UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Quarterly Period Ended March 31, 2010
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Transition Period from
to
Commission File Number 000-28275
PFSweb,
Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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75-2837058
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(State of Incorporation)
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(I.R.S. Employer I.D. No.)
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500 North Central Expressway, Plano, Texas
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75074
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(Address of principal executive offices)
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(Zip Code)
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Registrants telephone number, including area code:
(972) 881-2900
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by 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
o
No
þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer.
Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller Reporting Company
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Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes
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No
þ
At May 17, 2010 there were 9,954,957 shares of registrants common stock outstanding.
PFSWEB, INC. AND SUBSIDIARIES
Form 10-Q
March 31, 2010
INDEX
2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
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March 31,
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December 31,
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2010
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2009
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ASSETS
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CURRENT ASSETS:
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Cash and cash equivalents
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$
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15,091
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$
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14,812
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Restricted cash
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1,294
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2,096
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Accounts receivable, net of allowance for doubtful accounts of $969
and $973 at March 31, 2010 and December 31, 2009, respectively
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37,472
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39,861
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Inventories, net of reserves of $2,011 and $2,016 at March 31,
2010 and December 31, 2009,
respectively
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34,070
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37,949
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Other receivables
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11,104
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11,605
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Prepaid expenses and other current assets
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4,001
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4,170
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Total current assets
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103,032
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110,493
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PROPERTY AND EQUIPMENT, net
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9,592
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10,314
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IDENTIFIABLE INTANGIBLES
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765
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805
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GOODWILL
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3,602
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3,602
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OTHER ASSETS
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2,403
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2,555
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Total assets
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$
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119,394
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$
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127,769
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LIABILITIES AND SHAREHOLDERS EQUITY
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CURRENT LIABILITIES:
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Current portion of long-term debt and capital lease obligations
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$
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19,652
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$
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19,179
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Trade accounts payable
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46,505
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53,642
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Deferred revenue
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5,236
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5,164
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Accrued expenses
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14,674
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13,180
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Total current liabilities
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86,067
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91,165
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LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current
portion
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2,172
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3,348
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OTHER LIABILITIES
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3,540
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3,903
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Total liabilities
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91,779
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98,416
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COMMITMENTS AND CONTINGENCIES
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SHAREHOLDERS EQUITY:
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Preferred stock, $1.00 par value; 1,000,000 shares authorized;
none issued and outstanding
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Common stock, $0.001 par value; 35,000,000 shares authorized;
9,954,957 and 9,952,164 shares issued at March 31, 2010 and
December 31, 2009, respectively; and 9,936,596 and 9,933,803
outstanding at March 31, 2010 and December 31, 2009,
respectively
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10
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10
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Additional paid-in capital
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93,251
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93,152
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Accumulated deficit
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(67,172
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(65,963
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Accumulated other comprehensive income
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1,611
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2,239
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Treasury stock at cost, 18,361 shares
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(85
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(85
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Total shareholders equity
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27,615
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29,353
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Total liabilities and shareholders equity
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$
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119,394
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$
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127,769
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The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
3
PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
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Three Months Ended
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March 31,
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2010
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2009
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REVENUES:
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Product revenue, net
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$
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65,647
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$
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66,263
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Service fee revenue
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15,979
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17,119
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Pass-through revenue
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6,634
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5,555
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Total net revenues
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88,260
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88,937
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COSTS OF REVENUES:
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Cost of product revenue
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60,622
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60,832
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Cost of service fee revenue
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11,454
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11,319
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Pass-through cost of revenue
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6,634
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5,555
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Total costs of revenues
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78,710
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77,706
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Gross profit
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9,550
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11,231
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SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES, including stock based
compensation expense of $96 and $103
in the three months ended March 31,
2010 and 2009, respectively
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10,335
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10,667
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AMORTIZATION OF IDENTIFIABLE INTANGIBLES
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35
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26
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Total operating expenses
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10,370
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10,693
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Income (loss) from operations
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(820
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538
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INTEREST EXPENSE, NET
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262
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357
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Income (loss) before income taxes
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(1,082
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181
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INCOME TAX EXPENSE, NET
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127
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429
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NET LOSS
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$
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(1,209
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$
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(248
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NET LOSS PER SHARE:
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Basic and Diluted
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$
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(0.12
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$
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(0.02
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WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING:
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Basic and Diluted
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9,936
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9,924
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The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
4
PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
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Three Months Ended
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March 31,
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2010
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2009
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CASH FLOWS FROM OPERATING ACTIVITIES:
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Net loss
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$
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(1,209
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$
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(248
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Adjustments to reconcile net loss to net cash provided by operating activities:
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Depreciation and amortization
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1,635
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2,028
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Provision for doubtful accounts
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24
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(174
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Provision for excess and obsolete inventory
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202
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300
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Stock-based compensation
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96
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103
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Changes in operating assets and liabilities:
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Restricted cash
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20
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3
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Accounts receivable
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1,850
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11,161
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Inventories, net
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2,810
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438
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Prepaid expenses, other receivables and other assets
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314
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(308
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Accounts payable, accrued expenses and other liabilities
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(4,545
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(6,903
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Net cash provided by operating activities
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1,197
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6,400
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CASH FLOWS FROM INVESTING ACTIVITIES:
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Purchases of property and equipment
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(886
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)
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(1,215
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)
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Net cash used in investing activities
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(886
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)
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(1,215
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)
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CASH FLOWS FROM FINANCING ACTIVITIES:
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Payments on capital lease obligations
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(387
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)
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(390
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)
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Decrease (increase) in restricted cash
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781
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(163
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)
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Proceeds from issuance of common stock
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4
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5
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Payments on debt, net
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(213
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)
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(5,253
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)
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Net cash provided by (used in) financing activities
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185
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(5,801
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)
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EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
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(217
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)
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24
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
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279
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(592
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)
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CASH AND CASH EQUIVALENTS, beginning of period
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14,812
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16,050
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CASH AND CASH EQUIVALENTS, end of period
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$
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15,091
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$
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15,458
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SUPPLEMENTAL CASH FLOW INFORMATION
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Non-cash investing and financing activities:
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Property and equipment acquired under capital leases
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$
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28
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$
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66
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The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
5
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
1.
OVERVIEW AND BASIS OF PRESENTATION
PFSweb, Inc. and its subsidiaries, including Supplies Distributors, Inc., and eCOST.com, Inc.,
are collectively referred to as the Company; Supplies Distributors refers to Supplies
Distributors, Inc. and its subsidiaries; eCOST refers to eCOST.com, Inc.; and PFSweb refers to
PFSweb, Inc. and its subsidiaries excluding Supplies Distributors and eCOST.
PFSweb Overview
PFSweb is an international 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 such services as professional consulting, technology collaboration, managed web
hosting and internet application development, order management, web-enabled customer contact
centers, customer relationship management, financial services including billing and collection
services and working capital solutions, information management, facilities and operations
management, kitting and assembly services, and international fulfillment and distribution services.
Supplies Distributors Overview
Supplies Distributors, PFSweb and InfoPrint Solutions Company (IPS), a joint venture company
owned by Ricoh and International Business Machines Corporation (IBM), have entered into master
distributor agreements under which Supplies Distributors acts as a master distributor of various
products, primarily IPS product.
Supplies Distributors has obtained certain financing that allows it to fund the working
capital requirements for the sale of primarily IPS products. Pursuant to the transaction management
services agreements between PFSweb and Supplies Distributors, PFSweb provides to Supplies
Distributors transaction management and fulfillment services such as managed web hosting and
maintenance, procurement support, web-enabled customer contact center services, customer
relationship management, financial services including billing and collection services, information
management, and international distribution services. Supplies Distributors does not have its own
sales force and relies upon IPS sales force and product demand generation activities for its sale
of IPS products. Supplies Distributors sells its products in the United States, Canada and Europe.
All of the agreements between PFSweb and Supplies Distributors were made in the context of a
related party relationship and were negotiated in the overall context of PFSwebs and Supplies
Distributors arrangement with IPS. Although management believes that the terms of these agreements
are generally consistent with fair market values, there can be no assurance that the prices charged
to or by each company under these arrangements are not higher or lower than the prices that may be
charged by, or to, unaffiliated third parties for similar services.
eCOST Overview
eCOST is a multi-category online discount retailer of new, close-out and recertified
brand-name merchandise, selling products primarily to customers in the United States. eCOST offers
products in several merchandise categories, including computers, networking, electronics and
entertainment, TVs, monitors and projectors, cameras and camcorders, memory and storage, For the
Home and sports and leisure. eCOST carries products from leading manufacturers such as Sony, JVC,
Canon, Hewlett-Packard, Denon, Cuisinart, Sennheiser, Garmin, Panasonic, Toshiba and Microsoft.
The Companys liquidity has been negatively impacted as a result of the merger with eCOST. Since
the merger, eCOST has experienced a net use of cash primarily due to operating losses. As a
result, the Company has had to support eCOSTs cash needs with the goal of reducing losses. The
amount of additional cash needed to support eCOST operations will depend upon working capital
requirements, bank
6
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
financing availability as well as eCOSTs continued ability to improve its financial results.
