UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Quarterly Period Ended March 31, 2009
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Transition Period from
to
Commission File Number 000-28275
PFSweb, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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75-2837058
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(State of Incorporation)
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(I.R.S. Employer I.D. No.)
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500 North Central Expressway, Plano, Texas
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7
5074
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(Address of principal executive offices)
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(Zip Code)
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Registrants telephone number, including area code:
(972) 881-2900
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes
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No
þ
At May 15, 2009 there were 9,946,584 shares of registrants common stock outstanding.
PFSWEB, INC. AND SUBSIDIARIES
Form 10-Q
March 31, 2009
INDEX
2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
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March 31,
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December 31,
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2009
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2008
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ASSETS
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CURRENT ASSETS:
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Cash and cash equivalents
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$
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15,458
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$
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16,050
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Restricted cash
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2,168
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2,008
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Accounts receivable, net of allowance for doubtful accounts of $695
and $980 at March 31, 2009 and December 31, 2008, respectively
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33,123
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44,546
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Inventories, net of reserves of $1,983 and $2,124 at March 31,
2009 and December 31, 2008,
respectively
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45,759
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47,186
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Other receivables
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13,820
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13,072
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Prepaid expenses and other current assets
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3,110
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3,802
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Total current assets
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113,438
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126,664
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PROPERTY AND EQUIPMENT, net
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11,356
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12,106
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IDENTIFIABLE INTANGIBLES
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922
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961
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GOODWILL
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3,602
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3,602
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OTHER ASSETS
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1,037
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1,188
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Total assets
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$
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130,355
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$
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144,521
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LIABILITIES AND SHAREHOLDERS EQUITY
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CURRENT LIABILITIES:
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Current portion of long-term debt and capital lease obligations
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$
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17,783
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$
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22,251
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Trade accounts payable
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57,618
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61,988
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Accrued expenses
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18,146
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21,054
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Total current liabilities
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93,547
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105,293
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LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current
portion
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3,681
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4,951
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OTHER LIABILITIES
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867
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1,192
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Total liabilities
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98,095
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111,436
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COMMITMENTS AND CONTINGENCIES
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SHAREHOLDERS EQUITY:
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Preferred stock, $1.00 par value; 1,000,000 shares authorized; none
issued and outstanding
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Common stock, $0.001 par value; 75,000,000 shares authorized; 9,942,140
and 9,935,095 shares issued at March 31, 2009 and
December 31, 2008, respectively; and 9,923,779 and 9,916,734
outstanding at March 31, 2009 and December 31, 2008,
respectively
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10
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10
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Additional paid-in capital
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92,836
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92,728
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Accumulated deficit
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(61,641
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(61,393
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Accumulated other comprehensive income
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1,140
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1,825
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Treasury stock at cost, 18,361 shares
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(85
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(85
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Total shareholders equity
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32,260
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33,085
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Total liabilities and shareholders equity
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$
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130,355
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$
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144,521
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The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
3
PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
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Three Months Ended
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March 31,
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2009
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2008
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REVENUES:
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Product revenue, net
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$
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66,263
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$
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90,291
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Service fee revenue
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17,119
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20,812
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Pass-through revenue
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5,555
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7,366
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Total net revenues
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88,937
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118,469
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COSTS OF REVENUES:
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Cost of product revenue
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60,832
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83,979
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Cost of service fee revenue
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11,319
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13,844
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Pass-through cost of revenue
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5,555
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7,366
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Total costs of revenues
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77,706
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105,189
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Gross profit
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11,231
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13,280
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SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES, including stock based
compensation expense of $103 and $201
in the three months ended March 31,
2009 and 2008, respectively
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10,667
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12,094
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AMORTIZATION OF IDENTIFIABLE INTANGIBLES
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26
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202
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Total operating expenses
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10,693
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12,296
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Income from operations
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538
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984
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INTEREST EXPENSE, NET
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357
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330
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Income before income taxes
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181
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654
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INCOME TAX EXPENSE, NET
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429
