UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
þ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission File Number 000-28275
PFSweb, Inc.
Delaware | 75-2837058 | |
|
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(State of Incorporation) | (I.R.S. Employer I.D. No.) | |
500 North Central Expressway, Plano, Texas | 75074 | |
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(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (972) 881-2900
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No þ
At April 18, 2005 there were 22,394,142 shares of registrants common stock outstanding, excluding 86,300 shares of common stock in treasury.
PFSWEB, INC. AND SUBSIDIARIES
Form 10-Q
March 31, 2005
INDEX
2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
PFSWEB, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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
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
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., are collectively
referred to as the Company; Supplies Distributors refers to Supplies Distributors, Inc. and its
subsidiaries; and PFSweb refers to PFSweb, Inc. and its subsidiaries excluding Supplies
Distributors.
PFSweb Overview
PFSweb is an international provider of integrated business process outsourcing services to
major brand name companies seeking to maximize their supply chain efficiencies and to extend their
traditional and e-commerce initiatives in the United States, Canada, and Europe. PFSweb offers 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 acts as a master distributor of various products, primarily
International Business Machines Corporation (IBM) product, under a master distributor agreement
with IBM. Supplies Distributors has outsourced to PFSweb the transaction management and fulfillment
service functions of its distribution business and has outsourced to a third party the sales and
marketing functions. Supplies Distributors sells its products in the United States, Canada and
Europe.
Basis of Presentation
The unaudited interim condensed consolidated financial statements as of March 31, 2005, and
for the three months ended March 31, 2005 and 2004, have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC) and are unaudited. Certain
information and footnote disclosures normally included in financial statements prepared in
accordance with 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, 2005, its
results of operations for the three months ended March 31, 2005 and 2004 and its results of cash
flows for the three months ended March 31, 2005 and 2004. Results of the Companys operations for
interim periods may not be indicative of results for the full fiscal year.
Certain prior period data has been reclassified to conform to the current period presentation.
These reclassifications had no effect on previously reported net loss or shareholders equity.
2.
SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The recognition and allocation of certain operating expenses
in these consolidated financial statements also
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PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
require management estimates and assumptions. The Companys estimates and assumptions are
continually evaluated based on available information and experience. Because the use of estimates
is inherent in the financial reporting process, actual results could differ from estimates.
Concentration of Business and Credit Risk
The Companys product revenue was primarily generated by sales of product purchased under
master distributor agreements with one supplier.
Sales to four customers accounted individually each for greater than 10%, and in the aggregate
accounted for approximately 48%, of the Companys total product revenues for the three months ended
March 31, 2005. Service fee revenue from three clients individually accounted for approximately
28%, 13% and 12% service fee revenue for the three months ended March 31, 2005. On a consolidated
basis, one customer/client accounted for approximately 10% of the Companys total revenues for the three
months ended March 31, 2005. As of March 31, 2005, two customers each individually accounted for
approximately 10% of accounts receivable.
In conjunction with Supplies Distributors financings, PFSweb has provided certain
collateralized guarantees on behalf of Supplies Distributors. Supplies Distributors ability to
obtain financing on similar terms would be significantly impacted without these guarantees.
Additionally, since Supplies Distributors has limited personnel and physical resources, its ability
to conduct business could be materially impacted by contract terminations by the party performing
product demand generation for the IBM products.
The Company has multiple arrangements with IBM and is dependent upon the continuation of such
arrangements. These arrangements, which are critical to the Companys ongoing operations, include
Supplies Distributors master distributor agreements, certain of Supplies Distributors working
capital financing agreements, product sales to IBM business units, a service fee relationship, and
a term master lease agreement.
Cash and Cash Equivalents
Cash equivalents are defined as short-term highly liquid investments with original maturities
of three months or less.
Inventories
Inventories (all of which are finished goods) are stated at the lower of weighted average cost
or market. 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. The Company reviews inventory for
impairment on a periodic basis, but at a minimum, annually. Recoverability of the inventory on hand
is measured by comparison of the carrying value of the inventory to the fair value of the
inventory. The allowance for slow moving inventory was $2.0 million and $2.5 million at March 31,
2005 and December 31, 2004, respectively.
In the event PFSweb, Supplies Distributors and IBM 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.
Inventories include merchandise in-transit that has not been received by the Company but that
has been shipped and invoiced by Supplies Distributors vendors. The corresponding payable for
inventories in-transit is included in accounts payable in the accompanying consolidated financial
statements.
Property and Equipment
The Companys property held under capital leases amounted to approximately $2.7 million and
$3.0
7
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
million, net of accumulated amortization of approximately $5.9 million and $5.4 million, at
March 31, 2005 and December 31, 2004, respectively.
Stock-Based Compensation
The Company accounts for stock-based employee compensation plans using the intrinsic-value
method as outlined under Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to
Employees
(APB No. 25) and related interpretations, including FASB Interpretation No. 44,
Accounting for Certain Transactions Involving Stock Compensation and Interpretation of APB No. 25
,
issued in March 2000. The following table shows the pro forma effect on the Companys net income
(loss) and income (loss) per share as if compensation cost had been recognized for stock-based
employee compensation plans based on their fair value at the date of the grant. The pro forma
effect of stock-based employee compensation plans on the Companys net income (loss) for those
periods may not be representative of the pro forma effect for future periods due to the impact of
vesting and potential future awards.
During April 2005, the
Company issued an aggregate of 700,000 options to purchase shares of
common stock to officers and employees of the Company.
Impact of Recently Issued Accounting Standards
In December 2004, the FASB issued SFAS No. 123,
Share-Based Payment
(SFAS 123R) which replaces
SFAS No. 123,
Accounting for Stock-Based Compensation,
(SFAS 123) and supercedes APB Opinion No.
25,
Accounting for Stock Issued to Employees.
In March 2005, the Securities and Exchange
Commission (SEC) issued Staff Accounting Bulletin No. 107,
Share-Based Payment,
which provides
interpretive guidance related to SFAS 123R. SFAS 123R requires all share-based payment
transactions to be recognized in the financial statements based on their fair values. The pro
forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial
statement recognition. In April 2005, the SEC delayed the effective date of SFAS 123R to the
beginning of the annual reporting period that begins after June 15, 2005. The Company is currently
evaluating SFAS 123R to determine the impact on its consolidated financial statements. However, it
is expected to have a negative effect on consolidated net income.
3.
COMPREHENSIVE LOSS (in thousands)
8
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
4.
NET LOSS PER COMMON SHARE
Basic
net loss per common share is computed by dividing the net loss
available to common stockholders by the weighted-average number of common shares outstanding for
the reporting period. For the three months ended March 31, 2005
and 2004, outstanding options of 4,821,376 and 5,051,554,
respectively, to
purchase common shares were anti-dilutive and have been excluded from the weighted diluted average
share computation.
5.
VENDOR FINANCING
:
Outstanding obligations under vendor financing arrangements consist of the following (in
thousands):
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 IBM products in the United States, providing financing for eligible IBM inventory
and for certain other receivables up to $27.5 million (temporarily increased to $31.0 million as of
March 31, 2005). As of March 31, 2005, Supplies Distributors had $4.5 million of available credit
under this facility. The credit facility contains cross default provisions, various restrictions
upon the ability of Supplies Distributors to, among others, merge, consolidate, sell assets, incur
indebtedness, make loans and payments to related parties, 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 all of the
assets of Supplies Distributors, as well as a collateralized guaranty of PFSweb. Additionally,
PFSweb is required to maintain a minimum Subordinated Note receivable balance from Supplies
Distributors of $7.0 million and a minimum shareholders equity of $18.0 million. Borrowings under
the credit facility accrue interest, after a defined free financing period, at prime rate plus 1%.
The facility also includes a monthly service fee. The Company has classified the outstanding
amounts under this credit facility as accounts payable in the consolidated balance sheets.