Further advances to eCOST may be limited by the Companys current cash and future cash flow and may
be restricted by the Companys credit facility obligations.
In the event eCOST is unable to increase its revenue and/or gross profit from its present
levels, it may fail to comply with one or more of the financial covenants required under its
working capital line of credit. In such event, absent a waiver, the working capital lender would
be entitled to accelerate all amounts outstanding thereunder and exercise all other rights and
remedies, including sale of collateral and demand for payment under the Company parent guaranty.
Any acceleration of the repayment of the credit facility would have a material adverse impact on
the Companys financial condition and results of operations and no assurance can be given that the
Company would have the financial ability to repay all of such obligations.
Management currently believes eCOST will meet the Companys expectations related to improved
overall profitability. If eCOST does not meet expectations to become profitable, the Company
anticipates that it would be able to terminate or sublease eCOSTs facilities, liquidate remaining
inventory through the eCOST website and reduce certain personnel related costs as needed so as to
minimize any material impact upon the Companys other segments.
Basis of Presentation
The unaudited interim condensed consolidated financial statements as of March 31, 2010, and
for the three months ended March 31, 2010 and 2009, have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC) and are unaudited. Certain
information and note disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America have been condensed
or omitted pursuant to the rules and regulations promulgated by the SEC. In the opinion of
management and subject to the foregoing, the unaudited interim condensed consolidated financial
statements of the Company include all adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation of the Companys financial position as of March 31, 2010, its
results of operations for the three months ended March 31, 2010 and 2009 and its cash flows for the
three months ended March 31, 2010 and 2009. Results of the Companys operations for interim periods
may not be indicative of results for the full fiscal year.
2.
SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements and related disclosures in conformity
with generally accepted accounting principles requires management to make judgments, estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and
disclosure of contingent assets and liabilities. The recognition and allocation of certain revenues
and operating expenses in these consolidated financial statements also require management estimates
and assumptions.
Estimates and assumptions about future events and their effects cannot be determined with
certainty. The Company bases its estimates on historical experience and on various other
assumptions believed to be applicable and reasonable under the circumstances. These estimates may
change as new events occur, as additional information is obtained and as the operating environment
changes. These changes have been included in the consolidated financial statements as soon as they
became known. In addition, management is periodically faced with uncertainties, the outcomes of
which are not within its control and will not be known for prolonged periods of time. These
uncertainties are discussed in this report and in the Companys Annual Report on Form 10-K for the
year ended December 31, 2009 in the section entitled Risk Factors.
7
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
Based on a critical assessment of accounting policies and the underlying judgments and
uncertainties affecting the application of those policies, management believes the Companys
consolidated financial statements are fairly stated in accordance with generally accepted
accounting principles in the United States of America, and provide a fair presentation of the
Companys financial position and results of operations.
Investment in Affiliates
Priority Fulfillment Services, Inc. (PFS), a wholly-owned subsidiary of PFSweb, Inc., has
made advances to Supplies Distributors that are evidenced by a Subordinated Demand Note (the
Subordinated Note). Under the terms of certain of the Companys debt facilities, the outstanding
balance of the Subordinated Note cannot be increased to more than $5.5 million or decreased to less
than $4.3 million without prior approval of the Companys lenders. As of both March 31, 2010 and
December 31, 2009, the outstanding balance of the Subordinated Note was $5.0 million. The
Subordinated Note is eliminated in the Companys consolidated financial statements.
PFS
has also made advances to eCOST, which aggregated $11.1 million as of March 31, 2010 and
$10.9 million as of December 31, 2009. Certain terms of the Companys debt facilities provide that
the total advances to eCOST may not be less than $2.0 million without prior approval of eCOSTs
lender. PFS has received the approval of its lender to advance incremental amounts subject to
certain cash inflows to PFS, as defined, to certain of its subsidiaries and/or affiliates,
including eCOST, if needed. PFSweb has also advanced to eCOST an additional $5.0 million as of
both March 31, 2010 and December 31, 2009.
Concentration of Business and Credit Risk
The Companys service fee revenue is generated under contractual service fee relationships
with multiple client relationships. No service fee client or product revenue customers exceeded
10% of consolidated total net revenue during the three months ended March 31, 2010. A summary of
the nonaffiliated customer and client concentrations is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
March 31,
|
|
|
2010
|
|
2009
|
Product Revenue (as a percentage of Product Revenue):
|
|
|
|
|
|
|
|
|
Customer 1
|
|
|
11
|
%
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
Service Fee Revenue (as a percentage of Service Fee
Revenue):
|
|
|
|
|
|
|
|
|
Client 1
|
|
|
14
|
%
|
|
|
13
|
%
|
Client 2
|
|
|
14
|
%
|
|
|
9
|
%
|
Client 3
|
|
|
|
%
|
|
|
22
|
%
|
|
|
|
|
|
|
|
|
|
Accounts Receivable:
|
|
|
|
|
|
|
|
|
Client/Customer 1
|
|
|
10
|
%
|
|
|
6
|
%
|
Client/Customer 2
|
|
|
8
|
%
|
|
|
10
|
%
|
Client 3 did not renew its contract with PFS effective January 2009, though certain project
work continued to occur through April 2009. PFS currently operates three distinct geographical
contract arrangements with Client 1, which are aggregated in the service fee revenue percentages
reflected above. Client 1 has notified PFS that it is not renewing
substantially all of its contracts with PFS which expire during 2010.
PFSweb has provided certain collateralized guarantees of its subsidiaries financings and
credit arrangements. These subsidiaries ability to obtain financing on similar terms would be
significantly impacted without these guarantees.
8
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
The Company has multiple arrangements with IBM and IPS and is dependent upon the continuation
of such arrangements. These arrangements, which are critical to the Companys ongoing operations,
include Supplies Distributors master distributor agreements 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
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.
eCOSTs arrangements with its vendors are terminable by either party at will. Loss of any
vendors could have a material adverse effect on eCOSTs financial position, results of operations
and cash flows. Sales of HP and HP-related products represented 58% of eCOSTs net revenues (13%
of the Companys consolidated total net revenues) in the three months ended March 31, 2010 and 42%
of eCOSTs net revenues (10% of the Companys consolidated total net revenues) in the comparable
2009 period.
Inventories
The Company establishes inventory reserves based upon estimates of declines in values due to
inventories that are slow moving or obsolete, excess levels of inventory or values assessed at
lower than cost. Recoverability of the inventory on hand is measured by comparison of the carrying
value of the inventory to the fair value of the inventory.
Supplies Distributors assumes responsibility for slow-moving inventory under certain master
distributor agreements, subject to certain termination rights, but has the right to return product
rendered obsolete by engineering changes, as defined. In the event PFSweb, Supplies Distributors
and IPS terminate the master distributor agreements, the agreements provide for the parties to
mutually agree on a plan of disposition of Supplies Distributors then existing inventory.
Property and Equipment
The Companys property held under capital leases amounted to approximately $1.8 million and
$2.1 million, net of accumulated amortization of approximately $7.1 million and $6.7 million, at
March 31, 2010 and December 31, 2009, respectively.
Cash Paid for Interest and Taxes
The Company made payments for interest of approximately $0.2 million and $0.4 million during
the three months ended March 31, 2010 and 2009, respectively. Income taxes of approximately
$25,000 and $0.2 million were paid by the Company during the three months ended March 31, 2010 and
2009, respectively.
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 Codification
TM
(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.
9
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
The FASB also issued ASU 2009-14,
Certain Revenue Arrangements That Include Software Elements
a consensus of the FASB Emerging Issues Task Force
, to amend the scope of arrangements under ASC
985,
Software
, 605, Revenue Recognition to exclude tangible products containing software
components and non-software components that function together to deliver a products essential
functionality.
The amended guidance in ASC 605-25 and ASC 985-605 is effective prospectively for revenue
arrangements entered into or materially modified in fiscal years beginning on or after June 15,
2010, with early application and retrospective application permitted. The Company is in the process
of evaluating the impact the amendments to ASC 605-25 and ASC 985-605 will have on its consolidated
financial statements.
3.
COMPREHENSIVE LOSS (in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Net loss
|
|
$
|
(1,209
|
)
|
|
$
|
(248
|
)
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
|
(628
|
)
|
|
|
(685
|
)
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(1,837
|
)
|
|
$
|
(933
|
)
|
|
|
|
|
|
|
|
4.
NET LOSS PER COMMON SHARE
Basic and diluted net income (loss) per share is computed by dividing net income (loss) by the
weighted-average number of common shares outstanding for the reporting period. For the three
months ended March 31, 2010 and 2009, outstanding options to purchase common shares of 1.8 million
and 1.4 million, respectively, were anti-dilutive and have been excluded from the diluted weighted
average share computation.
5.