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240
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NET INCOME (LOSS)
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$
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(248
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$
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414
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NET INCOME (LOSS) PER SHARE:
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Basic
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$
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(0.02
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$
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0.04
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Diluted
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$
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(0.02
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$
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0.04
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WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING:
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Basic
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9,924
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9,892
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Diluted
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9,924
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10,042
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The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
4
PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
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Three Months Ended
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March 31,
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2009
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2008
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CASH FLOWS FROM OPERATING ACTIVITIES:
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Net income (loss)
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$
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(248
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$
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414
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Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
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Depreciation and amortization
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2,028
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1,581
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Provision for doubtful accounts
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(174
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)
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Provision for excess and obsolete inventory
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300
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324
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Deferred income taxes
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(23
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Stock-based compensation
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103
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201
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Changes in operating assets and liabilities:
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Restricted cash
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3
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(441
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Accounts receivable
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11,161
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4,819
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Inventories, net
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438
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(3,211
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Prepaid expenses, other receivables and other assets
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(308
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(4,096
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Accounts payable, accrued expenses and other liabilities
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(6,903
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11,815
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Net cash provided by operating activities
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6,400
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11,383
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CASH FLOWS FROM INVESTING ACTIVITIES:
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Purchases of property and equipment
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(1,215
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(664
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Net cash used in investing activities
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(1,215
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)
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(664
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CASH FLOWS FROM FINANCING ACTIVITIES:
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Payments on capital lease obligations
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(390
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)
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(518
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)
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Increase in restricted cash
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(163
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)
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(1,704
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)
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Proceeds from issuance of common stock
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5
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7
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Proceeds from (payments on) debt, net
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(5,253
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)
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(9,409
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)
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Net cash used in financing activities
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(5,801
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)
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(11,624
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)
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EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
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24
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354
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NET DECREASE IN CASH AND CASH EQUIVALENTS
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(592
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)
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(551
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)
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CASH AND CASH EQUIVALENTS, beginning of period
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16,050
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14,272
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CASH AND CASH EQUIVALENTS, end of period
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$
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15,458
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$
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13,721
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SUPPLEMENTAL CASH FLOW INFORMATION
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Non-cash investing and financing activities:
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Property and equipment acquired under capital leases
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$
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66
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$
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69
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The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
5
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
1.
OVERVIEW AND BASIS OF PRESENTATION
PFSweb, Inc. and its subsidiaries, including Supplies Distributors, Inc., and eCOST.com, Inc.,
are collectively referred to as the Company; Supplies Distributors refers to Supplies
Distributors, Inc. and its subsidiaries; eCOST refers to eCOST.com, Inc.; and PFSweb refers to
PFSweb, Inc. and its subsidiaries excluding Supplies Distributors and eCOST.
PFSweb Overview
PFSweb is an international provider of integrated business process outsourcing services to
major brand name companies seeking to maximize their supply chain efficiencies and to extend their
traditional and e-commerce initiatives in the United States, Canada, and Europe. PFSweb offers a
broad range of services such as professional consulting, technology collaboration, managed web
hosting and internet application development, order management, web-enabled customer contact
centers, customer relationship management, financial services including billing and collection
services and working capital solutions, information management, facilities and operations
management, kitting and assembly services, and international fulfillment and distribution services.
Supplies Distributors Overview
Supplies Distributors, PFSweb and InfoPrint Solutions Company (IPS), a joint venture company
owned by Ricoh and International Business Machines Corporation (IBM), have entered into master
distributor agreements under which Supplies Distributors acts as a master distributor of various
products, primarily IPS product.
Supplies Distributors has obtained certain financing that allows it to fund the working
capital requirements for the sale of primarily IPS products. Pursuant to the transaction management
services agreements between PFSweb and Supplies Distributors, PFSweb provides to Supplies
Distributors transaction management and fulfillment services such as managed web hosting and
maintenance, procurement support, web-enabled customer contact center services, customer
relationship management, financial services including billing and collection services, information
management, and international distribution services. Supplies Distributors does not have its own
sales force and relies upon IPS sales force and product demand generation activities for its sale
of IPS products. Supplies Distributors sells its products in the United States, Canada and Europe.
All of the agreements between PFSweb and Supplies Distributors were made in the context of a
related party relationship and were negotiated in the overall context of PFSwebs and Supplies
Distributors arrangement with IPS. Although management believes that the terms of these agreements
are generally consistent with fair market values, there can be no assurance that the prices charged
to or by each company under these arrangements are not higher or lower than the prices that may be
charged by, or to, unaffiliated third parties for similar services.
eCOST Overview
eCOST is a multi-category online discount retailer of new, close-out and recertified
brand-name merchandise, selling products primarily to customers in the United States. eCOST offers
products in several merchandise categories, including computers, networking, electronics and
entertainment, TVs, plasmas and monitors, cameras and camcorders, memory and storage, For the
Home and sports and leisure. eCOST carries products from leading manufacturers such as Sony, JVC,
Canon, Hewlett-Packard, Denon, Dyson, Sennheiser, Garmin, Panasonic, Toshiba and Microsoft.