Inventory and Working Capital Financing Agreement, Europe
Supplies Distributors European subsidiaries have a short-term credit facility with IBM
Belgium Financial Services S.A. (IBM Belgium) to finance their distribution of IBM products in
Europe. The asset based credit facility with IBM Belgium provides up to 12.5 million Euros
(approximately $16.2 million) in financing for purchasing IBM inventory and for certain other
receivables. As of March 31, 2005, Supplies Distributors European subsidiaries had 2.9 million
euros ($3.8 million) of available credit under this facility. The credit facility contains cross
default provisions, various restrictions upon the ability of Supplies Distributors and its European
subsidiaries to, among others, merge, consolidate, sell assets, incur indebtedness, make loans and
payments to related parties, 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 all of the assets of Supplies
Distributors European subsidiaries, as well as collateralized guaranties of Supplies Distributors
and PFSweb. Additionally, PFSweb is required to maintain a minimum Subordinated Note receivable
balance from Supplies Distributors of $7.0 million and a minimum shareholders equity of $18.0
million. Borrowings under the credit facility accrue interest, after a defined free financing
period, at Euribor plus 2.5%. Supplies Distributors European subsidiaries pay a monthly service
fee on the commitment. The Company has
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PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
classified the outstanding amounts under this credit facility that are collateralized by
inventory 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):
Loan and Security Agreement Supplies Distributors
Supplies Distributors has a loan and security agreement with Congress Financial Corporation
(Southwest) (Congress) to provide financing for up to $25 million of eligible accounts receivable
in the United States and Canada. As of March 31, 2005, Supplies Distributors had $2.5 million of
available credit under this agreement. The Congress facility expires on the earlier of March 29,
2007 or the date on which the parties to the IBM master distributor agreement no longer operate
under the terms of such agreement and/or IBM no longer supplies products pursuant to such
agreement. Borrowings under the Congress facility accrue interest at prime rate plus 0.00% to 0.25%
or Eurodollar rate plus 2.25% to 2.75%, dependent on excess availability, as defined. This
agreement contains cross default provisions, various restrictions upon the ability of and Supplies
Distributors to, among other things, merge, consolidate, sell assets, incur indebtedness, make
loans and payments to related parties, provide guarantees, make investments and loans, pledge
assets, make changes to capital stock ownership structure and pay dividends, as well as financial
covenants, such as minimum net worth, as defined, and is secured by all of the assets of Supplies
Distributors, as well as a collateralized guaranty of PFSweb. Additionally, PFSweb is required to
maintain a Subordinated Note receivable balance from Supplies Distributors of no less than $6.5
million and restricted cash of less than $5.0 million, and is restricted with regard to
transactions with related parties, indebtedness and changes to capital stock ownership structure.
Supplies Distributors has entered into blocked account agreements with its banks and Congress
pursuant to which a security interest was granted to Congress for all customer remittances received
in specified bank accounts. At March 31, 2005 and December 31, 2004, these bank accounts held $0.3
million and $1.2 million, respectively, which was restricted for payment to Congress.
Loan and Security Agreement PFSweb
Priority Fulfillment Services, Inc. (PFS), a wholly-owned subsidiary of PFSweb, has a Loan
and Security Agreement with Comerica Bank (Comerica), which was amended in December 2004
(Comerica Agreement). The Comerica Agreement provides for up to $5.0 million of eligible accounts
receivable financing (Working Capital Advances) through March 2, 2007 and $2.5 million of
equipment financing (Equipment Advances) through June 15, 2008. Outstanding Working Capital
Advances, $3.5 million as of March 31, 2005, accrue interest at prime rate plus 1%. Outstanding
Equipment Advances, $1.9 million as of March 31, 2005, accrue interest at prime rate plus 1.5%. As
of March 31, 2005, PFS had $1.4 million of available credit under the Working Capital Advance
portion of this facility and $0.2 million of available credit under the Equipment Advance portion
of this facility. In April 2005, the Company repaid the $3.5
10
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
million of Working Capital Advances outstanding as of March 31, 2005. 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,
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 to a maximum of $8 million. The Comerica Agreement is
secured by all of the assets of PFS, as well as a guarantee of PFSweb. The Comerica Agreement
requires PFS to maintain a minimum cash balance of $1.3 million at Comerica.
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 $9.7
million) of eligible accounts receivables through March 2006. As of March 31, 2005, Supplies
Distributors European subsidiary had approximately 2.1 million euros ($2.7 million) of available
credit under this agreement. Borrowings under this agreement can be either cash advances or
straight loans, as defined. Cash advances accrue interest at 3.8% and straight loans accrue
interest at Euribor plus 1.3%. 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
PFSweb has a Loan Agreement with the Mississippi Business Finance Corporation (the MBFC) in
connection with the issuance by the MBFC of $5 million MBFC Taxable Variable Rate Demand Limited
Obligation Revenue Bonds, Series 2004 (Priority Fulfillment Services, Inc. Project) (the Bonds).
The MBFC loaned the proceeds of the Bonds to PFSweb for the purpose of financing the acquisition
and installation of equipment, machinery and related assets located in the Companys Southaven,
Mississippi distribution facility. The Bonds bear interest at a variable rate, as determined by
Comerica Securities, as Remarketing Agent. PFSweb, at its option, may convert the Bonds to a fixed
rate, to be determined by the Remarketing Agent at the time of conversion.
The primary source of repayment of the Bonds is a letter of credit (the Letter of Credit) in
the initial face amount of $5.1 million issued by Comerica pursuant to a Reimbursement Agreement
between PFSweb and Comerica under which PFSweb is obligated to pay to Comerica all amounts drawn
under the Letter of Credit. The Letter of Credit has an initial maturity date of December 2006 at
which time, if not renewed or replaced, will result in a draw on the undrawn face amount thereof.
Debt Covenants
To the extent the Company fails to comply with its covenants applicable to its debt or vendor
financing obligations, including the monthly financial covenant requirements and required level of
stockholders equity ($20.0 million), and the lenders accelerate the repayment of the credit
facility obligations, the Company would be required to repay all amounts outstanding thereunder.
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.
PFSweb has also provided a guarantee of the obligations of Supplies Distributors to IBM,
excluding the trade payables that are financed by IBM credit.
11
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
Master Lease Agreements
The Company has a Term Lease Master Agreement with IBM Credit Corporation (Master Lease
Agreement) that provides for leasing or financing transactions of equipment and other assets,
which generally have terms of 3 to 5 years. The outstanding leasing transactions ($1.1 million and
$1.2 million as of March 31, 2005 and December 31, 2004, respectively) are secured by the related
equipment and letters of credit. The outstanding financing transactions ($0.4 million and $0.5
million as of March 31, 2005 and December 31, 2004, respectively) are secured by a letter of
credit.
The Company has a master agreement with a leasing company that provided for leasing
transactions of certain equipment. The amounts outstanding under this agreement as of March 31,
2005 and December 31, 2004 were $1.2 million and $1.2 million, respectively, and are secured by the
related equipment.
The Company enters into other leasing and financing agreements 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 two operating segments: PFSweb is an international provider of
integrated business process outsourcing solutions and operates as a service fee business; Supplies
Distributors is a master distributor of primarily IBM products.
12
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. The Company plans to dispute the notice. If the dispute is not resolved favorably,
the Company could be assessed additional taxes for calendar years 2004 and 2005. The Company has
not accrued for the additional taxes, which through March 31, 2005 could be $0.4 million to $0.5
million for 2004 and $0.1 million for 2005, as it does not believe that it is probable that an
additional assessment will be incurred.
On May 9, 2005, a lawsuit was filed in the District Court of Collin County, Texas, by J. Gregg
Pritchard, as Trustee of the D.I.C. Creditors Trust, naming the former directors of Daisytek
International Corporation and the Company as defendants. Daisytek filed for bankruptcy in May 2003
and the Trust was created pursuant to Daisyteks Plan of Liquidation. The complaint alleges, among
other things, that the spin-off of the Company from Daisytek in December 1999 was a fraudulent
conveyance and that Daisytek was damaged thereby in the amount of at least $38 million. The Company
believes the claim has no merit and intends to vigorously defend the action.
9.
SUBSEQUENT EVENT
In April 2005, the Company entered into a five-year operating lease arrangement for a new
distribution facility in Southaven, MS, near its existing facility in Southaven, MS.
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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, 2004, could cause our results to differ
materially from those expressed in our forward-looking statements. These factors include:
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. There may be additional risks that we do not currently view as material or that are not
presently known.
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Overview
We are an international provider of integrated business process outsourcing solutions to major
brand name companies seeking to maximize their supply chain efficiencies and to extend their
traditional business and e-commerce initiatives. We derive our revenues from a broad range of
services, including professional consulting, technology collaboration, order management, managed
web hosting and web development, customer relationship management, financial services including
billing and collection services and working capital solutions, kitting and assembly services,
information management and international fulfillment and distribution services. We offer our
services as an integrated solution, which enables our clients to outsource their complete
infrastructure needs to a single source and to focus on their core competencies. Our distribution
services are conducted at warehouses that we lease or manage and include real-time inventory
management and customized picking, packing and shipping of our clients customer orders. We
currently offer the ability to provide infrastructure and distribution solutions to clients that
operate in a range of vertical markets, including technology manufacturing, computer products,
printers, cosmetics, fragile goods, high security collectibles, pharmaceuticals, contemporary home
furnishings, apparel, aviation, telecommunications and consumer electronics, among others.
We provide these services, and earn our revenue, through two separate business segments, which
have operationally similar business models. The first business segment is a service fee revenue
model. In this 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 IBM and certain other clients. In this capacity, we purchase, and thus
own, inventory and recognize the corresponding product revenue. As a result, upon the sale of
inventory, we own the accounts receivable. Freight costs billed to customers are reflected as
components of product revenue. This business segment requires significant working capital
requirements, for which we have senior credit facilities to provide for more than $80 million of
available financing.
Growth is a key element to achieving our future goals, including maintaining sustainable
profitability. Our growth is driven by two main elements: new client relationships and organic
growth from existing clients. On an overall basis, we have experienced an increase in service fee
revenues from existing clients and an increase in product revenues in recent years. During 2004,
we were successful in winning new contracts with new and existing clients. We currently believe
these new contracts, once fully operational, will generate annual service fee revenue of more than
$20 million. We expect to invoice more than 80% of the estimated annual run-rate revenue of these
new contracts during 2005. Our results for the quarter ended March 31, 2005 include approximately
$4.6 million of new revenue including certain incremental projects.
