
Supplies Distributors |
|
|
3,451 |
|
|
|
5,365 |
|
Eliminations |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
$ |
(1,991 |
) |
|
$ |
(3,405 |
) |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended |
|
|
Year Ended |
|
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
Depreciation and amortization (in thousands): |
|
|
|
|
|
|
|
|
PFSweb |
|
$ |
6,032 |
|
|
$ |
6,509 |
|
Supplies Distributors |
|
|
28 |
|
|
|
35 |
|
Eliminations |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
$ |
6,060 |
|
|
$ |
6,544 |
|
|
|
|
|
|
|
|
59
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
Capital expenditures (in thousands): |
|
|
|
|
|
|
|
|
PFSweb |
|
$ |
3,774 |
|
|
$ |
4,438 |
|
Supplies Distributors |
|
|
— |
|
|
|
2 |
|
Eliminations |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
$ |
3,774 |
|
|
$ |
4,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets (in thousands): |
|
|
|
|
|
|
|
|
PFSweb |
|
$ |
62,617 |
|
|
$ |
65,716 |
|
Supplies Distributors |
|
|
73,992 |
|
|
|
69,291 |
|
eCOST |
|
|
8,183 |
|
|
|
13,579 |
|
Eliminations |
|
|
(14,562 |
) |
|
|
(20,817 |
) |
|
|
|
|
|
|
|
|
|
$ |
130,230 |
|
|
$ |
127,769 |
|
|
|
|
|
|
|
|
Geographic areas in which the Company operates include the United States, Europe (primarily
Belgium), and Canada. The following is geographic information by area. Revenues are attributed
based on the Company’s domicile.
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended |
|
|
Year Ended |
|
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
Revenues (in thousands): |
|
|
|
|
|
|
|
|
United States |
|
$ |
194,791 |
|
|
$ |
183,937 |
|
Europe |
|
|
77,758 |
|
|
|
81,460 |
|
Canada |
|
|
5,439 |
|
|
|
5,389 |
|
Inter-segment eliminations |
|
|
(3,472 |
) |
|
|
(2,894 |
) |
|
|
|
|
|
|
|
|
|
$ |
274,516 |
|
|
$ |
267,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-lived assets (in thousands): |
|
|
|
|
|
|
|
|
United States |
|
$ |
11,525 |
|
|
$ |
16,181 |
|
Europe |
|
|
765 |
|
|
|
900 |
|
Canada |
|
|
163 |
|
|
|
195 |
|
|
|
|
|
|
|
|
|
|
$ |
12,453 |
|
|
$ |
17,276 |
|
|
|
|
|
|
|
|
11. Employee Savings Plan
The Company has a defined contribution employee savings plan under Section 401(k) of the
Internal Revenue Code. Substantially all full-time and part-time U.S. employees are eligible to
participate in the plan. The Company, at its discretion, may match employee contributions to the
plan and also make an additional matching contribution in the form of profit sharing in recognition
of the Company’s performance.
12. Discontinued Operations
In February 2011, the Company sold certain assets of eCOST to a third party for a total
aggregate cash purchase price of approximately $2.3 million (before expenses of approximately $0.2
million). Accordingly, the accompanying consolidated financial statements reflect the related
operating results of the eCOST segment as discontinued operations for all periods presented.
Summarized financial information in the accompanying consolidated statements of operations for
the discontinued eCOST operations is as follows (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
Twelve Months |
|
| |
|
Ended |
|
| |
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
Product revenue, net |
|
$ |
69,172 |
|
|
$ |
84,607 |
|
Expenses |
|
|
70,327 |
|
|
|
84,257 |
|
Goodwill and intangible asset impairment |
|
|
2,792 |
|
|
|
— |
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes |
|
|
(3,947 |
) |
|
|
350 |
|
Provision for income taxes |
|
|
28 |
|
|
|
8 |
|
|
|
|
|
|
|
|
Discontinued operations, net of income taxes |
|
$ |
(3,975 |
) |
|
$ |
342 |
|
|
|
|
|
|
|
|
60
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
Summarized financial information in the accompanying consolidated balance sheets for the
discontinued eCOST operations is as follows (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
As of |
|
| |
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
Inventories, net |
|
$ |
2,776 |
|
|
$ |
4,372 |
|
Identifiable intangibles |
|
|
316 |
|
|
|
422 |
|
Goodwill |
|
|
810 |
|
|
|
3,602 |
|
|
|
|
|
|
|
|
Assets of discontinued operations |
|
$ |
3,902 |
|
|
$ |
8,396 |
|
|
|
|
|
|
|
|
At December 31, 2010 and 2009, the amount of allowance for slow moving inventory included in
discontinued operations is $0.2 million and $0.3 million, respectively.