VENDOR FINANCING
:
Outstanding obligations under vendor financing arrangements consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Inventory and working capital financing agreements:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
13,437
|
|
|
$
|
16,073
|
|
Europe
|
|
|
15,396
|
|
|
|
15,649
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,833
|
|
|
$
|
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 April 2011. As of March 31,
2010, Supplies Distributors had $3.0 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
10
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
credit facility accrue interest, after a defined free financing period, at prime rate plus
0.5% (3.75% as of March 31, 2010). The facility also includes a monthly service fee. Given the
structure of this facility and as outstanding balances, which represent inventory purchases, are
repaid within twelve months, the Company
has classified the outstanding amounts under this facility as accounts payable in the
consolidated balance sheets.
Inventory and Working Capital Financing Agreement, Europe
Supplies Distributors European subsidiary has a short-term credit facility with IBM Belgium
Financial Services S.A. (IBM Belgium) to finance its distribution of IPS products in Europe. The
asset based credit facility with IBM Belgium provides up to 16.0 million euros (approximately $21.6
million as of March 31, 2010) in inventory financing and cash advances based on eligible inventory
and accounts receivable through its expiration in April 2011. As of March 31, 2010, Supplies
Distributors European subsidiaries had 2.2 million euros (approximately $3.0 million as of March
31, 2010) of available credit. The credit facility contains cross default provisions, various
restrictions upon the ability of Supplies Distributors and its European subsidiaries to, among
others, merge, consolidate, sell assets, incur indebtedness, make loans and payments to related
parties (including entities directly or indirectly owned by PFSweb, Inc.), provide guarantees, make
investments and loans, pledge assets, make changes to capital stock ownership structure and pay
dividends, as well as financial covenants, such as annualized revenue to working capital, net
profit after tax to revenue, and total liabilities to tangible net worth, as defined, and are
secured by certain of the assets of Supplies Distributors European subsidiary, as well as
collateralized guaranties of Supplies Distributors and PFSweb. Additionally, PFSweb is required to
maintain a minimum Subordinated Note receivable balance from Supplies Distributors of $3.5 million
and a minimum shareholders equity of $18.0 million. Borrowings under the credit facility accrue
interest at Euribor plus 1.94% for cash advances, and, after a defined free financing period, at
Euribor plus 4.25% for inventory financings. As of March 31, 2010, the interest rate was 4.7% on
the $15.4 million of outstanding inventory financings. Supplies Distributors European subsidiary
pays a monthly service fee on the commitment. Given the structure of this facility and as
outstanding inventory financing balances are repaid within twelve months, the Company has
classified the outstanding inventory financing amounts under this facility as accounts payable in
the consolidated balance sheets.
6.
DEBT AND CAPITAL LEASE OBLIGATIONS;
Outstanding obligations under debt and capital lease obligations consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Loan and security agreements, United States
|
|
|
|
|
|
|
|
|
Supplies Distributors
|
|
$
|
7,515
|
|
|
$
|
8,921
|
|
PFS
|
|
|
7,000
|
|
|
|
6,000
|
|
Credit facility eCOST
|
|
|
|
|
|
|
|
|
Factoring agreement, Europe
|
|
|
2,056
|
|
|
|
1,074
|
|
Taxable revenue bonds
|
|
|
1,600
|
|
|
|
2,400
|
|
Master lease agreements
|
|
|
2,845
|
|
|
|
3,467
|
|
Other
|
|
|
808
|
|
|
|
665
|
|
|
|
|
|
|
|
|
Total
|
|
|
21,824
|
|
|
|
22,527
|
|
Less current portion of long-term debt
|
|
|
19,652
|
|
|
|
19,179
|
|
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
$
|
2,172
|
|
|
$
|
3,348
|
|
|
|
|
|
|
|
|
Loan and Security Agreement Supplies Distributors
Supplies Distributors has a loan and security agreement with Wachovia Bank, N.A. (Wachovia)
to provide financing for up to $25 million of eligible accounts receivable in the United States and
Canada. As of March 31, 2010, Supplies Distributors had $2.3 million of available credit under this
agreement. The Wachovia facility expires on the earlier of March 2011 or the date on which the
parties to the IPS master distributor agreement no longer operate under the terms of such agreement
and/or IPS no longer supplies
11
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
products pursuant to such agreement. Borrowings under the Wachovia facility accrue interest at
prime rate plus 0.25% to 0.75% (3.75% as of March 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 March 31, 2010
was 3.75% for $4.5 million of outstanding borrowings and 3.0% 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 Wachovia
pursuant to which a security interest was granted to Wachovia for all U.S. and Canadian customer
remittances received in specified bank accounts. At March 31, 2010 and December 31, 2009, these
bank accounts held $0.3 million and $1.0 million, respectively, which was restricted for payment to
Wachovia.
Loan and Security Agreement PFS
PFS has a Loan and Security Agreement (Comerica Agreement) with Comerica Bank (Comerica).
The Comerica Agreement provides for up to $10.0 million of eligible accounts receivable financing
through March 2011. As of March 31, 2010, PFS had $2.6 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 March 31, 2010). 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 $5.5 million. Comerica has provided approval for PFS to advance incremental amounts
subject to certain cash inflows to PFS, as defined, to certain of its subsidiaries and/or
affiliates, including eCOST, if needed. The Comerica Agreement is secured by all of the assets of
PFS, as well as a guarantee of PFSweb, Inc.
Credit Facility eCOST
eCOST has an asset-based line of credit facility of up to $7.5 million from Wachovia, through
May 2011, which is collateralized by substantially all of eCOSTs assets. Borrowings under the
facility are limited to a percentage of eligible accounts receivable and inventory. Outstanding
borrowings under the facility bear interest at rates ranging prime rate plus 0.75% to 1.25% or
Eurodollar rate plus 3.0% to 4.0%, depending on eCOSTs financial results. There were no
outstanding borrowings as of March 31, 2010. As of March 31, 2010, eCOST had $1.0 million of
letters of credit outstanding and $1.3 million of available credit under this facility. In
connection with the line of credit, eCOST entered into a cash management arrangement whereby
eCOSTs operating amounts are considered restricted and swept and used to repay outstanding amounts
under the line of credit. As of March 31, 2010 and December 31, 2009, the restricted cash amount
was $0.2 million in each period. The credit facility restricts eCOSTs ability to, among other
things, merge, consolidate, sell assets, incur indebtedness, make loans, investments and payments
to subsidiaries, affiliates and related parties (including entities directly or indirectly owned by
PFSweb, Inc.), make investments and loans, pledge assets, make changes to capital stock ownership
structure, and requires a minimum tangible net worth of $0 million, as defined. PFSweb has
guaranteed all current and future obligations of eCOST under this line of credit.
12
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
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 $10.1
million as of March 31, 2010) of eligible accounts receivables through March 2011. As of March 31,
2010, Supplies Distributors European subsidiary had approximately 0.7 million euros (approximately
$0.9 million as of March 31, 2010) of available credit under this agreement. Borrowings accrue
interest at Euribor plus 1.2% (1.6% at March 31, 2010). This agreement contains various
restrictions upon the ability of Supplies Distributors European subsidiary to, among other things,
merge, consolidate and incur indebtedness, as well as financial covenants, such as minimum net
worth. This agreement is secured by a guarantee of Supplies Distributors, up to a maximum of
200,000 euros.
Taxable Revenue Bonds
PFS has a Loan Agreement with the Mississippi Business Finance Corporation (the MBFC) in
connection with the issuance by the MBFC of MBFC Taxable Variable Rate Demand Limited Obligation
Revenue Bonds, Series 2004 (Priority Fulfillment Services, Inc. Project) (the Bonds). The MBFC
loaned the proceeds of the Bonds to PFS for the purpose of financing the acquisition and
installation of equipment, machinery and related assets located in one of the Companys Southaven,
Mississippi distribution facilities. The Bonds bear interest at a variable rate (0.5% as of March
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 2011 at which time, if not renewed or replaced, will result in a draw
on the undrawn face amount thereof. If the Letter of Credit is renewed or replaced, the Bonds
require future annual principal repayments of $800,000 in January of 2011 and 2012. PFS
obligations under the Reimbursement Agreement are secured by substantially all of the assets of
PFS, including restricted cash of $0.7 million and a Company parent guarantee.
Debt Covenants
To the extent the Company or any of its subsidiaries fail to comply with covenants applicable
to its debt or vendor financing obligations, including the monthly financial covenant requirements
and required level of shareholders equity or net worth, and one or all of the lenders accelerate
the repayment of the credit facility obligations, the Company would be required to repay all
amounts outstanding thereunder. In particular, in the event eCOST is unable to increase its
revenue and/or gross profit from its present levels, or if PFS service fee revenue declines from
expected levels and it is unable to reduce costs to correspond to such reduced revenue levels or if
Supplies Distributors revenue or gross profit declines from expected levels, such events may result
in a breach of one or more of the financial covenants required under its working capital line of
credit. In such event, absent a waiver, the working capital lender would be entitled to accelerate
all amounts outstanding thereunder and exercise all other rights and remedies, including sale of
collateral and demand for payment under the Company parent guaranty. Any acceleration of the
repayment of the credit facilities would have a material adverse impact on the Companys financial
condition and results of operations and no assurance can be given that the Company would have the
financial ability to repay all of such obligations. As of March 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 ($1.3 million as of March 31, 2010 and $1.6 million as of December 31, 2009) are secured
by the related equipment.