Although our success with winning new contracts has recently improved, we continue to monitor
and control our costs to focus on profitability. While we expect our new service fee contracts to
yield increased gross profit, we expect this profit to be somewhat offset by incremental
investments to implement new contracts, investments in infrastructure and sales and marketing to
support our targeted growth and increased public company professional fees.
Our expenses comprise primarily four categories: 1) cost of product revenue, 2) cost of
service fee revenue, 3) cost of pass-through revenue and 4) selling, general and administrative
(SG&A) expenses.
15
Cost of product revenue
cost of product revenue consists of the purchase price of product
sold and
freight costs, which are reduced by certain reimbursable expenses. These reimbursable
expenses include pass-through customer marketing programs, direct costs incurred in passing on any
price decreases offered by IBM to Supplies Distributors or its customers to cover price protection
and certain special bids, the cost of products provided to replace defective product returned by
customers and certain other expenses as defined under the master distributor agreements.
Cost of service fee revenue
consists primarily of compensation and related expenses for our
web-enabled customer contact center services, international fulfillment and distribution services
and professional consulting services, and other fixed and variable expenses directly related to
providing services under the terms of fee based contracts, including certain occupancy and
information technology costs and depreciation and amortization expenses.
Cost of pass-through revenue
the related reimbursable costs for pass-through expenditures
are reflected as cost of pass-through revenue.
SG&A expenses
consist primarily of compensation and related expenses for sales and marketing
staff, executive, management and administrative personnel and other overhead costs, including
certain occupancy and information technology costs and depreciation and amortization expenses. In
addition, certain direct contract costs related to our IBM and other master distributor agreements
are reflected as selling and administrative expenses.
Monitoring and controlling our available cash balances continues to be a primary focus. Our
cash and liquidity positions are important components of our financing of both current operations
and our targeted growth. In recent years we have added to our available cash and liquidity
positions through various transactions. First we have a working capital financing agreement with a
bank that currently provides financing for up to $5 million of eligible accounts receivable and
financing for up to $2.5 million of eligible capital expenditures. Secondly, in 2003 we completed
a private placement of approximately 1.6 million shares of our common stock to certain investors
that provided net proceeds of approximately $3.2 million. In January 2005, we issued an additional
0.4 million shares of common stock to certain of these investors who exercised warrants issued in
the private placement. The warrants exercised provided $1.3 million of additional proceeds.
Thirdly, in 2004 we received proceeds of $5 million of taxable revenue bonds to finance capital
additions to our new facility in Southaven, MS.
16
Results of Operations
The following table sets forth certain historical financial information from our unaudited
interim condensed consolidated statements of operations expressed as a percent of revenue.
Results of Operations for the Interim Periods Ended March 31, 2005 and 2004
Product Revenue.
Product revenue was $63.6 million for the three months ended March 31, 2005,
as compared to $68.6 million for the three months ended March 31, 2004, a decrease of $5.0 million,
or 7.2%. The decrease in product revenue resulted primarily from the decreased sales volume of
certain product in Europe, partially offset by the favorable impact of exchange rates in our
European and Canadian operations.
Service Fee Revenue
. Service fee revenue was $14.1 million for the three months ended March
31, 2005 as compared to $7.1 million for the three months ended March 31, 2004, an increase of $7.0
million or 97.6%. Service fee revenue for both the three months ended March 31, 2005 and 2004
included increased service fees generated from incremental projects with certain client
relationships. The change in service fee revenue is shown below ($ millions):
The increase in existing client service fees primarily resulted from product release schedule
changes from our largest service fee client. We expect that these schedule changes will ultimately
accelerate volumes into the first three months of the year that we previously processed during the
second six months of the year.
Cost
of Product Revenue.
Cost of product revenue was $59.6 million for the three months ended
March 31, 2005, as compared to $64.5 million for the three months ended March 31, 2004,
a decrease
of $4.9 million or 7.6%. Cost of product revenue as a percent of
product revenue was 93.7% during
the three
17
months ended March 31, 2005 and 94.0% during the three months ended March 31, 2004. The
resulting gross profit margin was 6.3% for the three months ended March 31, 2005 and 6.0% for the
three months ended March 31, 2004. Cost of product revenue decreased primarily as the result of
decreased sales volumes of certain products. The gross margin improved primarily as a result
of a provision of $0.4 million for excess and obsolete inventory
recorded during the three months ended March 31, 2004.
Cost of Service Fee Revenue
. Cost of service fee revenue was $10.8 million for the three
months ended March 31, 2005, as compared to $5.3 million during the three months ended March 31,
2004, an increase of $5.5 million or 105.0%. The resulting service fee gross profit was $3.3
million or 23.5% of service fee revenue, during the three months ended March 31, 2005 as compared
to $1.9 million, or 26.3% of service fee revenue for the three months ended March 31, 2004. Our
gross profit as a percent of service fees decreased in the current period primarily due to lower
gross margins on certain new contracts, including certain start up costs, partially offset by
higher margins earned on our largest service fee client as a result of reduced seasonality. As we
add new service fee revenue in the future, we currently intend to target the underlying contracts
to earn an average gross profit percentage of 25-35%, but we have and may continue to accept lower
gross margin percentages on certain contracts depending on contract scope and other factors.
Selling, General and Administrative Expenses
. SG&A expenses were $7.0 million for the three
months ended March 31, 2005, or 8.5% of total net revenues, as
compared to $7.1 million, or 9.2% of
total net revenues, for the three months ended March 31, 2004. We currently expect to incur
incremental costs during the quarters ending June 30 and September 30, 2005 associated with our relocation of certain
operations from two of our Memphis, TN facilities to a new facility in Southaven, MS.
Interest
Expense, net
. Net interest expense was $0.3 million for the
three months ended March 31, 2005 as compared to $0.4 million for the three months ended March 31, 2004. The decrease in net
interest expense is primarily due to lower average loan balances, partially offset by the impact of
increased interest rates.
Income Taxes.
For the three months ended March 31, 2005 and 2004, we recorded a tax provision
of $0.2 million primarily associated with our subsidiary Supplies Distributors Canadian and
European operations. We did not record an income tax benefit associated with our consolidated net
loss in our U.S. operations. A valuation allowance has been provided for our net deferred tax
assets as of March 31, 2005, which are primarily related to our net operating loss carryforwards.
We did not record an income tax benefit for our PFSweb Canadian pre-tax losses in the current or
prior periods. Due to the consolidation of Supplies Distributors, in the future we anticipate that
we will continue to record an income tax provision associated with Supplies Distributors Canadian
and European results of operations.
Liquidity and Capital Resources
Net cash used in operating activities was $3.5 million for the three months ended March 31,
2005, and primarily resulted from a $2.0 million increase in inventories, a $2.1 million increase
in prepaid expenses, other receivables and other current assets and a $2.0 million decrease in
accounts payable, accrued expenses and other liabilities partially offset by a decrease in accounts
receivable of $1.3 million. The decrease in accounts payable was due to the timing of invoice
processing by one of our master distribution vendors and a decrease in certain liabilities due to
clients for unremitted funds collected on their behalf and reimbursable expense deposits. The
decrease in accounts receivable was primarily due to reduced revenue from our Supplies Distributors
business segment partially offset by increased service fee billings for certain client
relationships. Net cash used in operating activities was $0.8 million for the three months ended
March 31, 2004, and primarily resulted from a decrease in accounts payable, accrued expenses and other
liabilities of $1.3 million, an increase in accounts
receivable of $3.9 million and an increase in prepaid expenses,
other receivables and other current assets of $0.7 million,
partially offset by a $5.4 million decrease in inventory.
Net cash used in investing activities for the three months ended March 31, 2005 totaled $0.9
million, representing capital expenditures, offset by a decrease in restricted cash. Net cash
provided by investing activities for the three months ended March 31, 2004 totaled $0.9 million,
primarily representing capital expenditures. Capital expenditures have historically consisted
primarily of additions to upgrade our management information systems, and general expansion of our
facilities, both domestic and foreign. We
18
expect to incur capital expenditures to support new contracts and anticipated future growth
opportunities. Based on our current client business activity and our
targeted growth plans, we anticipate that our total
investment in upgrades and additions to facilities and information technology services for the
upcoming twelve months will be approximately $7 to $10 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 debt, operating or capital leases or additional equity. We may elect to modify or defer a
portion of such anticipated investments in the event that we do not obtain the financing or achieve
the revenue necessary to support such investments.
Net cash provided by financing activities was approximately $5.8 million for the three months
ended March 31, 2005, primarily representing $3.5 million of proceeds from debt, $1.7 million from
the issuance of common stock pursuant to our employee stock purchase and stock option programs and
warrant exercises and a $0.9 million decrease in restricted cash. Net cash provided by financing
activities was approximately $1.4 million for the three months ended March 31, 2004, primarily
representing proceeds from debt.