The original eCOST acquisition resulted in a purchase price in excess of the fair value of net
identifiable assets acquired and liabilities assumed. This excess purchase price, $18.9 million,
was allocated to goodwill. Goodwill, which is not deductible for tax purposes, is not amortized yet
is subject to an annual impairment test, using a fair-value-based approach. In 2008 and prior,
following the Company’s analysis of the carrying value of goodwill, the Company determined the
carrying value of goodwill exceeded its fair value, which resulted in cumulative non-cash goodwill
write-offs of $15.3 million. During the Company’s 2010 analysis of the carrying value of goodwill,
using the February 2011 sale as a basis to determine the fair value, the Company recorded a
non-cash goodwill write-off of $2.8 million, which is included in loss from discontinued
operations. The remaining balance of goodwill, $0.8 million as of December 31, 2010, is included in
assets of discontinued operations.
61
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and our Chief Financial Officer, after evaluating the
effectiveness of our disclosure controls and procedures (as defined in Securities Exchange Act of
1934 (the “Exchange Act”) Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by
this report (the “Evaluation Date”), have concluded that as of the Evaluation Date, our disclosure
controls and procedures are effective, at a reasonable assurance level, to ensure that information
required to be disclosed in the reports that we file and submit under the Exchange Act (i) is
recorded, processed, summarized and reported as and when required and (ii) is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter
ended December 31, 2010 that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) under the Exchange Act. Our internal control over
financial reporting is designed, under the supervision of our principle executive and principle
financial officers, and effected by our board of directors, management and other personnel, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with accounting principles generally
accepted in the United States of America (GAAP). Our internal control over financial reporting
includes those policies and procedures that: (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with GAAP, and that our receipts and expenditures are being
made only in accordance with authorizations of our management and Board of Directors; and (iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of our assets that could have a material effect on the financial statements.
We conducted an evaluation of the effectiveness of our internal control over financial
reporting as of December 31, 2010. This evaluation was based on the framework in “Internal
Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can provide only reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with GAAP. Also, projections of any evaluation of
the effectiveness of internal control over financial reporting to future periods are subject to the
risk that the controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Based on our evaluation under the framework in Internal Control—Integrated Framework, our
Chief Executive Officer and Chief Financial Officer concluded that internal control over financial
reporting was effective as of December 31, 2010.
This annual report does not include an attestation report of our independent registered public
accounting firm regarding internal control over financial reporting. Management’s report was not
subject to attestation by our independent registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit us to provide only management’s report
in this annual report.
62
Item 9B. Other Information
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Reference is made to the information to be set forth in the section entitled “Board of
Directors” and “Committees of the Board” in the definitive proxy statement in connection with our
Annual Meeting of Shareholders (the “Proxy Statement”), which section is incorporated herein by
reference. Our Proxy Statement will be filed with the Securities and Exchange Commission not later
than 120 days after the last day of our fiscal year ended December 31, 2010.
Item 11. Executive Compensation
Information required by Part III, Item 11, will be included in the section entitled “Executive
Compensation” of our Proxy Statement relating to our annual meeting of shareholders and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder
Matters
Information required by Part III, Item 12, will be included in the Sections entitled “Election
of Directors” and “Security Ownership of Certain Beneficial Owners and Management” of our Proxy
Statement relating to our annual meeting of shareholders and is incorporated herein by reference.
The following table summarizes information with respect to equity compensation plans under
which equity securities of the Company are authorized for issuance as of December 31, 2010:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Number of |
|
|
|
|
|
|
|
| |
|
securities to be |
|
|
|
|
|
|
|
| |
|
issued upon |
|
|
Weighted-average |
|
|
Number of |
|
| |
|
exercise of |
|
|
exercise price of |
|
|
securities |
|
| |
|
outstanding options |
|
|
outstanding options |
|
|
remaining available |
|
| Plan category (1) |
|
and warrants |
|
|
and warrants |
|
|
for future issuance |
|
Equity
compensation plans
approved by security
holders |
|
|
2,193,673 |
|
|
$ |
4.28 |
|
|
|
845,443 |
|
Equity compensation
plans not approved
by security holders |
|
|
88,719 |
|
|
$ |
4.28 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,282,392 |
|
|
|
|
|
|
|
845,443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (2) |
|
See Note 5 to the Consolidated Financial Statements for more detailed information
regarding the Company’s equity compensation plans. |
Item 13. Certain Relationship and Related Transactions
Information regarding certain of our relationships and related transactions will be included
in the section entitled “Certain Relationship and Related Transactions” of our Proxy Statement
relating to our annual meeting of shareholders and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
Information required by Part III, Item 14, will be included in the section entitled
“Ratification of Appointment of Independent Auditors” of our Proxy Statement relating to our annual
meeting of shareholders and is incorporated herein by reference.