13
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
The Company has two other master agreements with financing companies that provide for leasing
or financing transactions of certain equipment. The amounts outstanding under these agreements were
$0.8 million and $0.9 million as of March 31, 2010 and December 31, 2009, respectively, and are
secured by the related equipment.
The Company has other leasing and financing agreements and will continue to enter into those
arrangements as needed to finance the purchasing or leasing of certain equipment or other assets.
Borrowings under these agreements are generally secured by the related equipment.
7
.
SEGMENT INFORMATION
The Company is organized into three operating segments: PFSweb is an international provider of
integrated eCommerce and business process outsourcing solutions and operates as a service fee
business; Supplies Distributors is a master distributor primarily of IPS products; and eCOST is a
multi-category online discount retailer of new, close-out and recertified brand-name merchandise.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Revenues (in thousands):
|
|
|
|
|
|
|
|
|
PFSweb
|
|
$
|
24,316
|
|
|
$
|
24,764
|
|
Supplies Distributors
|
|
|
45,502
|
|
|
|
45,331
|
|
eCOST
|
|
|
20,145
|
|
|
|
20,932
|
|
Eliminations
|
|
|
(1,703
|
)
|
|
|
(2,090
|
)
|
|
|
|
|
|
|
|
|
|
$
|
88,260
|
|
|
$
|
88,937
|
|
|
|
|
|
|
|
|
Income (loss) from operations (in thousands):
|
|
|
|
|
|
|
|
|
PFSweb
|
|
$
|
(1,479
|
)
|
|
$
|
(403
|
)
|
Supplies Distributors
|
|
|
1,013
|
|
|
|
1,416
|
|
eCOST
|
|
|
(354
|
)
|
|
|
(475
|
)
|
Eliminations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(820
|
)
|
|
$
|
538
|
|
|
|
|
|
|
|
|
Depreciation and amortization (in thousands):
|
|
|
|
|
|
|
|
|
PFSweb
|
|
$
|
1,530
|
|
|
$
|
1,935
|
|
Supplies Distributors
|
|
|
8
|
|
|
|
10
|
|
eCOST
|
|
|
97
|
|
|
|
83
|
|
Eliminations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,635
|
|
|
$
|
2,028
|
|
|
|
|
|
|
|
|
Capital expenditures (in thousands):
|
|
|
|
|
|
|
|
|
PFSweb
|
|
$
|
876
|
|
|
$
|
1,158
|
|
Supplies Distributors
|
|
|
|
|
|
|
|
|
eCOST
|
|
|
10
|
|
|
|
57
|
|
Eliminations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
886
|
|
|
$
|
1,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Assets (in thousands):
|
|
|
|
|
|
|
|
|
PFSweb
|
|
$
|
62,545
|
|
|
$
|
65,716
|
|
Supplies Distributors
|
|
|
64,840
|
|
|
|
69,291
|
|
eCOST
|
|
|
13,276
|
|
|
|
13,579
|
|
Eliminations
|
|
|
(21,267
|
)
|
|
|
(20,817
|
)
|
|
|
|
|
|
|
|
|
|
$
|
119,394
|
|
|
$
|
127,769
|
|
|
|
|
|
|
|
|
14
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
8.
COMMITMENTS AND CONTINGENCIES
The Company receives municipal tax abatements in certain locations. During 2004 the Company
received notice from a municipality that it did not satisfy certain criteria necessary to maintain
the abatements. In December 2006, the Company received notice that the municipal authority planned
to make an adjustment to the Companys tax abatement. The Company has disputed the adjustment as
of March 31, 2010, but if the dispute is not resolved favorably, additional property taxes of
approximately $1.7 million could be assessed against the Company.
Pursuant to the terms of certain contractual agreements with certain of eCOSTs vendors, the
vendor has the right to inspect and audit eCOSTs books and records relating to sales of such
vendors products to verify eCOSTs compliance with any terms and conditions imposed by such vendor
upon the resale of such products. Under certain circumstances, eCOST may be subject to certain
contractual defined liabilities and obligations in the event the results of such audit determine
noncompliance by eCOST with such terms and conditions. In April 2010, an audit was conducted by an
eCOST vendor to determine compliance by eCOST with such vendors terms and conditions. As of the
date of this Report, eCOST has not received the results of such audit or any further information
from such vendor. No assurance can be given that the results of such audit, or any claim asserted
by the vendor in connection therewith, will not have a material adverse effect upon the Companys
financial condition or results of operations.
In April 2010, a sales employee of eCOST was charged with violating various federal criminal
statutes 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. Shortly thereafter, the Company received a subpoena from
the Office of the U.S. Attorney requesting information regarding the employee and other matters,
and the Company provided such information 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 has been
charged with any criminal activity, and eCOST intends to seek the
recovery or reimbursement of the funds. Based on the information
available to date, eCOST 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 eCOST to recover such funds or any significant portion thereof, will not have a material adverse effect upon
the Companys 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. In particular, eCOST and other manufacturers,
distributors and retailers of consumer electronic and computer products, may be subject to claims
of patent holders alleging that the manufacture, distribution and sale of such products infringe
their patents. eCOST, together with other manufacturers, distributors and retailers, is currently
the subject of two such claims. The Company does not believe such claims will have a material adverse
effect upon the Companys financial condition or results of operations.
15
|
|
|
ITEM 2.
|
|
Managements Discussion and Analysis of Financial Condition and Results of Operations
|
The following discussion and analysis of our results of operations and financial condition
should be read in conjunction with the unaudited interim condensed consolidated financial
statements and related notes appearing elsewhere in this Form 10-Q.
Forward-Looking Information
We have made forward-looking statements in this Report on Form 10-Q. These statements are
subject to risks and uncertainties, and there can be no guarantee that these statements will prove
to be correct. Forward-looking statements include assumptions as to how we may perform in the
future. When we use words like seek, strive, believe, expect, anticipate, predict,
potential, continue, will, may, could, intend, plan, target and estimate or
similar expressions, we are making forward-looking statements. You should understand that the
following important factors, in addition to those set forth above or elsewhere in this Report on
Form 10-Q and our Form 10-K for the year ended December 31, 2009, could cause our results to differ
materially from those expressed in our forward-looking statements. These factors include:
|
|
|
our ability to retain and expand relationships with existing clients and attract and
implement new clients;
|
|
|
|
|
our reliance on the fees generated by the transaction volume or product sales of our
clients;
|
|
|
|
|
our reliance on our clients projections or transaction volume or product sales;
|
|
|
|
|
our dependence upon our agreements with International Business Machines Corporation
(IBM) and InfoPrint Solutions Company (IPS), a joint venture company owned by Ricoh and
IBM;
|
|
|
|
|
our dependence upon our agreements with our major clients;
|
|
|
|
|
our client mix, their business volumes and the seasonality of their business;
|
|
|
|
|
our ability to finalize pending contracts;
|
|
|
|
|
the impact of strategic alliances and acquisitions;
|
|
|
|
|
trends in e-commerce, outsourcing, government regulation both foreign and domestic and
the market for our services;
|
|
|
|
|
whether we can continue and manage growth;
|
|
|
|
|
increased competition;
|
|
|
|
|
our ability to generate more revenue and achieve sustainable profitability;
|
|
|
|
|
effects of changes in profit margins;
|
|
|
|
|
the customer and supplier concentration of our business;
|
|
|
|
|
the reliance on third-party subcontracted services;
|
|
|
|
|
the unknown effects of possible system failures and rapid changes in technology;
|
|
|
|
|
foreign currency risks and other risks of operating in foreign countries;
|
|
|
|
|
potential litigation;
|
|
|
|
|
our dependency on key personnel;
|
|
|
|
|
the impact of new accounting standards, and changes in existing accounting rules or the
interpretations of those rules;
|
|
|
|
|
our ability to raise additional capital or obtain additional financing;
|
|
|
|
|
our ability and the ability of our subsidiaries to borrow under current financing
arrangements and maintain compliance with debt covenants;
|
|
|
|
|
relationship with and our guarantees of certain of the liabilities and indebtedness of
our subsidiaries;
|
|
|
|
|
taxation on the sale of our products;
|
|
|
|
|
eCOSTs ability to maintain existing and build new relationships with manufacturers and
vendors and the success of its advertising and marketing efforts;
|
|
|
|
|
eCOSTs ability to increase its sales revenue and sales margin and improve operating
efficiencies;
|
|
|
|
|
eCOSTs ability to generate projected cash flows sufficient to cover the values of its
intangible assets; and
|
|
|
|
|
whether the contingencies noted in Note 8 of our unaudited financial statements
included in this report have a material adverse effect upon our financial condition or
results of operations.
|
16
We have based these statements on our current expectations about future events. Although we
believe that the expectations reflected in our forward-looking statements are reasonable, we cannot
guarantee you that these expectations actually will be achieved. In addition, some forward-looking
statements are based upon assumptions as to future events that may not prove to be accurate.