During
the three months ended March 31, 2005, our working capital increased to $23.4 million
from $22.6 million at December 31, 2004, primarily as a result of the issuance of common stock due
to the exercise of certain warrants. To obtain additional financing in the future, in addition to
our current cash position, we plan to evaluate various financing alternatives including the sale of
equity, utilizing capital or operating leases, borrowing under our credit facilities, expanding our
current credit facilities, entering into new debt agreements or transferring to third parties a
portion of our subordinated loan balance due from Supplies Distributors. In conjunction with
certain of these alternatives, we may be required to provide certain letters of credit to secure
these arrangements. No assurances can be given that we will be successful in obtaining any
additional financing or the terms thereof. We currently believe that our cash position, financing
available under our credit facilities and funds generated from operations (including our
anticipated revenue growth and/or cost reductions to offset lower than anticipated revenue growth)
will satisfy our presently known operating cash needs, our working capital and capital expenditure
requirements, our lease obligations, and additional subordinated loans to our subsidiary Supplies
Distributors, if necessary, for at least the next twelve months.
The following is a schedule of our total contractual cash obligations as of March 31, 2005,
which is comprised of operating leases, debt (including vendor
financing) and capital leases, including
interest (in millions):
In support of certain debt instruments and leases, as of March 31, 2005, we had $0.8
million of cash restricted as collateral for letters of credit. The letters of credit expire at
various dates through March 2007, the related debt and lease obligations termination dates. In
addition, as described above, we have provided collateralized guarantees to secure the repayment of
certain Supplies Distributors credit facilities. Many of our debt facilities include both
financial and non-financial covenants, and also include cross default provisions applicable to
other agreements. 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. Any requirement to accelerate the repayment of the credit facility
obligations would have a material adverse impact on our financial condition and results of
operations. We can provide no assurance that we will have the financial ability to repay all of
such obligations. As of March 31, 2005, we were in compliance with all debt covenants and we
believe that we will maintain such compliance throughout calendar year 2005. Other than those noted
herein, 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.
19
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.
Supplies Distributors has a short-term credit facility with IBM Credit LLC (IBM Credit) and
its European subsidiaries have a short-term credit facility with IBM Belgium Financial Services
S.A. (IBM Belgium) to finance their distribution of IBM products. We have provided a
collateralized guaranty to secure the repayment of these credit facilities. As of March 31, 2005,
the asset-based credit facilities provided financing for up to $31.0 million and up to 12.5 million
Euros (approximately $16.2 million) with IBM Credit and IBM Belgium, respectively. These agreements
expire in March 2006.
Supplies Distributors also has a loan and security agreement with Congress Financial
Corporation (Southwest) (Congress) to provide financing for up to $25 million of eligible
accounts receivables in the United States and Canada. The Congress facility expires on the earlier
of March 29, 2007 or the date on which the parties to the IBM master distributor agreement no
longer operate under the terms of such agreement and/or IBM 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 $9.7
million) of eligible accounts receivables through March 29, 2006. Borrowings under this agreement
can be either cash advances or straight loans, as defined.
These credit facilities contain cross default provisions, various restrictions upon the
ability of Supplies Distributors and its subsidiaries to, among other things, merge, consolidate,
sell assets, incur indebtedness, make loans and payments to related parties, provide guarantees,
make investments and loans, pledge assets, make changes to capital stock ownership structure and
pay dividends, as well as financial covenants, such as cash flow from operations, annualized
revenue to working capital, net profit after tax to revenue, minimum net worth and total
liabilities to tangible net worth, as defined, and are secured by all of the assets of Supplies
Distributors, as well as a collateralized guaranty of PFSweb. Additionally, we are required to
maintain a subordinated loan to Supplies Distributors of no less than $7.0 million, maintain
restricted cash of less than $5.0 million, are restricted with regard to transactions with related
parties, indebtedness and changes to capital stock ownership structure and a minimum shareholders
equity of at least $18.0 million. Furthermore, we are obligated to repay any over-advance made to
Supplies Distributors or its subsidiaries under these facilities if they are unable to do so. We
have also provided a guarantee of the obligations of Supplies Distributors and its subsidiaries to
IBM, excluding the trade payables that are financed by IBM credit.
Our subsidiary, Priority Fulfillment Services, Inc. (PFS), has entered into a Loan and
Security Agreement with Comerica Bank (Comerica), which provides for up to $5.0 million of
eligible accounts receivable financing through March 2007, and up to $2.5 million of eligible
equipment purchases through June 2008 (of which $0.2 million was available at March, 2005). We
entered this Agreement to supplement our existing cash position, and provide funding for our 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 related parties, make investments and loans, pledge
assets, make changes to capital stock ownership structure, as well as financial covenants of a
minimum tangible net worth of $20 million, as defined, and a minimum liquidity ratio, as defined.
The agreement also limits our ability to increase the subordinated loan to Supplies Distributors to
more than $8.0 million without the lenders approval. The agreement is secured by all of the assets
of PFS, as well as a guarantee of PFSweb.
In 2003, we entered into a Securities Purchase Agreement with certain institutional investors
in a private placement transaction pursuant to which we issued and sold an aggregate of 1.6 million
shares of our common stock, par value $.001 per share (the Common Stock), at $2.16 per share,
resulting in gross proceeds of $3.4 million. After deducting expenses, the net proceeds were
approximately $3.2 million. In addition to the Common Stock, the investors received one-year
warrants to purchase an aggregate 525,692 shares of Common Stock at an exercise price of $3.25 per
share and four-year warrants to purchase an
20
aggregate of 395,486 shares of Common Stock at an exercise price of $3.30 per share. In
January 2005, 394,865 of the one-year warrants were exercised prior to their expiration, generating
net proceeds to us of $1.3 million. We intend to use the net proceeds from the private placement
and warrant exercises for general working capital purposes.
In 2004, to fulfill our obligations under certain new client relationships, we entered into a
three-year operating lease arrangement for a new distribution facility in Southaven, MS, near our
existing distribution complex in Memphis, TN. Additionally, we incurred additional capital
expenditures during 2004, primarily to support the incremental business in this new distribution
center. Upon completion, which is expected to occur during the second quarter of 2005, we expect
the total capital expenditures to support this facility will total approximately $6 million. We
financed a significant portion of these expenditures via a Loan Agreement with the Mississippi
Business Finance Corporation (the MBFC) pursuant to which the MBFC issued $5 million MBFC Taxable
Variable Rate Demand Limited Obligation Revenue Bonds, Series 2004 (Priority Fulfillment Services,
Inc. Project) (the Bonds). The MBFC loaned us the proceeds of the Bonds for the purpose of
financing the acquisition and installation of equipment, machinery and related assets located in
our new Southaven, Mississippi distribution facility. The primary source of repayment of the Bonds
is a letter of credit (the Letter of Credit) in the initial face amount of $5.1 million issued by
Comerica pursuant to a Reimbursement Agreement between us and Comerica under which we are obligated
to pay to Comerica all amounts drawn under the Letter of Credit. The Letter of Credit has an
initial maturity date of December 2006 at which time, if not renewed or replaced, will result in a
draw on the undrawn face amount thereof.
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. We
plan to dispute the notice. If the dispute is not resolved favorably, we could be assessed
additional taxes for calendar years 2004 and 2005. We have not accrued for the additional taxes,
which through March 31, 2005 could be $0.4 million to $0.5 million for 2004 and $0.1 million for
2005, as we do not believe that it is probable that an additional assessment will be incurred.
In
April 2005, we entered into a five-year operating lease arrangement
for a new distribution facility in Southaven, MS, near our existing
facility in Southaven, MS.
On May 9, 2005, a lawsuit was filed in the District Court of Collin County, Texas, by J. Gregg
Pritchard, as Trustee of the D.I.C. Creditors Trust, naming the former directors of Daisytek
International Corporation and the Company as defendants. Daisytek filed for bankruptcy in May 2003
and the Trust was created pursuant to Daisyteks Plan of Liquidation. The complaint alleges, among
other things, that the spin-off of the Company from Daisytek in December 1999 was a fraudulent
conveyance and that Daisytek was damaged thereby in the amount of at least $38 million. We believe
the claim has no merit and intend to vigorously defend the action.
Seasonality
The seasonality of our business is dependent upon the seasonality of our clients business and
sales of their products. Accordingly, our management must rely upon the projections of our clients
in assessing quarterly variability. We believe that with our current client mix and their current
business volumes, our service fee business activity will be at it lowest in the quarter ended March
31. However due to product release schedule changes from certain of our clients, we believe this
seasonal impact will not be as significant in 2005 as it has been in prior years. We anticipate
that our product revenue will be highest during the quarter ended December 31.
We believe that results of operations for a quarterly period may not be indicative of the
results for any other quarter or for the full year.
Inflation
Management believes that inflation has not had a material effect on our operations.
21
Critical Accounting Policies
A description of critical accounting policies is included in Note 2 to the accompanying
unaudited interim condensed consolidated financial statements. For other significant accounting
policies, see Note 2 to the consolidated financial statements in our December 31, 2004 Annual
Report on Form 10-K.