63
PART IV
Item 15. Exhibits and Financial Statement Schedules
| |
(a) |
|
The following documents are filed as part of this report: |
| |
| |
1. |
|
Financial Statements
PFSweb, Inc. and Subsidiaries |
| |
| |
|
|
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Shareholders’ Equity and Comprehensive Loss
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements |
| |
| |
|
|
Financial Statement Schedules |
| |
| |
|
|
Schedule I — Condensed Financial Information of Registrant
Schedule II — Valuation and Qualifying Accounts
All other schedules are omitted because the required information is not present in
amounts sufficient to require submission of the schedule or because the information required
is included in the financial statements or notes thereto. |
| |
|
|
| Exhibit |
|
|
| Number |
|
Description of Exhibits |
3.1 (1)
|
|
Amended and Restated Certificate of Incorporation of PFSweb, Inc. |
|
|
|
3.1.1 (20)
|
|
Certificate of Amendment to Amended and Restated Certificate of
Incorporation of PFSweb, Inc. |
|
|
|
3.1.2 (32)
|
|
Certificate of Amendment to Certificate of Incorporation of
PFSweb, Inc. |
|
|
|
3.1.3 (36)
|
|
Certificate of Amendment to Amended and Restated Certificate of
Incorporation of PFSweb, Inc. |
|
|
|
3.2 (1)
|
|
Amended and Restated Bylaws |
|
|
|
3.2.1 (26)
|
|
Amendment to the Amended and Restated By-Laws of PFSweb, Inc. |
|
|
|
2.2.2 (39)
|
|
Amendment to the Amended and Restated By-Laws of PFSweb, Inc. |
|
|
|
4.1 (30)
|
|
Rights Agreement, dated as of June 8, 2000, between the Company
and ChaseMellon Shareholder Services, LLC |
|
|
|
4.1 (31)
|
|
Amendment No. 1 to Rights Agreement, dated as of May 30, 2008
between the Company and Mellon Investor Services LLC, as
successor to ChaseMellon Shareholder Services, L.L.C., as rights
agent. |
|
|
|
4.1 (38)
|
|
Amendment No. 2 to Rights Agreement, dated as of May 24, 2010
between the Company and Mellon Investor Services LLC, as
successor to ChaseMellon Shareholder Services, L.L.C., as rights
agent. |
|
|
|
4.1 (39)
|
|
Amendment No. 3 to Rights Agreement, dated as of July 2, 2010
between the Company and Mellon Investor Services LLC, as
successor to ChaseMellon Shareholder Services, L.L.C., as rights
agent. |
|
|
|
10.1 (17)
|
|
PFSweb, Inc. 2005 Employee Stock Purchase Plan. |
|
|
|
10.2 (18)
|
|
Amendment 3 to Loan and Security Agreement. |
|
|
|
10.3 (18)
|
|
Amendment 6 to Agreement for Inventory Financing. |
|
|
|
10.4 (18)
|
|
Amendment 1 to First Amended and Restated Loan and Security
Agreement. |
|
|
|
10.5 (16)
|
|
Amendment 5 to Amended and Restated Platinum Plan Agreement. |
|
|
|
10.6 (16)
|
|
Agreement for IBM Global Financing Platinum Plan Invoice
Discounting Schedule. |
|
|
|
10.7 (16)
|
|
Amendment No. 5 to Agreement for Inventory Financing. |
|
|
|
10.8 (1)
|
|
Industrial Lease Agreement between Shelby Drive Corporation and
Priority Fulfillment Services, Inc. |
|
|
|
10.9 (1)
|
|
Lease Contract between Transports Weerts and Priority
Fulfillment Services Europe B.V. |
64
| |
|
|
| Exhibit |
|
|
| Number |
|
Description of Exhibits |
10.10 (2)
|
|
Form of Change of Control Agreement between the Company and each
of its executive officers |
|
|
|
10.11 (4)
|
|
Ninth Amendment to Lease Agreement by and between AGBRI ATRIUM.