The Companys liquidity has been negatively impacted as a result of the merger with eCOST.
Since the merger, eCOST has experienced a net use of cash primarily due to operating losses. As a
result, the Company has had to support eCOSTs cash needs with the goal of reducing losses. The
amount of additional cash needed to support eCOST operations will depend upon working capital
requirements, bank
6
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
financing availability as well as eCOSTs continued ability to improve its
financial results. Further advances to eCOST may be limited by the Companys current cash and
future cash flow and may be restricted by the Companys credit facility obligations.
In the event eCOST is unable to increase its revenue and/or gross profit from its present
levels, it may fail to comply with one or more of the financial covenants required under its
working capital line of credit. In such event, absent a waiver, the working capital lender would
be entitled to accelerate all amounts outstanding thereunder and exercise all other rights and
remedies, including sale of collateral and demand for payment under the Company parent guaranty.
Any acceleration of the repayment of the credit facilities would have a material adverse impact on
the Companys financial condition and results of operations and no assurance can be given that the
Company would have the financial ability to repay all of such obligations.
Management currently believes eCOST will meet the Companys expectations related to improved
overall profitability. The Company has reported improvement in eCOSTs financial results beginning
in 2007, excluding the impact of any non-cash impairment charges, and currently expects improvement
as a result of efforts to increase sales, improve product mix and control operating costs, although
there can be no assurance that these future improvements will be achieved. If eCOST does not meet
expectations, the Company currently anticipates that it would be able to terminate or sublease
eCOSTs facilities, liquidate remaining inventory through the eCOST website and reduce certain
personnel related costs as needed so as to minimize any material impact upon the Companys other
segments.
Basis of Presentation
The unaudited interim condensed consolidated financial statements as of March 31, 2009, and
for the three months ended March 31, 2009 and 2008, have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC) and are unaudited. Certain
information and note disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America have been condensed
or omitted pursuant to the rules and regulations promulgated by the SEC. In the opinion of
management and subject to the foregoing, the unaudited interim condensed consolidated financial
statements of the Company include all adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation of the Companys financial position as of March 31, 2009, its
results of operations for the three months ended March 31, 2009 and 2008 and its cash flows for the
three months ended March 31, 2009 and 2008. Results of the Companys operations for interim periods
may not be indicative of results for the full fiscal year.
All share, per share and option amounts have been restated to reflect the 1-for-4.7
reserve stock split which occurred on June 2, 2008.
2.
SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements and related disclosures in conformity
with generally accepted accounting principles requires management to make judgments, estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and
disclosure of contingent assets and liabilities. The recognition and allocation of certain revenues
and operating expenses in these consolidated financial statements also require management estimates
and assumptions.
Estimates and assumptions about future events and their effects cannot be determined with
certainty. The Company bases its estimates on historical experience and on various other
assumptions believed to be
7
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
applicable and reasonable under the circumstances. These estimates may
change as new events occur, as additional information is obtained and as the operating environment
changes. These changes have been included in the consolidated financial statements as soon as they
became known. In addition, management is periodically faced with uncertainties, the outcomes of
which are not within its control and will not be known for prolonged periods of time. These
uncertainties are discussed in this report and in the Companys Annual Report on Form 10-K for the
year ended December 31, 2008 in the section entitled
Risk Factors. Based on a critical assessment of accounting policies and the underlying judgments
and uncertainties affecting the application of those policies, management believes that the
Companys consolidated financial statements are fairly stated in accordance with generally accepted
accounting principles in the United States of America, and provide a fair presentation of the
Companys financial position and results of operations.
Investment in Affiliates
Priority Fulfillment Services, Inc. (PFS), a wholly-owned subsidiary of PFSweb, has made
advances to Supplies Distributors that are evidenced by a Subordinated Demand Note (the
Subordinated Note). Under the terms of certain of the Companys debt facilities, the outstanding
balance of the Subordinated Note cannot be increased to more than $6.5 million or decreased to less
than $5.0 million without prior approval of the Companys lenders. As of March 31, 2009 and
December 31, 2008, the outstanding balance of the Subordinated Note was $5.5 million. The
Subordinated Note is eliminated in the Companys consolidated financial statements.
PFS has also made advances to eCOST, which aggregated $10.6 million as of March 31, 2009 and
December 31, 2008. Certain of the Companys debt facilities provide that the total advances to
eCOST may not be less than $2.0 million without prior approval of eCOSTs lender. PFS has received
the approval of its lender to advance incremental amounts subject to certain cash
inflows to PFS, as defined, to certain of its subsidiaries and/or affiliates, including eCOST, if
needed. PFSweb has also advanced to eCOST $4.7 million as of March 31, 2009 and December 31, 2008.