22
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
We are exposed to various market risks including interest rates on its financial instruments
and foreign exchange rates.
Interest Rate Risk
Our interest rate risk is limited to our outstanding balances on our inventory and working
capital financing agreements, taxable revenue bonds, loan and security agreements and factoring
agreement for the financing of inventory, accounts receivable and certain other receivables and
certain equipment, which amounted to $65.2 million at March 31, 2005. A 100 basis point movement in
interest rates would result in approximately $0.3 million annualized increase or decrease in
interest expense based on the outstanding balance of these agreements at March 31, 2005.
Foreign Exchange Risk
Currently, our foreign currency exchange rate risk is primarily limited to the Canadian Dollar
and the Euro. In the future, our foreign currency exchange risk may also include other currencies
applicable to certain of our international operations. We have and may continue, from time to
time, to employ derivative financial instruments to manage our exposure to fluctuations in foreign
currency rates. To hedge our net investment and intercompany payable or receivable balances in
foreign operations, we may enter into forward currency exchange contracts.
ITEM 4. Controls and Procedures
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, within 90 days prior to the filing date of this report. 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.
23
Table of Contents
Three Months Ended
March 31,
2005
2004
$
63,630
$
68,570
14,085
7,131
4,150
1,784
81,865
77,485
59,637
64,453
10,768
5,253
4,150
1,784
74,555
71,490
7,310
5,995
6,966
7,132
344
(1,137
)
319
428
25
(1,565
)
239
202
$
(214
)
$
(1,767
)
$
(0.01
)
$
(0.08
)
22,136
21,186
Table of Contents
(In Thousands)
Table of Contents
Table of Contents
Table of Contents
Three Months Ended
March 31,
2005
2004
(In thousands, except per share amts)
$
(214
)
$
(1,767
)
(201
)
(108
)
$
(415
)
$
(1,875
)
$
(0.01
)
$
(0.08
)
$
(0.02
)
$
(0.08
)
Three Months Ended
March 31
2005
2004
$
(214
)
$
(1,767
)
(542
)
(281
)
$
(756
)
$
(2,048
)
Table of Contents
March 31,
December 31,
2005
2004
$
26,522
$
26,962
12,347
13,110
$
38,869
$
40,072
Table of Contents
March 31,
December 31,
2005
2004
$
13,250
$
8,328
5,375
4,853
2,415
3,848
5,000
5,000
3,117
3,141
682
418
478
29,575
26,330
22,625
19,098
$
6,950
$
7,232
Table of Contents
Table of Contents
Three Months Ended
March 31,
2005
2004
$
20,365
$
11,037
63,630
68,570
(2,130
)
(2,122
)
$
81,865
$
77,485
$
(1,334
)
$
(2,821
)
1,678
1,677
7
$
344
$
(1,137
)
$
1,503
$
1,119
14
(7
)
$
1,503
$
1,126
$
2,073
$
956
$
2,073
$
956
Table of Contents
March 31,
December 31,
2005
2004
$
59,131
$
56,610
87,551
88,548
(15,203
)
(14,831
)
$
131,479
$
130,327
Table of Contents
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 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 the market for our services;
trends in e-commerce;
whether we can continue and manage growth;
changes in the trend toward outsourcing;
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 unknown effects of possible system failures and rapid changes in technology;
trends in government regulation both foreign and domestic;
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 rules regarding revenue recognition, stock
options and other matters;
changes in accounting rules or the interpretations of those rules;
our ability to raise additional capital or obtain additional financing; and
our ability or the ability of our subsidiaries to borrow under current financing
arrangements and maintain compliance with debt covenants.
Table of Contents
Table of Contents
Table of Contents
Three Months Ended
March 31,
2005
2004
(Unaudited)
(Unaudited)
77.7
%
88.5
%
17.2
9.2
5.1
2.3
100.0
100.0
93.7
94.0
76.5
73.7
100.0
100.0
91.1
92.3
8.9
7.7
8.5
9.2
0.4
(1.5
)
0.4
0.5
0.0
(2.0
)
0.3
0.3
(0.3
)%
(2.3
)%
Three
Months
$
7.1
4.6
2.9
(0.5
)
$
14.1
Table of Contents
Table of Contents
Payments Due By Period
Less than
1 - 3
3 - 5
More than
Contractual Obligations
Total
1 Year
Years
Years
5 Years
$
65,652
$
59,821
$
2,631
$
3,200
$
2,995
1,279
1,716
19,815
6,211
12,144
1,251
209
$
88,462
$
67,311
$
16,491
$
4,451
$
209
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Table of Contents
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
None
ITEM 2. Changes in Securities and Use of Proceeds
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibits:
b) Reports on Form 8-K:
Form 8-K furnished on March 4, 2005 reporting Item 12, Results of Operations and Financial
Condition, that on March 4, 2005, PFSweb, Inc. issued a press release announcing its financial
results for the year ended December 31, 2004.
24
Exhibit
No.
Description of Exhibits
Amended and Restated Certificate of Incorporation
Amended and Restated Bylaws
Amendment 5 to Amended and Restated Platinum Plan Agreement
Agreement for IBM Global Financing Platinum Plan Invoice Discounting Schedule
Amendment No. 5 to Agreement for Inventory Financing
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
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
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
*
Incorporated by reference from PFSweb, Inc. Registration Statement on Form S-1 (Commission File
No. 333-87657).
**
Filed herewith
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 16, 2005
25
PFSweb, Inc.
By:
/s/ Thomas J. Madden
Thomas J. Madden
Chief Financial Officer,
Chief Accounting Officer,
Executive Vice President
Table of Contents
INDEX TO EXHIBITS
26
Exhibit
No.
Description of Exhibits
Amended and Restated Certificate of Incorporation
Amended and Restated Bylaws
Amendment 5 to Amended and Restated Platinum Plan Agreement
Agreement for IBM Global Financing Platinum Plan Invoice Discounting Schedule
Amendment No. 5 to Agreement for Inventory Financing
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
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
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
*
Incorporated by reference from PFSweb, Inc. Registration Statement on Form S-1 (Commission File
No. 333-87657).
**
Filed herewith
EXHIBIT 10.1
AMENDMENT 5
TO
AMENDED AND RESTATED PLATINUM PLAN AGREEMENT (WITH INVOICE DISCOUNTING)
This Amendment 5 (Amendment) dated March 30, 2005 is made to the AMENDED AND RESTATED PLATINUM PLAN AGREEMENT (WITH INVOICE DISCOUNTING) by and among IBM BELGIUM FINANCIAL SERVICES S.A ., with a registered number of R.C. Brussels 451.673 with an address of Avenue du Bourget 42, BE- 1130 Brussels VAT BE 424300467 ( IBM GF or us ), Suppliers Distributors S.A. with a registered number of RC Liege 208795 with an address of Rue Louis Blériot 5, B-4460 Gráce-Hollogne, Belgium (SDSA), and Business Supplies Distributors Europe BV a Netherlands company registered in Maastricht with a Netherlands trade registration number of HR Maastricht 14062763 with an address of Dalderhaag 13, 6136 Sittard, The Netherlands (BSDE) (SDSA and BSDE collectively, you ), PFS Web B.V a Netherlands company registered in Maastricht under the number 17109541 with a Belgian trade registration number of R.C. Liege 204162 (PFS Web B.V.) (SDSA, BSDE and PFS Web B.V. collectively, the Loan Parties )
RECITALS:
A. The Loan Parties and IBM GF have entered into that certain AMENDED AND RESTATED PLATINUM PLAN AGREEMENT (WITH INVOICE DISCOUNTING) dated as of March 29, 2002 (as amended and modified from time to time, the Agreement);
B. The Loan Parties have requested and IBM GF has agreed to extend the Agreement for twelve months;
C. The Loan Parties agree to certain financial covenants revisions by IBM GF; and
D. | The parties have agreed to modify the Agreement as more specifically set forth below, upon and subject to the terms and conditions set forth herein. |
AGREEMENT
NOW THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, IBM GF and the Loan Parties hereby agree as follows:
Section 1. Definitions. All capitalized terms not otherwise defined herein shall have the respective meanings set forth in the Agreement.
Section 2. Amendment. Subject to Section 4 hereof, the Agreement is hereby amended as follows:
A. The Agreement is hereby amended as follows:
(a) Section 1.1 is hereby amended by adding the following definition:
Termination Date : means March 31, 2006 or such other date as to which IBM GF and the Loan Parties may agree from time to time.