L.P., and Priority Fulfillment Services, Inc. |
|
|
|
10.12 (5)
|
|
Agreement for Inventory Financing by and among Business Supplies
Distributors Holdings, LLC, Supplies Distributors, Inc.,
Priority Fulfillment Services, Inc., PFSweb, Inc., Inventory
Financing Partners, LLC and IBM Credit Corporation |
|
|
|
10.13 (5)
|
|
Amended and Restated Collateralized Guaranty by and between
Priority Fulfillment Services, Inc. and IBM Credit Corporation |
|
|
|
10.14 (5)
|
|
Amended and Restated Guaranty to IBM Credit Corporation by
PFSweb, Inc. |
|
|
|
10.15 (5)
|
|
Amended and Restated Notes Payable Subordination Agreement by
and between Priority Fulfillment Services, Inc., Supplies
Distributors, Inc. and IBM Credit Corporation |
|
|
|
10.16 (5)
|
|
Amended and Restated Platinum Plan Agreement (with Invoice
Discounting) by and among Supplies Distributors, S.A., Business
Supplies Distributors Europe B.V., PFSweb B.V., and IBM Belgium
Financial Services S.A. |
|
|
|
10.17 (5)
|
|
Amended and Restated Collateralized Guaranty between Priority
Fulfillment Services, Inc. and IBM Belgium Financial Services
S.A. |
|
|
|
10.18 (5)
|
|
Amended and Restated Guaranty to IBM Belgium Financial Services
S.A. by PFSweb, Inc. |
|
|
|
10.19 (5)
|
|
Subordinated Demand Note by and between Supplies Distributors,
Inc. and Priority Fulfillment Services, Inc. |
|
|
|
10.20 (5)
|
|
Notes Payable Subordination Agreement between Congress Financial
Corporation (Southwest) and Priority Fulfillment Services, Inc. |
|
|
|
10.21 (5)
|
|
Guarantee in favor of Congress Financial Corporation (Southwest)
by Business Supplies Distributors Holdings, LLC, Priority
Fulfillment Services, Inc. and PFSweb, Inc. |
|
|
|
10.22 (5)
|
|
General Security Agreement by Priority Fulfillment Services,
Inc. in favor of Congress Financial Corporation (Southwest). |
|
|
|
10.23 (5)
|
|
Inducement Letter by Priority Fulfillment Services, Inc. and
PFSweb, Inc. in favor of Congress Financial Corporation
(Southwest). |
|
|
|
10.24 (6)
|
|
Form of Executive Severance Agreement between the Company and
each of its executive officers. |
|
|
|
10.24.1 (33)
|
|
Form of Amendment to Executive Severance Agreement. |
|
|
|
10.24.2 (33)
|
|
Form of Amendment to Change in Control Severance Agreement. |
|
|
|
10.24.3 (39)
|
|
Severance, Nondisclosure, Nonsolicitation and Noncompete
Agreement dated July 2, 2010 between the Company and Cynthia
Almond. |
|
|
|
10.25 (7)
|
|
Amendment to Agreement for Inventory Financing by and among
Business Supplies Distributors Holdings, LLC, Supplies
Distributors, Inc., Priority Fulfillment Services, Inc., PFSweb,
Inc., Inventory Financing Partners, LLC and IBM Credit
Corporation |
|
|
|
10.26 (7)
|
|
Amendment to Amended and Restated Platinum Plan Agreement (with
Invoice Discounting) by and among Supplies Distributors, S.A.,
Business Supplies Distributors Europe B.V., PFSweb B.V., and IBM
Belgium Financial Services S.A. |
|
|
|
10.27 (7)
|
|
Amended and Restated Notes Payable Subordination Agreement by
and between Priority Fulfillment Services, Inc., Supplies
Distributors, Inc. and IBM Credit Corporation |
|
|
|
10.28 (7)
|
|
Amendment to Factoring agreement dated March 29, 2002 between
Supplies Distributors S.A. and Fortis Commercial Finance N.V. |
|
|
|
10.29 (8)
|
|
Unconditional Guaranty of PFSweb, Inc. to Comerica Bank —
California |
|
|
|
10.30 (8)
|
|
Security Agreement of PFSweb, Inc. to Comerica Bank — California |
65
| |
|
|
| Exhibit |
|
|
| Number |
|
Description of Exhibits |
10.31 (8)
|
|
Intellectual Property Security Agreement between Priority
Fulfillment Services, Inc. and Comerica Bank — California |
|
|
|
10.32 (8)
|
|
Amendment 2 to Amended and Restated Platinum Plan Agreement
(with Invoice Discounting) by and among Supplies Distributors,
S.A., Business Supplies Distributors B.V., PFSweb B.V., and IBM
Belgium Financial Services S.A. |
|
|
|
10.33 (8)
|
|
Amendment to Agreement for Inventory Financing by and among
Business Supplies Distributors Holdings, LLC, Supplies
Distributors, Inc., Priority Fulfillment Services, Inc., PFSweb,
Inc., and IBM Credit LLC |
|
|
|
10.34 (9)
|
|
Amendment to factoring agreement dated April 30, 2003 between
Supplies Distributors S.A. and Fortis Commercial Finance N.V. |
|
|
|
10.35 (9)
|
|
Loan and Security Agreement by and between Congress Financial
Corporation (Southwest), as Lender and Supplies Distributors,
Inc., as Borrower dated March 29, 2002. |
|
|
|
10.36 (9)
|
|
General Security Agreement — Business Supplies Distributors
Holdings, LLC in favor of Congress Financial Corporation
(Southwest) |
|
|
|