Therefore, actual outcomes and results may differ materially from what is expected or forecasted in
such forward-looking statements. We undertake no obligation to update publicly any forward-looking
statement for any reason, even if new information becomes available or other events occur in the
future.
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.
Through our eCOST.com
®
business unit, we are also a leading multi-category online discount retailer
of new, close-out and recertified brand-name merchandise. We derive our revenues from three
business segments: eCommerce and business process outsourcing, master distribution and an online
discount retailing.
First, in our eCommerce and business process outsourcing segment, we derive our revenues from
a broad range of services, including professional consulting, technology collaboration, order
management, managed web hosting and web development, the development of an eCommerce technology
platform, customer relationship management, financial services including billing and collection
services and working capital solutions, kitting and assembly services, information management and
international fulfillment and distribution services. We offer our services as an integrated
solution, which enables our clients to outsource their complete infrastructure needs to a single
source and to focus on their core competencies. Our distribution services are conducted at
warehouses that we lease or manage and include real-time inventory management and customized
picking, packing and shipping of our clients customer orders. We currently offer the ability to
provide infrastructure and distribution solutions to clients that operate in a range of vertical
markets, including technology manufacturing, computer products, cosmetics, fragile goods,
contemporary home furnishings, apparel, aviation, telecommunications and consumer electronics,
among others.
In this eCommerce and business process outsourcing segment, we do not own the underlying
inventory or the resulting accounts receivable, but provide management services for these
client-owned assets. We typically charge our service fee revenue on a cost-plus basis, a percent
of shipped revenue basis or a per-transaction basis, such as a per-minute basis for web-enabled
customer contact center services and a per-item basis for fulfillment services. Additional fees are
billed for other services. We price our services based on a variety of factors, including the depth
and complexity of the services provided, the amount of capital expenditures or systems
customization required, the length of contract and other factors.
Many of our service fee contracts involve third-party vendors who provide additional services
such as package delivery. The costs we are charged by these third-party vendors for these services
are often passed on to our clients. Our billings for reimbursements of these and other
out-of-pocket expenses include travel, shipping and handling costs and telecommunication charges
are included in pass-through revenue.
Our second business segment is a product revenue model. In this segment, we are a master
distributor of product for IPS and certain other clients. In this capacity, we purchase, and thus
own, inventory and recognize the corresponding product revenue. As a result, upon the sale of
inventory, we own the accounts receivable. Freight costs billed to customers are reflected as
components of product revenue. This business segment requires significant working capital
requirements, for which we have senior credit facilities to provide for approximately $89 million
of available financing.
Our third business segment is a web-commerce product revenue model focused on the sale of
products to a broad range of consumer and small business customers. In this segment we operate as
a multi-category online discount retailer of new, close-out and recertified brand-name
merchandise. Our product line currently offers approximately 280,000 products in several primary
merchandise categories, primarily including computers, networking, electronics and entertainment,
TVs, monitors and projectors, cameras and camcorders, memory and storage, For the Home and
sports and leisure.
17
Growth is a key element to achieving our future goals, including achieving and maintaining
sustainable profitability. Growth in our eCommerce and business process outsourcing segment is
driven by two main elements: new client relationships and organic growth from existing clients. We
focus our sales efforts on larger contracts with brand-name companies within two primary target
markets, online brands and retailers and technology manufacturers, which, by nature, require a
longer duration to close but also have the potential to be higher-quality and longer duration
engagements.
Growth within our product revenue business is primarily driven by our ability to attract new
master distributor arrangements with IPS or other manufacturers and the sales and marketing efforts
of the manufacturers and third party sales partners.
Growth within our web-commerce product revenue model is primarily driven by eCOSTs ability to
increase sales by generating organic growth, attracting new customers and expanding its product
line.
We continue to monitor and control our costs to focus on profitability. While we are
targeting our new service fee contracts to yield increased gross profit, we also expect to incur
incremental investments to implement new contracts, investments in infrastructure and sales and
marketing to support our targeted growth and increased public company professional fees.
Our expenses comprise primarily four categories: 1) cost of product revenue, 2) cost of
service fee revenue, 3) cost of pass-through revenue and 4) operating expenses.
Cost of product revenues
consists of the purchase price of product sold and freight costs,
which are reduced by certain reimbursable expenses. These reimbursable expenses include
pass-through customer marketing programs, direct costs incurred in passing on any price decreases
offered by vendors to cover price protection and certain special bids, the cost of products
provided to replace defective product returned by customers and certain other expenses as defined
under the master distributor agreements. Vendor marketing programs, such as co-op advertising,
also reduce cost of product revenue.
Cost of service fee revenue
consists primarily of compensation and related expenses for our
web-enabled customer contact center services, international fulfillment and distribution services
and professional consulting services, and other fixed and variable expenses directly related to
providing services under the terms of fee based contracts, including certain occupancy and
information technology costs and depreciation and amortization expenses.
Cost of pass-through revenue
the related reimbursable costs for pass-through expenditures
are reflected as cost of pass-through revenue.
Operating expenses
consist primarily of selling, general and administrative (SG&A)
expenses such as compensation and related expenses for sales and marketing staff, advertising,
online marketing and catalog production, distribution costs (excluding freight) applicable to the
Supplies Distributors and eCOST businesses, executive, management and administrative personnel and
other overhead costs, including certain occupancy and information technology costs and depreciation
and amortization expenses.
18
Results of Operations
For the Interim Periods Ended March 31, 2010 and 2009
The following table sets forth certain historical financial information from our unaudited
interim condensed consolidated statements of operations expressed as a percent of net revenues (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net Revenues
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
2010
|
|
|
2009
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue, net
|
|
$
|
65.7
|
|
|
$
|
66.3
|
|
|
$
|
(0.6
|
)
|
|
|
74.4
|
%
|
|
|
74.5
|
%
|
Service fee revenue
|
|
|
16.0
|
|
|
|
17.1
|
|
|
|
(1.1
|
)
|
|
|
18.1
|
%
|
|
|
19.2
|
%
|
Pass-through revenue
|
|
|
6.6
|
|
|
|
5.5
|
|
|
|
1.1
|
|
|
|
7.5
|
%
|
|
|
6.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
88.3
|
|
|
|
88.9
|
|
|
|
(0.6
|
)
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue (1)
|
|
|
60.6
|
|
|
|
60.9
|
|
|
|
(0.3
|
)
|
|
|
92.3
|
%
|
|
|
91.8
|
%
|
Cost of service fee revenue (2)
|
|
|
11.5
|
|
|
|
11.3
|
|
|
|
0.2
|
|
|
|
71.7
|
%
|
|
|
66.1
|
%
|
Pass-through cost of revenue
(3)
|
|
|
6.6
|
|
|
|
5.5
|
|
|
|
1.1
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
78.7
|
|
|
|
77.7
|
|
|
|
1.0
|
|
|
|
89.2
|
%
|
|
|
87.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue gross profit
|
|
|
5.1
|
|
|
|
5.4
|
|
|
|
(0.3
|
)
|
|
|
7.7
|
%
|
|
|
8.2
|
%
|
Service fee gross profit
|
|
|
4.5
|
|
|
|
5.8
|
|
|
|
(1.3
|
)
|
|
|
28.3
|
%
|
|
|
33.9
|
%
|
Pass-through gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
|
9.6
|
|
|
|
11.2
|
|
|
|
(1.6
|
)
|
|
|
10.8
|
%
|
|
|
12.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
10.4
|
|
|
|
10.7
|
|
|
|
(0.3
|
)
|
|
|
11.7
|
%
|
|
|
12.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
(0.8
|
)
|
|
|
0.5
|
|
|
|
(1.3
|
)
|
|
|
(0.9
|
)%
|
|
|
0.6
|
%
|
Interest expense, net
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
|
|
|
|
0.3
|
%
|
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
(1.1
|
)
|
|
|
0.2
|
|
|
|
(1.3
|
)
|
|
|
(1.2
|
)%
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense, net
|
|
|
0.1
|
|
|
|
0.4
|
|
|
|
(0.3
|
)
|
|
|
0.1
|
%
|
|
|
0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1.2
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
(1.0
|
)
|
|
|
(1.3
|
)%
|
|
|
(0.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
% of net revenues represents the percent of Product revenue, net.
|
|
(2)
|
|
% of net revenues represents the percent of Service fee revenue.
|
|
(3)
|
|
% of net revenues represents the percent of Pass-through revenue.
|
Product Revenue, net.
eCOST product revenue was $20.2 million in the three months ended
March 31, 2010, a 3.8% decrease as compared to $20.9 million in the comparable quarter of the prior
year. The decrease is primarily due to the continued impact of the current economic environment.