(b) Section 8.2.7 is hereby amended by deleting it in its entirety and substituting, in lieu thereof, the following:
Financial Covenants
Page 1 of 5
You agree to comply with the Financial Covenants, if any, set out in the relevant supplements or the Schedule. You also agree that you will not, without our consent, make any of the following payments (Restricted Payments) without our prior written consent (i) declare or pay any dividend (other than dividends payable solely in common stock of BSDE and/or SDSA and the aggregate amount of such dividends under this Agreement and the AIF does not cause you or Holdings to violate such Financial Covenants on, or make any payment on account of, or set apart assets for a sinking or other analogous fund for, the purchase, redemption, defeasance, retirement or other acquisition of, any shares of any class of capital stock of BSDE and/or SDSA or any warrants, options or rights to purchase any such capital stock or Equity Interests, whether now or hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of BSDE and/or SDSA ; or (ii) make any optional payment or prepayment on or redemption (including, without limitation, by making payments to a sinking or analogous fund) or repurchase of any Indebtedness (other than the Obligations)), except as permitted by the Amended and Restated Notes Payable Subordination Agreement. However, as long as you are not in violation with any such Financial Covenants prior to or subsequent to the following transactions, (i) BSDE may pay cash dividends to Supplies Distributors, Inc. up to an amount not to exceed BSDEs liquidation value, and (ii) SDSA may pay cash dividends in an amount not to exceed 600,000 euros to Supplies Distributors, Inc. in fiscal year 2005.
(c) Section 10.1 is hereby amended by deleting it in its entirety and substituting, in lieu thereof, the following:
This Agreement will remain in force until the Termination Date. However following the occurrence of an Event of Default that we have not waived in writing we may by notice with immediate effect terminate this Agreement. Upon any termination of this Agreement we shall have all the rights and remedies set out in Clause 9.2 until the complete discharge of all the Loan Parties obligations to us. Any such termination shall not affect any right we have in relation to the IBM Reimbursables and IBM Receivables or the Receivables Rights and the Supplier Obligations and the Product Rights.
B. The Schedule to the Agreement is hereby amended by deleting such Schedule in its entirety and substituting, in lieu thereof, the Schedule attached hereto. Such new Schedule shall be effective as of the date specified in the new Schedule. The changes contained in the new Schedule include, without limitation, the following:
Credit Line : 12,500,000
VAT Receivables: Deleted from Collateral Valuation
Prepayment Percentage: (i) 80% of Eligible IBM Reimbursables (1) and (ii) 80% or Eligible IBM Receivables
Collateral Value of Stock-in-Trade: (A) 100% of paid for IBM Printing Systems Division inventory (other than (a) machines which IBM Printing Systems Division has declared obsolete at least 60 days prior to the date of determination and (b) service parts) which (i) we have purchased the associated Supplier Invoice from the Authorised Supplier on or after the Closing Date (ii) purchased directly from IBM prior to the Closing Date and not subject to retention of title, provided, however, we have a first priority security interest in such inventory, (iii) is repurchasable under a repurchase agreement with the Authorized Supplier and (iv) is secured and managed through a pledge with Disposition, with coverage percentage acceptable to us (such acceptable percentage to be determined by us within 60 days of the date this Schedule is executed)The value to be assigned to such inventory shall be based upon the Supplier Invoice net of all applicable credit notes.
Page 2 of 5
Financial Covenant Definitions: Changed for net Profit After Tax, Revenue and Working Capital Turnover.
Covenant
Covenant Requirement
(i)
Debt to Tangible Net Worth
Greater than Zero and
Less than 7.0:1.0
(ii)
Net Profit after Tax to Revenue
Greater than 0.10 percent
(iii)
Working Capital Turnover (WCTO)
Greater than Zero and
Less than 43.0:1.0
PFSweb, Inc. will be required to maintain the following financial ratios, percentages and amounts as of the last day of the fiscal period under review (quarterly and annually) by IBM Credit:
Covenant | ||||||||||
Covenant | Requirement | Date as of | ||||||||
(i) | Minimum Tangible Net Worth | $ | 18,000,000.00 | 03/31/04 and beyond |
|
Section 3. Conditions of Effectiveness of Consent and Amendment. This Amendment shall have been authorized, executed and delivered by each of the parties hereto and IBM GF shall have received a copy of a fully executed Amendment.
Section 4. Representations and Warranties. Each Loan Party makes to IBM GF the following representations and warranties all of which are material and are made to induce IBM GF to enter into this Amendment.
Section 4.1 Accuracy and Completeness of Warranties and Representations. All representations made by the Loan Party in the Agreement were true and accurate and complete in every respect as of the date made, and, as amended by this Amendment, all representations made by the Loan Party in the Agreement are true, accurate and complete in every material respect as of the date hereof, and do not fail to disclose any material fact necessary to make representations not misleading.
Section 4.2 Violation of Other Agreements . The execution and delivery of this Amendment and the performance and observance of the covenants to be performed and observed hereunder do not violate or cause any Loan Party not to be in compliance with the terms of any agreement to which such Loan Party is a party.
Section 4.3 Litigation. Except as has been disclosed by the Loan Party to IBM GF in writing, there is no litigation, proceeding, investigation or labor dispute pending or threatened against any Loan Party, which, if adversely determined, would materially adversely affect the Loan Partys ability to perform such Loan Partys obligations under the Agreement and the other documents, instruments and agreements executed in connection therewith or pursuant hereto.
Section 4.4 Enforceability of Amendment. This Amendment has been duly authorized, executed and delivered by each Loan Party and is enforceable against each Loan Party in accordance with its terms.
Page 3 of 5
Section 5. Ratification of Agreement. Except as specifically amended hereby, all of the provisions of the Agreement shall remain unamended and in full force and effect. Each Loan Party hereby ratifies, confirms and agrees that the Agreement, as amended hereby, represents a valid and enforceable obligation of such Loan Party, and is not subject to any claims, offsets or defenses.
Section 6. Ratification of Guaranty.
Each of Holdings, SDI, PFSweb and PFS hereby ratify and
confirm their respective guaranties in favor of IBM GF and agree that such guaranties remain in
full force and effect and that the term Liabilities, as used therein include, without limitation
the indebtedness liabilities and obligations of SDSA and BSDE under the Agreement as amended
hereby. SDI hereby ratifies and confirms its Notes Payable Subordination Agreement executed by SDI
on March 29, 2002 and confirms such Notes Payable Subordination Agreement remains in full force and
effect.
Section 7. Governing Law.
This Amendment shall be governed by and interpreted in accordance with
the laws which govern the Agreement.
Section 8. Counterparts.
This Amendment may be executed in any number of counterparts, each of
which shall be an original and all of which shall constitute one agreement.
IN WITNESS WHEREOF,
each Loan Party has read this entire Amendment, and has caused its
authorized representatives to execute this Amendment and has caused its corporate seal, if any, to
be affixed hereto as of the date first written above.
Page 4 of 5
Print Name: | ||||||||||
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Title: | ||||||||||
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Page 5 of 5
EXHIBIT 10.2
Agreement for IBM Global Financing Platinum Plan
Invoice Discounting Schedule
Supplies Distributors S.A./Business Supplies Distributors Europe B.V.
Your Name
|
Supplies Distributors S.A. and Business Supplies Distributors Europe B.V. | Schedule Number | 5 | ||||||||
Your Number
|
SDSA RC Liege 208795 BSDE HR Maastricht 14062763 | Effective date of Schedule | 30 March 2005 | ||||||||
Credit Limit
|
12,500,000 | Commencement Date | 27 September 2001 | ||||||||
No Charge Period
|
IBM 45 days |
Prepayment
Percentage |
(i) 80% of Eligible
IBM Reimbursables
(1)
(ii) 80% of Eligible IBM Receivables |
||||||||
Collateral Value of Stock-in-Trade
(A) | 100% of paid for IBM Printing Sytems Division inventory (other than (a) machines which IBM Printing Systems Division has declared obsolete at least 60 days prior to the date of determination and (b) service parts) which (i) we have purchased the associated Supplier Invoice from the Authorised Supplier on or after the Closing Date (ii) purchased directly from IBM prior to the Closing Date and not subject to retention of title, provided, however, we have a first priority security interest in such inventory, (iii) is repurchasable under a repurchase agreement with the Authorized Supplier and (iv) is secured and managed through a pledge with Dispostion, with coverage percentage acceptable to us (such acceptable percentage to be determined by us within 60 days of the date this Schedule is executed)The value to be assigned to such inventory shall be based upon the Supplier Invoice net of all applicable credit notes. | |
(B) | IBM Ireland is added as Authorised Supplier as well as IBM Endicott and IBM Singapore |
1
FINANCE CHARGES (2) | |||||
Base Rate (3)
|
EURIBOR | ||||
Discount Charge (5)
|
Base Rate plus 2.0.% | ||||
Default Rate
|
Base Rate plus 7% | ||||
Shortfall Fee
|
0.30% of Shortfall Amount | ||||
Banking Transfer
Charge
|
Nil | ||||
Service Fee per
Notification
|
N/A | ||||
Monthly Service
Fee, Set up Fee
|
1,500 plus VAT per month | ||||
Survey Fee
|
5,000 plus VAT per IBM GF survey | ||||
Security Filing Fee
|
Any fees required as a result of Uniform Commercial Code filings in US in connection with Collateralised Guarantees granted by SDI, Holdings and PFS | ||||
Unused Line Fee
|
Equal to thirty seven and one half (37.5) basis points times the weekly average unused portion of the Credit Line, accruable from the closing date and computed on the basis of a 360-day year, payable quarterly in arrears and upon the maturity or termination of the Credit Line | ||||
Extended Credit
Charge
|
Base Rate plus 2.00% | ||||
REPORTING
|
|||||
Audited Accounts (4)
|
90 days after fiscal year | ||||
Management
(unaudited) Accounts
|
35 days after fiscal calendar quarter | ||||
Collateral Management
Report
|
10 days after calendar month | ||||
Aged Creditor Report
|
10 days after calendar month | ||||
Stock Report
|
10 days after calendar month | ||||
Fixed Asset Register
|
10 days after calendar month | ||||
Surveys
|
A maximum of 4 times per year and not more than one per quarter | ||||
Financial Covenant
Compliance
Certificate from both
SDSA and Holdings
|
45 days after fiscal period | ||||
Extended Credit Period
|
in 10 day increments up to 30 days | ||||
Maximum Amount of
Prepayments
|
The maximum principal amount of Prepayments that may be outstanding at any time shall be Euros 1,500,000 | ||||
2
ADDITIONAL COLLATERAL
|
|||||
This Agreement
|
|||||
Stock Pledge Agreement among
Supplies Distributors, Inc
(SDI), and IBM GF, whereby
SDI pledges 65% of its shares
in SDSA and BSDE to IBM GF
|
Amended and Restated Stock Pledge | ||||
Liens: Charges: Pledges:
Fixed and Floating Charge over
all inventory of SDSA and BSDE
and Convention de Gage of SDSA
to be registered at Commercial
Court
|
As provided by us | ||||
Guarantees of payment of
amounts due under the
agreement.