10.37 (9)
|
|
Stock Pledge Agreement between Supplies Distributors, Inc. and
Congress Financial Corporation (Southwest) |
|
|
|
10.38 (9)
|
|
First Amendment to General Security Agreement by Priority
Fulfillment Services, Inc. in favor of Congress Financial
Corporation (Southwest) |
|
|
|
10.39 (12)
|
|
Industrial Lease Agreement between New York Life Insurance
Company and Daisytek, Inc. |
|
|
|
10.40 (12)
|
|
First Amendment to Industrial Lease Agreement between New York
Life Insurance Company, Daisytek, Inc. and Priority Fulfillment
Services, Inc. |
|
|
|
10.41 (12)
|
|
Second Amendment to Industrial Lease Agreement between ProLogis
North Carolina Limited Partnership and Priority Fulfillment
Services, Inc. |
|
|
|
10.42 (12)
|
|
Modification, Ratification and Extension of Lease between Shelby
Drive Corporation and Priority Fulfillment Services, Inc. |
|
|
|
10.43 (13)
|
|
Amendment to Agreement for Inventory Financing by and among
Business Supplies Distributors Holdings, LLC, Supplies
Distributors, Inc., Priority Fulfillment Services, Inc., PFSweb,
Inc., and IBM Credit LLC |
|
|
|
10.44 (13)
|
|
Amendment 4 to Amended and Restated Platinum Plan Agreement
(with Invoice Discounting) by and among Supplies Distributors,
S.A., Business Supplies Distributors B.V., PFSweb B.V., and IBM
Belgium Financial Services S.A. |
|
|
|
10.45 (13)
|
|
Third Amended and Restated Notes Payable Subordination Agreement
by and between Priority Fulfillment Services, Inc., Supplies
Distributors, Inc. and IBM Credit Corporation. |
|
|
|
10.46 (13)
|
|
First Amendment to Loan and Security Agreement by and between
Congress Financial Corporation (Southwest), as Lender and
Supplies Distributors, Inc., as Borrower. |
|
|
|
10.47 (13)
|
|
Form of Modification to Executive Severance Agreement. |
|
|
|
10.48 (14)
|
|
Industrial Lease Agreement by and between Industrial
Developments International, Inc. and Priority Fulfillment
Services, Inc. |
|
|
|
10.49 (14)
|
|
Guaranty by PFSweb, Inc. in favor of Industrial Developments
International, Inc. |
|
|
|
10.50 (14)
|
|
Lease between Fleet National Bank and Priority Fulfillment
Services, Inc. |
|
|
|
10.51 (14)
|
|
Guaranty by PFSweb, Inc. in favor of Fleet National Bank |
|
|
|
10.52 (14)
|
|
Amendment No. 3 to Lease dated as of March 3, 1999 between Fleet
National Bank and Priority Fulfillment Services, Inc. |
|
|
|
10.53 (15)
|
|
Loan Agreement between Mississippi Business Finance Corporation
and Priority Fulfillment Services, Inc. dated as of November 1,
2004 |
|
|
|
10.54 (15)
|
|
Reimbursement Agreement between Priority Fulfillment Services,
Inc. and Comerica Bank |
|
|
|
10.55 (15)
|
|
First Amended and Restated Loan and Security Agreement by and
between Comerica Bank and Priority Fulfillment Services, Inc. |
66
| |
|
|
| Exhibit |
|
|
| Number |
|
Description of Exhibits |
10.56 (15)
|
|
Remarketing Agreement between Priority Fulfillment Services,
Inc. and Comerica Securities |
|
|
|
10.57 (20)
|
|
Amendment to factoring agreement dated December 12, 2005 between
Supplies Distributors S.A. and Fortis Commercial Finance N.V. |
|
|
|
10.58 (21)
|
|
Fourth Amended and Restated Notes Payable Subordination
Agreement by and between Priority Fulfillment Services, Inc.,
Supplies Distributors, Inc. and IBM Credit Corporation. |
|
|
|
10.59 (21)
|
|
Amendment 7 to Agreement for Inventory Financing. |
|
|
|
10.60 (21)
|
|
Amendment 6 to Amended and Restated Platinum Plan Agreement. |
|
|
|
10.61 (21)
|
|
Agreement for IBM Global Financing Platinum Plan Invoice
Discounting Schedule. |
|
|
|
10.62 (21)
|
|
Second Amendment to Loan and Security Agreement by and between
eCOST.com, Inc. and Wachovia Capital Finance Corporation
(Western). |
|
|
|
10.63 (21)
|
|
Amendment 4 to Loan and Security Agreement. |
|
|
|
10.64 (21)
|
|
Guaranty by PFSweb, Inc., in favor of Wachovia Capital Finance
Corporation (Western). |
|
|
|
10.65 (21)
|
|
Second Amendment to First Amended and Restated Loan and Security
Agreement by and between Comerica Bank and Priority Fulfillment
Services, Inc. |
|
|
|
10.66 (23)
|
|
Tenth Amendment to Lease Agreement by and between Plano Atrium,
LLC and Priority Fulfillment Services, Inc. |
|
|
|
10.67 (24)
|
|
Fifth Amended and Restated Notes Payable Subordination Agreement
by and between Priority Fulfillment Services, Inc., Supplies
Distributors, Inc. and IBM Credit Corporation. |
|
|
|
10.68 (24)
|
|
Amendment 8 to Agreement for Inventory Financing. |
|
|
|
10.69 (24)
|
|
Fourth Amendment to the Loan and Security Agreement by and
between eCOST.com, Inc. and Wachovia Capital Finance Corporation