Supplies Distributors product revenue of $45.5 million increased $0.2 million, or 0.4%, in the
three months ended March 31, 2010 as compared to the same quarter of the prior year.
Service Fee Revenue
. Service fee revenue of $16.0 million decreased $1.1 million, or 6.7%, in
the three months ended March 31, 2010 as compared to the same quarter of the prior year. The
decrease in service fee revenue for the three months ended March 31, 2010 is primarily due to the
non-renewal of certain service contract relationships, including the non-renewal of a U.S.
government agency client relationship, which ended in early 2009, partially offset by increased
service fees generated from new service contract relationships. The change in service fee revenue
is shown below ($ millions):
|
|
|
|
|
|
|
Three
|
|
|
|
Months
|
|
Period ended March 31, 2009
|
|
$
|
17.1
|
|
New service contract relationships
|
|
|
4.3
|
|
Change in existing client service fees
|
|
|
1.2
|
|
Terminated clients not included in 2010 revenue
|
|
|
(6.6
|
)
|
|
|
|
|
Period ended March 31, 2010
|
|
$
|
16.0
|
|
|
|
|
|
19
The
service fee revenue for the current year period includes
approximately $2 million of revenue generated from clients who have given notice of their intent to
terminate their contractual relationship with the Company during 2010.
Cost of Product Revenue.
The gross margin for eCOST was $1.8 million or 8.9% of product
revenue in the three months ended March 31, 2010 and $2.1 million or 9.8% of product revenue during
the comparable period of 2009. The decline in gross margin is primarily due to a decrease in sales
from within the higher margin business to consumer sales channel. We are targeting an increasing
percentage of eCOST revenues to be generated from the business-to-consumer channel, although we
continue to strive to improve our product sales and gross margin in our business-to-business
channel.
Supplies Distributors cost of product revenue increased by $0.3 million, or 0.8%, to $42.3
million in the three months ended March 31, 2010 primarily as a result of increased product sales.
The resulting gross profit margin was $3.2 million, or 7.7% of product revenue, for the three
months ended March 31, 2010 and $3.4 million, or 7.5% of product revenue, for the comparable 2009
period. The three month periods ending March 31, 2010 and 2009 include the impact of certain incremental
gross margin earned on product sales resulting from certain product price increases and the impact
of certain incremental inventory cost reductions.
Cost of Service Fee Revenue
. Gross profit as a percentage of service fees was 28.3% in the
three months ended March 31, 2010, compared to 33.9% in the same period of the prior year. The
margin in the prior year period includes the benefit of three months of higher margin incremental
project work associated with the U.S. government contract relationship that was not renewed and was
completed in the second quarter of 2009.
We target to earn an overall average gross profit of 25-30% on existing and new service fee
contracts, but we have and may continue to accept lower gross margin percentages on certain
contracts depending on contract scope and other factors.
Operating Expenses
. Operating expenses for the three months ended March 31, 2010 decreased
$0.4 million to $10.3 million from $10.7 million in the same 2009 period. As a percentage of total
net revenue, operating expenses were 11.7% in the three months ended March 31, 2010 and 12.0% in
the prior year period.
Income Taxes.
We recorded a tax provision associated primarily with state income taxes and our
subsidiary Supplies Distributors Canadian and European operations. A valuation allowance has been
provided for the majority of our net deferred tax assets as of March 31, 2010 and December 31,
2009, which are primarily related to our net operating loss carryforwards, and certain foreign
deferred tax assets. We expect that we will continue to record an income tax provision associated
with state income taxes and Supplies Distributors Canadian and European results of operations.
Liquidity and Capital Resources
Net cash provided by operating activities was $1.2 million for the three months ended March
31, 2010, and primarily resulted from a decrease in inventories of $2.8 million, a $1.9 million
decrease in accounts receivable and cash income before working capital changes of $0.7 million
partially offset by a $4.5 million decrease in accounts payable, accrued expenses and other
liabilities.
Net cash provided by operating activities was $6.4 million for the three months ended March
31, 2009, and primarily resulted from cash income before working capital changes of $2.0 million
and an $11.2 million decrease in accounts receivable, partially offset by a $6.9 million decrease
in accounts payable, accrued expenses and other liabilities.
Net cash used in investing activities for the three months ended March 31, 2010 and 2009
totaled $0.9 million and $1.2 million, respectively, resulting from capital expenditures.
20
Capital expenditures have historically consisted primarily of additions to upgrade our
management information systems, development of customized technology solutions to support and
integrate with our service fee clients, and general expansion and upgrades to our facilities, both
domestic and foreign. We expect to incur capital expenditures to support new contracts and
anticipated future growth opportunities. Based on our current client business activity and our
targeted growth plans, we anticipate our total investment in upgrades and additions to facilities
and information technology services for the upcoming twelve months will be approximately $4 to $7
million, although additional capital expenditures may be necessary to support the infrastructure
requirements of new clients. To maintain our current operating cash position, a portion of these
expenditures may be financed through client reimbursements, debt, operating or capital leases or
additional equity. We may elect to modify or defer a portion of such anticipated investments in
the event we do not obtain the financing or achieve the financial results necessary to support such
investments.
Net cash provided by financing activities was approximately $0.2 million for the three months
ended March 31, 2010, representing a decrease in restricted cash partially offset by payments on
debt and capital lease obligations.
Net cash used in financing activities was approximately $5.8 million for the three months
ended March 31, 2009, primarily representing payments on debt and capital lease obligations.
Our liquidity has been negatively impacted as a result of the merger with eCOST. Since the
merger, eCOST has experienced a net use of cash primarily due to operating losses. As a result,
PFSweb has had to support eCOSTs cash needs with the goal of reducing operating losses. The
amount of further cash needed to support eCOST operations will depend upon the financing available
as well as eCOSTs ability to improve its financial results. eCOSTs results, excluding the impact
of any non-cash impairment charges, have improved in recent years, and we expect continued
improvement as a result of efforts to increase sales, improve product mix and further improve
operational efficiencies.
Our liquidity has also been negatively impacted by a decline in service fee revenue due to the
current general economic decline as well as the nonrenewal of a U.S. government agency contract and
certain other client contracts. To help minimize the impact of lower service fee revenue, we have
implemented certain measures that reduced variable costs and expenses and redeployed existing
infrastructure to other client activities. No assurance can be given that a further decline in
service fee revenue will not have a material adverse effect upon our business, financial condition
or results of operations.
During the three months ended March 31, 2010, our working capital decreased to $17.0 million
from $19.3 million at December 31, 2009 partially due to the paydown of debt facilities along with
the impact of certain technology and development costs incurred during 2010 that were prepaid by
certain clients in 2009. Working capital as of December 31, 2009 included the benefit from certain
clients paying implementation fees in 2009 applicable to technology and development costs that we
are incurring in 2010. To obtain additional financing in the future, in addition to our current
cash position, we plan to evaluate various financing alternatives including the sale of equity,
utilizing capital or operating leases, borrowing under our credit facilities, expanding our current
credit facilities, entering into new debt agreements or transferring to third parties a portion of
our subordinated loan balance due from Supplies Distributors. In conjunction with certain of these
alternatives, we may be required to provide certain letters of credit to secure these arrangements.
We currently believe our cash position, financing available under our credit facilities and funds
generated from operations (including cost reductions related to the nonrenewal or termination of
one or more service fee contracts) will satisfy our presently known operating cash needs, our
working capital and capital expenditure requirements, our current debt and lease obligations, and
additional loans to our subsidiaries Supplies Distributors and eCOST, if necessary, for at least
the next twelve months.
During the past two 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.
21
In support of certain debt instruments and leases, as of March 31, 2010, we had $1.3 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
restrictions on the ability of the borrower subsidiaries to advance funds to other borrower
subsidiaries. As a result, it is possible for one or more of these borrower subsidiaries to fail
to meet their respective covenants even if another borrower subsidiary otherwise has available
excess funds, which, if not restricted, could be used to cure the default. To the extent we fail
to comply with our debt covenants, including the monthly financial covenant requirements and our
required level of shareholders equity, and the lenders accelerate the repayment of the credit
facility obligations, we would be required to repay all amounts outstanding thereunder. In
particular, in the event eCOST is unable to increase its revenue and/or gross profit from its
present levels, or if PFS service fee revenue declines from expected levels and it is unable to
reduce costs to correspond to such reduced revenue levels or if Supplies Distributors revenue or
gross profit declines from expected levels, such events may result in a breach of one or more of
the financial covenants required under its working capital 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 that we will have the financial ability to repay all of
such obligations. As of March 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.
To finance their distribution of IPS products, Supplies Distributors and its subsidiaries have
short-term credit facilities with IBM Credit LLC (IBM Credit) and IBM Belgium Financial Services
S.A. (IBM Belgium). We have provided a collateralized guaranty to secure the repayment of these
credit facilities. These asset-based credit facilities provided financing for up to $30.5 million
and up to 16 million euros (approximately $21.6 million as of March 31, 2010) with IBM Credit and
IBM Belgium, respectively. These agreements expire in April 2011.