|
Amended and Restated Collateralised
Guarantees from PFS, Holdings, and SDI
Amended and Restated Corporate Guaranty from PFSweb |
||||
Amended and Restated Notes
Payable Subordination from SDI
in respect of SDSA
|
As provided by us | ||||
Opinion of Counsel
|
a favourable opinion of counsel for Loan Parties (to be provided post closing) in substantially the form provided to you by us satisfactory to us and from counsel satisfactory to it;. | ||||
Certificate of Authority
|
a certificate of the secretary or an assistant secretary of each Loan Party as applicable, certifying that, among other items, (i) BSDE and PFS Web B.V. are duly organized under the laws of the Netherlands and are registered to conduct business in Belgium, (ii) SDSA is duly organized under the laws of the Kingdom of Belgium and registered to do business there (iii) true and complete copies of the articles of incorporation, or corresponding organizational documents, as applicable, and your by-laws are delivered therewith, together with all amendments and addenda thereto as in effect on the date thereof, (iv) the resolution as stated in the certificate is a true, accurate and compared copy of the resolution adopted by your Board of Directors authorizing the execution, delivery and performance of this Agreement and each other document executed and delivered in connection herewith, and (v) the names and true signatures of your officers authorized to sign this Agreement and the other documents; | ||||
Miscellaneous
|
Listing of all
creditors (if any) providing accounts
receivable financing to you;
|
||||
|
A duly executed compliance
certificate as to your compliance with
the financial covenants set forth below
as of the last fiscal month you have
published financial statements;
|
||||
|
A copy of an all-risk
insurance certificate pursuant to Clause
8.2.5 of the Agreement.
|
||||
3
OTHER CONDITIONS
1. Valid and enforceable customary documentation for the Collateral provided by BSDE, SDSA and PFS Web B.V.
2. Any strategic changes in the structure of the group, significant management changes and/or any major changes in Capex/investment plans to be advised to IBM GF immediately.
3. Prepayments under the Platinum Plan are not to be used for early repayment of commercial loans.
4. The Financial Statements of SDSA and BSDA as of Closing Date in form and substance satisfactory to us in our sole discretion;
5. A certified copy of the current organization chart of Loan Parties;
6. Evidence satisfactory to us that UCC-1 statements have been filed against SDI, Holdings and PFS with IBM GF as the Lien holder;
7. IBM Credit is satisfied that all conditions precedent in accordance with the AIF have been met; and
8. Liquidation of BSD Europe B.V. is approved on terms that SDSA acknowledges that it will remain liable solely for all obligations owed or be come owing by both entities currently under this Agreement.
FINANCIAL COVENANTS
SDSA and BSDE will be required, on a consolidated basis, to maintain the following
financial ratios, percentages and amounts on a year to date basis as of the last day of
the fiscal period under review (quarterly and annually) by us and IBM Credit:
Covenant
Covenant Requirement
(i)
Debt to Tangible Net Worth
Greater than Zero and
Less than 7.0:1.0
(ii)
(iii)
Net Profit after Tax to Revenue
Working Capital Turnover (WCTO)
Greater than 0.10 percent
Greater than Zero and
Less than 43.0:1.0
PFSweb, Inc. will be required to maintain the following financial ratios, percentages and amounts as of the last day of the fiscal period under review ( quarterly and annually) by IBM Credit:
Covenant | Covenant Requirement | |||||
(v) | Tangible Net Worth | Greater than $18,000,000.00 for period ending 03/31/04 and beyond. |
|
FINANCIAL COVENANT DEFINITIONS
The following terms shall have the following respective meanings in this Schedule. All amounts shall be determined in accordance with generally accepted accounting principles (GAAP).
Consolidated Net Income shall mean, for any period, the consolidated net income (or loss), after taxes, of SDSA and BSDE on a consolidated basis for such period determined in accordance with GAAP.
Current shall mean within the ongoing twelve-month period.
Current Assets shall mean assets that are cash or expected to become cash within the ongoing twelve months.
4
Current Liabilities shall mean payment obligations resulting from past or current transactions that require settlement within the ongoing twelve-month period. All indebtedness to IBM GF shall be considered a Current Liability for purposes of determining compliance with the Financial Covenants.
Debt shall mean all liabilities or obligations to pay another person/company a certain amount at a specified date excluding subordinated debt.
Long Term shall mean beyond the ongoing twelve-month period.
Long Term Assets shall mean assets that take longer than a year to be converted to cash. They are divided into four categories: tangible assets, investments, intangibles and other.
Long Term Debt shall mean payment obligations of indebtedness which mature more than twelve months from the date of determination, or mature within twelve months from such date but are renewable or extendible at the option of the debtor to a date more than twelve months from the date of determination.
Net Profit after Tax shall mean Revenue plus all other income, minus all costs (excluding amortization of good will), including applicable taxes, excluding currency adjustments for each period (other than for annual periods to the extent required by GAAP).
Revenue shall mean the monetary expression of the aggregate of products or services transferred by an enterprise to its customers (excluding intercompany transactions) for which said customers have paid or are obligated to pay, plus other income as allowed.
Subordinated Debt shall mean SDSAs indebtedness to third parties as evidenced by an executed Notes Payable Subordination Agreement in favor of IBM GF (all Subordinated Debt shall not be considered Current Liabilities).
Tangible Net Worth shall mean Total Net Worth minus goodwill
Total Assets shall mean the total of Current Assets and Long Term Assets.
Total Liabilities shall mean the Current Liabilities and Long Term Debt less Subordinated Debt, resulting from past or current transactions, that require settlement in the future.
Total Net Worth (the amount of owners or stockholders ownership in an enterprise) is equal to Total Assets minus Total Liabilities.
Working Capital shall mean Current Assets minus Current Liabilities.
Working Capital Turnover (WCTO) shall mean annualised Revenue divided by Working Capital.
5
Addresses
Pursuant to Clause 11.9 of the Agreement, the following are the addresses of the parties to the Agreement:
(i) if to IBM GF:
|
(ii) if to SDSA: | ||||
|
|||||
IBM Belgium Financial Services S.A.
Avenue du Bourget , BE- 42 1130 Brussels VAT BE 424300467 |
Supplies Distributors S.A.
Rue Louis Blériot 5 B-4460 Gráce-Hollogne Belgium : |
||||
(iii) if to BSDE:
|
(iv) if to PFS Web B.V. | ||||
|
|||||
Business Supplies Distributors Europe BV
Dalderhaag 13 6136 KM Sittard The Nederlands |
PFS Web B.V.
c/o SDSA |
Footnotes:
(1) | The maximum value for collateral representing IBM Reimbursables is 2 million. |
(2) | All charges are exclusive of any taxes and duties. You agree to pay all applicable taxes and duties. |
(3) | EURIBOR, is the one month rate for Euros determined by the Banking Federation of the European Union appearing on Reuters page 01 at or about 11:00 am (Central European Time) on the relevant day. Reuters page 01 means the display designated as Page 01 on the Reuters Service (or such other page as may replace Page 01 on that service or such other service as may replace it). On the first Business Day of a calendar month the Base Rate will be changed to EURIBOR appearing for the last Business Day of the previous calendar month. If at any time, EURIBOR changes by 0.25% or more, the Base Rate will be changed by the same amount on the day of such change or the next following Business Day. Charges accruing from day to day will be calculated on the basis of a year of 360 days and the actual number of days elapsed. If the Due Date for payment in Euros is not a day on which settlement in Euros can be effected, the payment will be made on the preceding Business Day on which settlement can be effected. |
(4) | Audited Accounts within 90 days of fiscal year end. Revised business plans/budgets will also be required at this time to enable an annual facility and covenant review to be effected by us |
6
By signing below all parties accept the terms of the Schedule. This Schedule amends and replaces any Schedule issued and/or dated previously to this one.