(Western). |
|
|
|
10.70 (24)
|
|
Amendment 5 to Loan and Security Agreement. |
|
|
|
10.71 (24)
|
|
Amendment 7 to Amended and Restated Platinum Plan Agreement. |
|
|
|
10.72 (24)
|
|
Agreement for IBM Global Financing Platinum Plan Invoice
Discounting Schedule. |
|
|
|
10.73 (25)
|
|
Fifth Amendment to First Amended and Restated Loan and Security
Agreement by and between Comerica Bank and Priority Fulfillment
Services, Inc. |
|
|
|
10.74 (27)
|
|
Second Amendment to Industrial Lease Agreement by and between
Industrial Property Fund VI, LLC and Priority Fulfillment
Services, Inc. |
|
|
|
10.75 (29)
|
|
Sixth Amended and Restated Notes Payable Subordination Agreement
by and between Priority Fulfillment Services, Inc., Supplies
Distributors, Inc. and IBM Credit Corporation. |
|
|
|
10.76 (29)
|
|
Amendment 9 to Agreement for Inventory Financing. |
|
|
|
10.77 (29)
|
|
Amendment 8 to Amended and Restated Platinum Plan Agreement. |
|
|
|
10.78 (29)
|
|
Agreement for IBM Global Financing Platinum Plan Invoice
Discounting Schedule. |
|
|
|
10.79 (29)
|
|
Sixth Amendment to First Amended and Restated Loan and Security
Agreement by and between Comerica Bank and Priority Fulfillment
Services, Inc. |
|
|
|
10.80 (34)
|
|
Sixth Amendment to Loan and Security Agreement dated January 6,
2009 between Wachovia Bank and Supplies Distributors, Inc. |
|
|
|
10.81 (34)
|
|
Fifth Amendment to Loan and Security Agreement dated January 6,
2009 between Wachovia Bank and eCOST.com Inc. |
|
|
|
10.82 (35)
|
|
Seventh Amended and Restated Notes Payable Subordination
Agreement by and between Priority Fulfillment Services, Inc.,
Supplies Distributors, Inc. and IBM Credit Corporation. |
|
|
|
10.83 (35)
|
|
Amendment 10 to Agreement for Inventory Financing. |
|
|
|
10.84 (35)
|
|
Amendment 9 to Amended and Restated Platinum Plan Agreement. |
|
|
|
10.85 (35)
|
|
Agreement for IBM Global Financing Platinum Plan Invoice
Discounting Schedule. |
67
| |
|
|
| Exhibit |
|
|
| Number |
|
Description of Exhibits |
10.86 (35)
|
|
Seventh Amendment to First Amended and Restated Loan and
Security Agreement by and between Comerica Bank and Priority
Fulfillment Services, Inc. |
|
|
|
10.87 (36)
|
|
Amended and Restated 2005 Employee Stock and Incentive Plan of
PFSweb, Inc. |
|
|
|
10.88 (36)
|
|
Amended and Restated Non-Employee Director Stock Option and
Retainer Plan of PFSweb, Inc. |
|
|
|
10.89 (37)
|
|
Eighth Amended and Restated Notes Payable Subordination
Agreement by and between Priority Fulfillment Services, Inc.,
Supplies Distributors, Inc. and IBM Credit Corporation. |
|
|
|
10.90 (37)
|
|
Amendment 11 to Agreement for Inventory Financing. |
|
|
|
10.91 (37)
|
|
Amendment 10 to Amended and Restated Platinum Plan Agreement. |
|
|
|
10.92 (37)
|
|
Agreement for IBM Global Financing Platinum Plan Invoice
Discounting Schedule. |
|
|
|
10.93 (37)
|
|
Eighth Amendment to First Amended and Restated Loan and Security
Agreement by and between Comerica Bank and Priority Fulfillment
Services, Inc. |
|
|
|
10.94 (37)
|
|
2010 Management Bonus Plan |
|
|
|
10.95 (40)
|
|
Asset Purchase Agreement by and between eCOST.com., PC Mall,
Inc. and Mall Acquisition 3, Inc. dated as of February 17, 2011. |
|
|
|
10.96 (41)
|
|
Consent and Lien release dated as of February 17, 2011, by and
between Wells Fargo Bank, National Association and eCOST.com,
Inc. |
|
|
|
21 (41)
|
|
Subsidiary Listing |
|
|
|
23.1 (41)
|
|
Consent of GRANT THORNTON, LLP, Independent Registered Public
Accounting Firm |
|
|
|
31.1 (41)
|
|
Certifications of Principal Executive Officer Pursuant to 18
U.S.C. Section 1350 |
|
|
|
31.2 (41)
|
|
Certifications of Principal Financial Officer Pursuant to 18
U.S.C. Section 1350 |
|
|
|
32.1 (41)
|
|
Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
| (1) |
|
Incorporated by reference from PFSweb, Inc. Registration Statement on Form S-1
(Commission File No. 333-87657). |
| |
| (2) |
|
Incorporated by reference from PFSweb, Inc. Form 10-K for the fiscal year ended
March 31, 2001 |
| |
| (3) |
|
Incorporated by reference from PFSweb, Inc. Form 10-Q/A for the quarterly period
ended September 30, 2001 |
| |
| (4) |
|
Incorporated by reference from PFSweb, Inc. Form 10-K for the transition period
ended December 31, 2001 |
| |
| (5) |
|
Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period
ended March 31, 2002 |
| |
| (6) |
|
Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period
ended June 30, 2002 |
| |
| (7) |
|
Incorporated by reference from PFSweb, Inc. Form 10-K for the year ended December
31, 2002 |
| |
| (8) |
|
Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period
ended March 31, 2003 |
| |
| (9) |
|
Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period
ended June 30, 2003 |
| |
| (10) |
|
Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended
September 30, 2003 |
| |
| (11) |
|
Incorporated by reference from PFSweb, Inc. Report on Form 8-K filed on November 10,
2003 |
| |
| (12) |
|
Incorporated by reference from PFSweb, Inc. Form 10-K for the year ended December 31,
2003 |
| |
| (13) |
|
Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended
March 31, 2004 |
| |
| (14) |
|
Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended
September 30, 2004 |
| |
| (15) |
|
Incorporated by reference from PFSweb, Inc. Form 10-K for the year ended December 31,
2004. |
| |
| (16) |
|
Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended
March 31, 2005. |
| |
| (17) |
|
Incorporated by reference from PFSweb, Inc. Report on Form 8-K filed on June 14,
2005. |
68
|
|
|
| (18) |
|
Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended
June 30, 2005. |
| |
| (19) |
|
Incorporated by reference from PFSweb, Inc. Current Report on Form 8-K filed on
November 30, 2005. |
| |
| (20) |
|
Incorporated by reference from PFSweb, Inc. Form 10-K for the year ended December 31,
2005. |
| |
| (21) |
|
Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended
March 31, 2006. |
| |
| (22) |
|
Incorporated by reference from PFSweb, Inc. Current Report on Form 8-K filed on June
2, 2006. |
| |
| (23) |
|
Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended
September 30,
2006. |
| |
| (24) |
|
Incorporated by reference from PFSweb, Inc. Form 10-K for the year ended December 31,
2006. |
| |
| (25) |
|
Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended
March 31, 2007. |
| |
| (26) |
|
Incorporated by reference from PFSweb, Inc. Report on Form 8-K filed on November 13,
2007. |
| |
| (27) |
|
Incorporated by reference from PFSweb, Inc. Form 10-K for the year ended December 31,
2007. |
| |
| (28) |
|
Incorporated by reference from PFSweb, Inc. Report on Form 8-K filed on May 2, 2008. |
| |
| (29) |
|
Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended
March 31, 2008. |
| |
| (30) |
|
Incorporated by reference from PFSweb, Inc. Registration Statement on Form 8-A filed
on June 14, 2000. |
| |
| (31) |
|
Incorporated by reference from PFSweb, Inc. Report on Form 8K filed on May 30, 2008. |
| |
| (32) |
|
Incorporated by reference from PFSweb, Inc. Report on Form 8-K filed on June 2, 2008. |
| |
| (33) |
|
Incorporated by reference from PFSweb, Inc. Report on Form 8-K filed on January 6,
2009. |
| |
| (34) |
|
Incorporated by reference from PFSweb, Inc. Report on Form 8-K filed on January 9,
2009. |
| |
| (35) |
|
Incorporated by reference from PFSweb, Inc. Form 10-Q filed on May 15, 2009. |
| |
| (36) |
|
Incorporated by reference from PFSweb, Inc. Form 10-Q filed on August 14, 2009. |
| |
| (37) |
|
Incorporated by reference from PFSweb, Inc. Form 10-Q filed on May 17, 2010. |
| |
| (38) |
|
Incorporated by reference from PFSweb, Inc. Report on Form 8-K filed on May 25, 2010. |
| |
| (39) |
|
Incorporated by reference from PFSweb, Inc. Report on Form 8-K filed on July 2, 2010. |
| |
| (40) |
|
Incorporated by reference from PFSweb, Inc. Report on Form 8-K filed on February 23,
2011. |
| |
| (41) |
|
Filed herewith. |
69
SCHEDULE I
PFSWEB, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS — PARENT COMPANY ONLY
(In thousands)
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
ASSETS: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
5,006 |
|
|
$ |
182 |
|
Receivable from Priority Fulfillment Services, Inc. |
|
|
5,394 |
|
|
|
5,390 |
|
Receivable from eCOST.com, Inc. |
|
|
7,400 |
|
|
|
4,950 |
|
Investment in subsidiaries |
|
|
11,550 |
|
|
|
18,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
29,350 |
|
|
$ |
29,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES: |
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY: |
|
|
|
|
|
|
|
|
Preferred stock |
|
|
— |
|
|
|
— |
|
Common stock |
|
|
12 |
|
|
|
10 |
|
Additional paid-in capital |
|
|
101,229 |
|
|
|
93,152 |
|
Accumulated deficit |
|
|
(73,332 |
) |
|
|
(65,963 |
) |
Accumulated other comprehensive income |
|
|
1,526 |
|
|
|
2,239 |
|
Treasury stock |
|
|
(85 |
) |
|
|
(85 |
) |
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
29,350 |
|
|
|
29,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
29,350 |
|
|
$ |
29,353 |
|
|
|
|
|
|
|
|
The condensed financial statements should be read in conjunction with the consolidated
financial statements and notes.