Supplies Distributors also has a loan and security agreement with Wachovia Bank, N.A.
(Wachovia) to provide financing for up to $25 million of eligible accounts receivables in the
United States and Canada. The Wachovia facility expires on the earlier of March 2011 or the date on
which the parties to the IPS master distributor agreement no longer operate under the terms of such
agreement and/or IPS no longer supplies products pursuant to such agreement.
Supplies Distributors European subsidiary has a factoring agreement with Fortis Commercial
Finance N.V. (Fortis) to provide factoring for up to 7.5 million euros (approximately $10.1
million as of March 31, 2010) of eligible accounts receivables through March 2011.
These credit facilities contain cross default provisions, various restrictions upon the
ability of Supplies Distributors and its subsidiaries to, among other things, merge, consolidate,
sell assets, incur indebtedness, make loans, investments and payments to related parties (including
entities directly or indirectly owned by PFSweb, Inc.), provide guarantees, make investments and
loans, pledge assets, make changes to capital stock ownership structure and pay dividends, as well
as financial covenants, such as cash flow from operations, annualized revenue to working capital,
net profit after tax to revenue, minimum net worth and
22
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 $4.3 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.
Our subsidiary, Priority Fulfillment Services, Inc. (PFS), has a Loan and Security Agreement
(Agreement) with Comerica Bank (Comerica), which provides for up to $10 million of eligible
accounts receivable financing through March 2011. We entered this Agreement to supplement our
existing cash position, and provide funding for our current and future operations, including our
targeted growth. The Agreement contains cross default provisions, various restrictions upon our
ability to, among other things, merge, consolidate, sell assets, incur indebtedness, make loans and
payments to subsidiaries, affiliates and related parties (including entities directly or indirectly
owned by PFSweb, Inc.), make capital expenditures, make investments and loans, pledge assets, make
changes to capital stock ownership structure, as well as financial covenants of a minimum tangible
net worth of $20 million, as defined, a minimum earnings before interest and taxes, plus
depreciation, amortization and non-cash compensation accruals, if any, as defined,
and a minimum liquidity ratio, as defined. The agreement also limits PFS ability to increase
the subordinated loan to Supplies Distributors to more than $5.5 million and permits PFS to advance
incremental amounts subject to certain cash inflows to PFS, as defined, to certain of its
subsidiaries and/or affiliates, including eCOST. The Agreement is secured by all of the assets of
PFS, as well as a guarantee of PFSweb.
eCOST currently has an asset-based line of credit facility of up to $7.5 million with
Wachovia, which is collateralized by substantially all of eCOSTs assets and expires in May 2011.
Borrowings under the facility are limited to a percentage of eligible accounts receivable and
letter of credit availability is limited to a percentage of accounts receivable and inventory. As
of March 31, 2010, eCOST had $1.0 million of letters of credit outstanding and $1.3 million of
available credit under this facility. The credit facility restricts eCOSTs ability to, among
other things, merge, consolidate, sell assets, incur indebtedness, make loans, investments and
payments to subsidiaries, affiliates and related parties, make investments and loans, pledge
assets, make changes to capital stock ownership structure, as well as a minimum tangible net worth
of $0 million, as defined. PFSweb has guaranteed all current and future obligations of eCOST under
this line of credit.
We 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 us and Comerica under which PFS is obligated to pay to Comerica all
amounts drawn under the Letter of Credit. The Letter of Credit has a maturity date of April 2011
at which time, if not renewed or replaced, will result in a draw on the undrawn face amount
thereof. The amount outstanding on this Loan Agreement as of March 31, 2010 was $1.6 million.
PFS obligations under the Reimbursement Agreement are secured by substantially all of its assets,
including restricted cash of $0.7 million and a Company parent guarantee.
eCOST has historically incurred significant operating losses and used cash to fund its
operations. As a result, we have been required to invest cash to fund eCOSTs operations, which we
may not be able to continue to do without approval from our lenders. The amount of further cash
needed to support eCOST operations depends upon the financing available under its credit line as
well as eCOSTs ability to improve its financial results. Through March 31, 2010, we have advanced
$16.0 million to eCOST to fund eCOSTs cash flow requirements and have lender approval to advance
incremental amounts subject to certain cash inflows to PFS, as defined, to certain of our
subsidiaries and/or affiliates, including eCOST. In the event we need to invest further cash to
eCOST, we may be required to seek approval from our lenders to provide
23
such funds. We can provide
no assurance that we will receive such approval from our lenders or any terms or conditions
required by our lenders in order to obtain such approval. In addition, PFSweb has provided a
guaranty of eCOSTs bank line of credit and certain eCOST vendor trade payables.
We receive municipal tax abatements in certain locations. During 2004 we received notice from
a municipality that we did not satisfy certain criteria necessary to maintain the abatements. In
December 2006, we received notice that the municipal authority planned to make an adjustment to our
tax abatement. We have disputed the adjustment as of March 31, 2010, but if the dispute is not
resolved favorably, additional property taxes of approximately $1.7 million could be assessed
against us.
Pursuant to the terms of certain contractual agreements with certain of eCOSTs vendors, the
vendor has the right to inspect and audit eCOSTs books and records relating to sales of such
vendors products to verify eCOSTs compliance with any terms and conditions imposed by such vendor
upon the resale of such products. Under certain circumstances, eCOST may be subject to certain
contractual defined liabilities and obligations in the event the results of such audit determine
noncompliance by eCOST with such terms and conditions. In April 2010, an audit was conducted by an
eCOST vendor to determine compliance by eCOST with such vendors terms and conditions. As of the
date of this Report, eCOST has not received the results of such audit or any further information
from such vendor. No assurance can be given that the results of such audit, or any claim asserted
by the vendor in connection therewith, will not have a material adverse effect upon the Companys
financial condition or results of operations.
In April 2010, a sales employee of eCOST was charged with violating various federal criminal
statutes 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. Shortly thereafter, the Company received a subpoena from
the Office of the U.S. Attorney requesting information regarding the employee and other matters,
and the Company provided such information 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 has been charged with any criminal activity, and
eCOST intends to seek the recovery or reimbursement of the funds.
Based on the information available to date, eCOST 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 eCOST to
recover such funds or any significant portion thereof, will not have a material adverse effect upon
the Companys financial condition or results of operations.
Seasonality
The seasonality of our service fee business is dependent upon the seasonality of our clients
business and sales of their products. Accordingly, our management must rely upon the projections of
our clients in assessing quarterly variability. We believe with our current client mix and their
current business volumes, our run rate service fee business activity will be at its lowest in the
quarter ended March 31. We anticipate our Supplies Distributors product revenue will be highest
during the quarter ended December 31. Our eCOST business is moderately seasonal, reflecting the
general pattern of peak sales for the retail industry during the holiday shopping season.
Typically, a larger portion of our eCOST revenues occur during the fourth fiscal quarter. We
believe our historical revenue growth makes it difficult to predict the effect of seasonality on
our future revenues and results of operations.
We believe that results of operations for a quarterly period may not be indicative of the
results for any other quarter or for the full year.
Inflation
Management believes that inflation has not had a material effect on our operations.
Critical Accounting Policies
A description of our critical accounting policies, including goodwill and long-lived assets,
is included in Note 2 of the consolidated financial statements in our December 31, 2009 Annual
Report on Form 10-K.
24
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ITEM 3.
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Quantitative and Qualitative Disclosure about Market Risk
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Not required.
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ITEM 4.
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Controls and Procedures
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Disclosure Controls and Procedures
We maintain a system of controls and procedures designed to provide reasonable assurance as to
the reliability of the financial statements and other disclosures included in this report, as well
as to safeguard assets from unauthorized use or disposition. We evaluated the effectiveness of the
design and operation of our disclosure controls and procedures under the supervision and with the
participation of management, including our Chief Executive Officer and Principal Financial and
Accounting Officer. Based upon the evaluation, our Chief Executive Officer and Principal Financial
and Accounting Officer concluded that our disclosure controls and procedures are effective in
timely alerting them to material information required to be included in our periodic Securities and
Exchange Commission filings. No significant changes were made to our internal controls or other
factors that could significantly affect these controls subsequent to the date of their evaluation.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal controls over financial reporting (as defined in
Rule 13(a)-15(f) or Rule 15-d-15(f) of the Exchange Act) during the three months ended March 31,
2010 that have materially affected, or are reasonable likely to materially affect, our internal
controls over financial reporting.
25
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
In April 2010, a sales employee of eCOST was charged with violating various federal criminal
statutes 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. Shortly thereafter, the Company received a subpoena from
the Office of the U.S. Attorney requesting information regarding the employee and other matters,
and the Company provided such information 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 has been charged with any criminal activity, and eCOST intends to seek the
recovery or reimbursement of the funds. Based on the information available to date, eCOST 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 eCOST to
recover such funds or any significant portion thereof, will not have a material adverse effect upon
the Companys financial condition or results of operations.