7
EXHIBIT 10.3
AMENDMENT NO. 5
TO
AGREEMENT FOR INVENTORY FINANCING
This Amendment No. 5 (Amendment) to the Agreement for Inventory Financing is made as of February 28, 2005 by and among IBM Credit LLC , a Delaware limited liability company, formerly IBM Credit Corporation (IBM Credit), Business Supplies Distributors Holdings, LLC , a limited liability company duly organized under the laws of the state of Delaware (Holdings), Supplies Distributors, Inc. (formerly known as BSD Acquisition Corp.), a corporation duly organized under the laws of the state of Delaware (Borrower), Priority Fulfillment Services, Inc. , a corporation duly organized under the laws of the state of Delaware (PFS) and PFSweb, Inc. , a corporation duly organized under the laws of the state of Delaware (PFSweb) (Borrower, Holdings, PFS, PFSweb, and any other entity that executes this Agreement or any Other Document, including without limitation all Guarantors, are each individually referred to as a Loan Party and collectively referred to as Loan Parties).
RECITALS:
A. Each Loan Party and IBM Credit have entered into that certain Agreement for Inventory Financing dated as of March 29, 2002 (as amended, supplemented or otherwise modified from time to time, the Agreement); and
B. The parties have agreed to modify the Agreement as more specifically set forth below, upon and subject to the terms and conditions set forth herein.
AGREEMENT
NOW THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Borrower, the other Loan Parties and IBM Credit hereby agree as follows:
Section 1. Definitions. All capitalized terms not otherwise defined herein shall have the respective meanings set forth in the Agreement.
Section 2. Amendment.
Subject to the satisfaction of the conditions precedents set forth in Section 3 hereof, the Agreement is hereby amended as follows:
A. Section 1 of the Agreement is hereby amended by amending the definition of Termination Date to read in its entirety as follows:
Termination Date: shall mean March 31, 2006 or such other date as IBM Credit and the Borrower may agree to from time to time in writing.
B. Agreement is further hereby amended by amending by deleting Section 8.6 in its entirety and substituting, in lieu thereof, the following:
8.6. Restricted Payments. Borrower will not, directly or indirectly make any of the following payments (Restricted Payments) without prior written consent from IBM Credit, which shall not be unreasonably delayed or denied: (i) declare or pay any dividend (other than dividends payable solely in common stock of Borrower) on, or make any payment on account of, or set apart assets for a sinking or other analogous fund for, the purchase, redemption, defeasance, retirement or other acquisition of, any shares of any class of capital stock of Borrower or any warrants, options or rights to purchase any such capital stock or Equity Interests, whether now or hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash or
Page 1 of 3
property or in obligations of Borrower; or (ii) make any optional payment or prepayment on or redemption (including, without limitation, by making payments to a sinking or analogous fund) or repurchase of any Indebtedness (other than the Obligations), provided , however, that Borrower (a) may in the ordinary course administration thereof make payments on the revolving loans made by Congress pursuant to the Congress Credit Agreement, except as permitted by the Amended and Restated Notes Payable Subordination Agreement and (b) may in fiscal year 2005 pay cash dividends not to exceed the aggregate of One Million Dollars ($1,000,000.00) plus the United States Dollar equivalent of dividends the Borrower receives in fiscal year 2005 from BSD Europe.
Section 3. Conditions of Effectiveness of Amendment. This Amendment shall become effective upon the receipt by IBM Credit of this Amendment that shall have been authorized, executed and delivered by each of the parties hereto and IBM Credit shall have received a copy of such fully executed Amendment.
Section 4. Representations and Warranties. Each Loan Party makes to IBM Credit the following representations and warranties all of which are material and are made to induce IBM Credit to enter into this Amendment.
Section 4.1 Accuracy and Completeness of Warranties and Representations. All representations made by the Loan Party in the Agreement were true and accurate and complete in every respect as of the date made, and, as amended by this Amendment, all representations made by the Loan Party in the Agreement are true, accurate and complete in every material respect as of the date hereof, and do not fail to disclose any material fact necessary to make representations not misleading.
Section 4.2 Violation of Other Agreements and Consent. The execution and delivery of this Amendment and the performance and observance of the covenants to be performed and observed hereunder (a) do not violate or cause any Loan Party not to be in compliance with the terms of any agreement to which such Loan Party is a party, and (b) require the consent of any Person.
Section 4.3 Litigation. Except as has been disclosed by the Loan Party to IBM Credit in writing, there is no litigation, proceeding, investigation or labor dispute pending or threatened against any Loan Party, which, if adversely determined, would materially adversely affect the Loan Partys ability to perform such Loan Partys obligations under the Agreement and the other documents, instruments and agreements executed in connection therewith or pursuant hereto.
Section 4.4 Enforceability of Amendment. This Amendment has been duly authorized, executed and delivered by each Loan Party and is enforceable against each Loan Party in accordance with its terms.
Section 5. Ratification of Agreement. Except as specifically amended hereby, all of the provisions of the Agreement shall remain unamended and in full force and effect. Each Loan Party hereby ratifies, confirms and agrees that the Agreement, as amended hereby, represents a valid and enforceable obligation of such Loan Party, and is not subject to any claims, offsets or defenses.
Section 6. Ratification of Guaranty and Notes Payable Subordination Agreement. Each of Holdings, PFSweb and PFS hereby ratify and confirm their respective guaranties in favor of IBM Credit and agree that such guaranties remain in full force and effect and that the term Liabilities, as used therein include, without limitation the indebtedness liabilities and obligations of the Borrower under the Agreement as amended hereby.
Section 7. Governing Law. This Amendment shall be governed by and interpreted in accordance with the laws which govern the Agreement.
Page 2 of 3
Section 8. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be an original and all of which shall constitute one agreement.
IN WITNESS WHEREOF, each Loan Party has read this entire Amendment, and has caused its authorized representatives to execute this Amendment and has caused its corporate seal, if any, to be affixed hereto as of the date first written above.
IBM Credit LLC | Supplies Distributors, Inc. | |||
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[PLEASE PRINT NAME & TITLE] | [PLEASE PRINT NAME & TITLE] | |||
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Priority Fulfillment Services, Inc. | ||||
|
||||
|
||||
[PLEASE PRINT NAME & TITLE] | ||||
|
||||
PFSweb, Inc. | ||||
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||||
|
||||
[PLEASE PRINT NAME & TITLE] | ||||
|
||||
Business Supplies Distributors Holdings, LLC , | ||||
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||||
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By: | |||
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as Managing Member | |||
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[PLEASE PRINT NAME & TITLE] |
Page 3 of 3
EXHIBIT 31.1
CERTIFICATIONS OF PRINCIPAL EXECUTIVE OFFICER
I, Mark Layton, certify that:
1. I have reviewed this report on Form 10-Q of PFSweb, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the periods covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operation
and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for
the registrant and have:
5. The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the equivalent function):
Date: May 16, 2005
PURSUANT TO 18 U.S.C. SECTION 1350
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
b)
Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such evaluation;
and
c)
Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrants internal control over financial
reporting.
a)
All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize, and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting.
By:
/s/ Mark C. Layton
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATIONS OF PRINCIPAL EXECUTIVE OFFICER
I, Tom Madden, certify that:
1. I have reviewed this report on Form 10-Q of PFSweb, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the periods covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operation
and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for
the registrant and have:
5. The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the equivalent function):
Date: May 16, 2005
PURSUANT TO 18 U.S.C. SECTION 1350
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
b)
Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such evaluation;
and
c)
Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrants internal control over financial
reporting.
a)
All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize, and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting.
By:
/s/ Thomas J. Madden
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section
1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of PFSweb, Inc.
(the Company), does hereby certify that:
The Quarterly Report on Form 10-Q for the period ended March 31, 2005 (the Form 10-Q) of the
Company fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the
Securities Exchange Act of 1934 and the information contained in the
Form 10-Q fairly presents, in
all material respects, the financial condition and results of operations of the Company as of, and
for, the periods presented in the Form 10-Q.
The foregoing certification is being furnished as an exhibit to the Form 10-Q pursuant to Item
601(b)(32) of Regulation S-K and Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and
(b) of Section 1350, Chapter 63 of Title 18, United States Code) and, accordingly, is not being
filed as part of the Form 10-Q for purposes of Section 18 of the Securities Exchange Act of 1934,
as whether made before or after the date hereof, regardless of any general incorporation language
in such filing.
A signed original of this written statement required by Section 906 has been provided to PFSweb,
Inc. and will be retained by PFSweb, Inc. and furnished to the Securities and Exchange Commission
or its staff upon request.
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
May 16, 2005
/s/ Mark C. Layton
Mark C. Layton
Chief Executive Officer
May 16, 2005
/s/ Thomas J. Madden
Thomas J. Madden
Chief Financial Officer