70
SCHEDULE I
PFSWEB, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS — PARENT COMPANY ONLY
FOR THE YEARS ENDED DECEMBER 31
(In thousands)
| |
|
|
|
|
|
|
|
|
| |
|
2010 |
|
|
2009 |
|
EQUITY IN NET LOSS OF CONSOLIDATED SUBSIDIARIES |
|
$ |
(7,369 |
) |
|
$ |
(4,570 |
) |
|
|
|
|
|
|
|
NET LOSS |
|
$ |
(7,369 |
) |
|
$ |
(4,570 |
) |
|
|
|
|
|
|
|
The condensed financial statements should be read in conjunction with the consolidated
financial statements and notes.
71
SCHEDULE I
PFSWEB, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS — PARENT COMPANY ONLY
FOR THE YEARS ENDED DECEMBER 31
(In thousands)
| |
|
|
|
|
|
|
|
|
| |
|
2010 |
|
|
2009 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(7,369 |
) |
|
$ |
(4,570 |
) |
Adjustments to reconcile net loss to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Equity in net loss of consolidated subsidiaries |
|
|
7,369 |
|
|
|
4,570 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock |
|
|
7,270 |
|
|
|
17 |
|
Increase in receivable from eCOST.com, Inc. |
|
|
(2,450 |
) |
|
|
(250 |
) |
Increase (decrease) in payable due to PFSweb BV SPRL |
|
|
— |
|
|
|
(737 |
) |
Increase (decrease) in receivable from Priority
Fulfillment Services, Inc., net |
|
|
(6 |
) |
|
|
234 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
4,814 |
|
|
|
(736 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS |
|
|
10 |
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH |
|
|
4,824 |
|
|
|
(744 |
) |
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, beginning of period |
|
|
182 |
|
|
|
926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period |
|
$ |
5,006 |
|
|
$ |
182 |
|
|
|
|
|
|
|
|
The condensed financial statements should be read in conjunction with the consolidated financial
statements and notes.
72
SCHEDULE II
PFSWEB, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31
(Amounts in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Additions |
|
|
|
|
|
|
|
|
| |
|
Balance at |
|
|
Charges to Cost |
|
|
|
|
|
|
|
|
|
|
|
| |
|
Beginning |
|
|
and |
|
|
Charges to Other |
|
|
|
|
|
|
Balance at End |
|
| |
|
of Period |
|
|
Expenses |
|
|
Accounts |
|
|
Deductions |
|
|
of Period |
|
Year Ended December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
980 |
|
|
|
147 |
|
|
|
— |
|
|
|
(154 |
) |
|
$ |
973 |
|
Year Ended December 31, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
973 |
|
|
|
156 |
|
|
|
— |
|
|
|
(375 |
) |
|
$ |
754 |
|
73
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
| |
|
|
|
|
| |
|
|
| |
By: |
/s/ Thomas J. Madden
|
|
| |
|
Thomas J. Madden, |
|
| |
|
Executive Vice President and
Chief Financial and Accounting Officer |
|
| |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
| |
|
|
|
|
| Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ Mark C. Layton
|
|
Chairman of the Board, President and
|
|
March 31, 2011 |
|
|
|
|
|
Mark C. Layton
|
|
Chief Executive Officer (Principal
Executive Officer) |
|
|
|
|
|
|
|
/s/ Thomas J. Madden
|
|
Executive Vice President and Chief
|
|
March 31, 2011 |
|
|
|
|
|
Thomas J. Madden
|
|
Financial and Accounting Officer
(Principal Financial and Accounting
Officer) |
|
|
|
|
|
|
|
/s/ Neil Jacobs
Dr. Neil Jacobs
|
|
Director
|
|
March 31, 2011 |
|
|
|
|
|
/s/ Timothy M. Murray
Timothy M. Murray
|
|
Director
|
|
March 31, 2011 |
|
|
|
|
|
/s/ James F. Reilly
James F. Reilly
|
|
Director
|
|
March 31, 2011 |
|
|
|
|
|
/s/ David I. Beatson
David I. Beatson
|
|
Director
|
|
March 31, 2011 |
74