ITEM 1A. Risk Factors
In addition to the risk factors set forth in Part I, Item 1A of the Companys Annual Report on
Form 10-K for the fiscal year ended December 31, 2009 filed with the Securities and Exchange
Commission on March 31, 2010, our business, financial condition and operating results could be
adversely affected by any or all of the following factors.
Risks Related to All Our Business Segments
Our business and future growth depend on our continued access to bank and commercial financing.
The current economic crisis may negatively impact our business, results of operations, financial
condition or liquidity.
During the past two 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 May 2011 and are secured by substantially all our assets. Our
ability to renew our lines 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.
We operate with significant levels of indebtedness and are required to comply with certain
financial and non-financial covenants; we are required to maintain a minimum level of subordinated
loans to our subsidiary Supplies Distributors; and we have guaranteed certain indebtedness and
obligations of our subsidiaries Supplies Distributors and eCOST.
As of March 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 $50.7 million. Certain of the credit facilities have maturity dates in calendar year
2011, but are classified as current liabilities in our consolidated financial statements. We cannot
provide assurance that our credit facilities will be renewed by the lending parties. Additionally,
these credit facilities include both financial and non-financial covenants, many of which also
include cross default provisions applicable to other agreements. These covenants also restrict our
ability to transfer funds among our various subsidiaries, which may adversely affect the ability of
our subsidiaries to operate their businesses or comply with their
26
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
$5.0 million of subordinated indebtedness to Supplies Distributors as of March 31, 2010. The
maximum level of this subordinated indebtedness to Supplies Distributors that may be provided
without approval from our lenders is $5.5 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 eCOSTs $7.5 million credit line, as well as certain of its vendor trade payables. We
currently expect that it may be necessary to provide additional guarantees of certain eCOST vendor
trade payables in the future.
Risks Related to Our PFS and Supplies Distributors Operating Segments
Our business is subject to the risk of customer and supplier concentration.
For the three months ended March 31, 2010 and 2009, a technology company, a consumer products
company and a U.S. government agency represented the source of approximately 14%, 14% and 0%,
respectively, and approximately 13%, 9% and 22%, respectively, of our total service fee revenue,
excluding pass-through revenue. Our activity under our contract with the U.S. government agency
concluded in the second quarter of 2009. PFS currently operates three distinct geographical
contract arrangements with the technology company which are aggregated in the service fee revenue
percentages above. The technology company has notified PFS that it is
not renewing substantially all of its contracts with PFS which expire in 2010. The non-renewal of these contracts has had, and may
continue to have, a material adverse effect upon our business.
A substantial portion of our Supplies Distributors product revenue is generated by sales of
product purchased under master distributor agreements with IPS. These agreements are terminable at
will and no assurance can be given that IPS will continue the master distributor agreements with
Supplies Distributors. Supplies Distributors does not have its own sales force and relies upon IPS
sales force and product demand generation activities 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 accounted for, in the aggregate,
approximately 40% and 39% of Supplies Distributors total product revenue for the three months
ended March 31, 2010 and 2009, respectively (21% and 20% of our consolidated net revenues in each
three month period, respectively). The loss of any one or all of such customers, or non-payment of
any material amount by these or any other customer, are likely to have a material adverse effect
upon Supplies Distributors business.
We subcontract a portion of our client services to third parties, and we are subject to various
risks and liabilities if such subcontractors do not provide the subcontracted services or provide
them in a manner which does not meet required service levels.
We currently, and may in the future, subcontract to one or more third parties a portion of our
end-to-end solution service offering. Although our end-to-end solution service clients generally
approve in advance the designation of the subcontractor and its provision of the subcontracted
services, under the terms of our contracts with our end-to-end solution service clients, we remain
liable to provide such subcontracted services and may be liable for the actions and omissions of
such subcontractors. In certain instances, our end-to-end solution service clients prepay in
advance a portion of the service fees payable in respect of the subcontracted services, and, under
certain circumstances, including our breach or the breach by our subcontractor of our or their
respective obligations, we are liable to refund all or a portion of such prepaid fees.
Consequently, in the event our subcontractor fails to provide the subcontracted services in
compliance with required services levels, or otherwise breaches its obligations, or discontinues
its business, whether as the result of bankruptcy, insolvency or otherwise, we may be required to
provide such services at a higher cost to us and may otherwise be liable for various costs and
expenses related to such event. In addition, any such failure may damage our reputation and
otherwise result in a material adverse affect upon our business and financial condition.
27
Risks Related to eCOST, our Online Discount Retailer Segment
Our business is subject to the risk of supplier concentration.
Our business is dependent on sales of Hewlett Packard (HP) and HP-related products, which
represented approximately 58% of eCOSTs net revenues (13% of our consolidated net revenues) in the
three months ended March 31, 2010 and 42% of eCOSTs net revenues (10% of our consolidated net
revenues) in the comparable period of 2009. If our ability to purchase direct from HP is
terminated or restricted, or if the demand for HP and HP-related products declines, our business
will be materially adversely affected.
Our business is subject to various contingencies, including a vendor audit and an investigation
related to possible criminal activities by a sales employee which may have a material adverse
effect upon our financial condition and results of operations.
Pursuant to the terms of certain contractual agreements with certain of eCOSTs vendors, the
vendor has the right to inspect and audit eCOSTs books and records relating to sales of such
vendors products to verify eCOSTs compliance with any terms and conditions imposed by such vendor
upon the resale of such products. Under certain circumstances, eCOST may be subject to certain
contractual defined liabilities and obligations in the event the results of such audit determine
noncompliance by eCOST with such terms and conditions. In April 2010, an audit was conducted by an
eCOST vendor to determine compliance by eCOST with such vendors terms and conditions. To date,
eCOST has not received the results of such audit or any further information from such vendor. No
assurance can be given that the results of such audit, or any claim asserted by the vendor in
connection therewith, will not have a material adverse effect upon the Companys financial
condition or results of operations.
In April 2010, a sales employee of eCOST was charged with violating various federal criminal
statutes 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. Shortly thereafter, the Company received a subpoena from
the Office of the U.S. Attorney requesting information regarding the employee and other matters,
and the Company provided such information 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 has been charged with any criminal activity, and eCOST intends to seek the
recovery or reimbursement of the funds. Based on the information available to date, eCOST 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 eCOST to recover such
funds or any significant portion thereof, will not have a material adverse effect upon the
Companys financial condition or results of operations.
Risks Related to Our Stock
Our stock price could decline if a significant number of shares become available for sale.
As of March 31, 2010, we have an aggregate of 1.8 million stock options outstanding to employees,
directors and others with a weighted average exercise price of $4.74 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.
ITEM 2. Changes in Securities and Use of Proceeds
None
ITEM 3. Defaults Upon Senior Securities
None
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ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits
a) Exhibits:
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Exhibit
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No.
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Description of Exhibits
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3.1(1)
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Amended and Restated Certificate of Incorporation of PFSweb, Inc.
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3.1.1(2)
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Certificate of Amendment to Amended and Restated Certificate of
Incorporation of PFSweb, Inc.
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3.1.2(4)
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Certificate of Amendment to Certificate of Incorporation of
PFSweb, Inc.
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3.1.3(5)
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Certificate of Amendment to Amended and Restated Certificate of
Incorporation of PFSweb, Inc.
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3.2(1)
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Amended and Restated By-Laws
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3.2.1(3)
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Amendment to the Amended and Restated By-Laws of PFSweb, Inc.
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10.1*
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Eighth Amended and Restated Notes Payable Subordination Agreement
by and between Priority Fulfillment Services, Inc., Supplies
Distributors, Inc. and IBM Credit Corporation.
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10.2*
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Amendment 11 to Agreement for Inventory Financing.
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10.3*
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Amendment 10 to Amended and Restated Platinum Plan Agreement.
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10.4*
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Agreement for IBM Global Financing Platinum Plan Invoice
Discounting Schedule.
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10.5*
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Eighth Amendment to First Amended and Restated Loan and Security
Agreement by and between Comerica Bank and Priority Fulfillment
Services, Inc.
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10.6*
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2010 Management Bonus Plan
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31.1*
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Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
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31.2*
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Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
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32.1*
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Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
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(1)
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Incorporated by reference from PFSweb, Inc. Registration Statement on Form S-1 (Commission
File No. 333-87657).
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(2)
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Incorporated by reference from PFSweb, Inc. Form 10-K for the fiscal year ended December, 31,
2005 filed on March 31, 2006.
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(3)
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Incorporated by reference from PFSweb, Inc. Report on Form 8-K filed on November 13, 2007.
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(4)
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Incorporated by reference from PFSweb, Inc. Report on Form 8-K filed on June 2, 2008.
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(5)
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Incorporated by reference from PFSweb, Inc. Form 10-Q filed on August 14, 2009.
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*
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Filed Herewith
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29
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 17, 2010
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PFSweb, Inc.
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By:
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/s/ Thomas J. Madden
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Thomas J. Madden
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Chief Financial Officer,
Chief Accounting Officer,
Executive Vice President
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30