Concentration of Business and Credit Risk
The Companys service fee revenue is generated under contractual service fee relationships
with multiple client relationships. No service fee clients or product revenue customers exceeded
10% of consolidated revenue during the three months ended March 31, 2009. A summary of the
nonaffiliated customer and client concentrations is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
March 31,
|
|
|
2009
|
|
2008
|
Product Revenue (as a percentage of Product
Revenue):
|
|
|
|
|
|
|
|
|
Customer 1
|
|
|
13
|
%
|
|
|
11
|
%
|
Customer 2
|
|
|
9
|
%
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
Service Fee Revenue (as a percentage of
Service Fee Revenue):
|
|
|
|
|
|
|
|
|
Client 1
|
|
|
22
|
%
|
|
|
39
|
%
|
Client 2
|
|
|
13
|
%
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
Accounts Receivable:
|
|
|
|
|
|
|
|
|
Client/Customer 1
|
|
|
10
|
%
|
|
|
5
|
%
|
Client 1 did not renew its contract with PFS effective January 2009, though certain project
work will continue to occur during the first half of 2009.
8
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
PFSweb has provided certain collateralized guarantees of its subsidiaries financings and
credit arrangements. These subsidiaries ability to obtain financing on similar terms would be
significantly impacted without these guarantees.
The Company has multiple arrangements with IBM and IPS and is dependent upon the continuation
of such arrangements. 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 and IPS business units and an IBM term
master lease agreement. Substantially all of the Supplies Distributors revenue is generated by
its sale of product purchased from IPS. Supplies Distributors also relies upon IPS sales force
and product demand
generation activities and the discontinuance of such services would have a material impact
upon Supplies Distributors business.
eCOSTs arrangements with its vendors are terminable by either party at will. Loss of any
vendors could have a material adverse effect on eCOSTs financial position, results of operations
and cash flows. Sales of HP and HP-related products represented 42% of eCOSTs net revenues (10%
of the Companys consolidated total net revenues) in the three months ended March 31, 2009 and 57%
of eCOSTs net revenues (13% of the Companys consolidated total net revenues) in the comparable
2008 period.
Inventories
The Company establishes inventory reserves based upon estimates of declines in values due to
inventories that are slow moving or obsolete, excess levels of inventory or values assessed at
lower than cost. Recoverability of the inventory on hand is measured by comparison of the carrying
value of the inventory to the fair value of the inventory.
Supplies Distributors assumes responsibility for slow-moving inventory under certain master
distributor agreements, subject to certain termination rights, but has the right to return product
rendered obsolete by engineering changes, as defined. In the event PFSweb, Supplies Distributors
and IPS terminate the master distributor agreements, the agreements provide for the parties to
mutually agree on a plan of disposition of Supplies Distributors then existing inventory.
Property and Equipment
The Companys property held under capital leases amounted to approximately $3.0 million and
$3.4 million, net of accumulated amortization of approximately $8.9 million and $8.4 million, at
March 31, 2009 and December 31, 2008, respectively.
Long-Lived Assets
The Company reviews long-lived assets for impairment periodically, but at a minimum annually,
or whenever events or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Long-lived assets include property, intangible assets, goodwill and certain
other assets. Recoverability of assets is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured as the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Fair value would be determined
using appraisals, discounted cash flow analysis or similar valuation techniques. The Company makes
judgments and estimates in conjunction with the carrying value of these assets, including amounts
to be capitalized, depreciation and amortization methods and useful lives. The Company records
impairment losses in the period in which it determines that the carrying amount is not recoverable.
This may require the Company to make judgments regarding long-term forecasts of their future
revenues and costs related to the assets subject to review.
9
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
Cash Paid for Interest and Taxes
The Company made payments for interest of approximately $0.4 million during the three months
ended March 31, 2009 and 2008. Income taxes of approximately $0.2 million and $43,000 were paid by
the Company during the three months ended March 31, 2009 and 2008, respectively.
Impact of Recently Issued Accounting Standards
In September 2006, the FASB issued SFAS 157, Fair Value Measurements (SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair value and expands disclosures about
fair value measurements. In February 2008, the FASB issued FASB Staff Position (FSP) 157-2,
Effective Date of FASB Statement No. 157, which delayed the effective date of SFAS 157 for
nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at
fair value on a recurring basis, at least annually, until fiscal years beginning after November 15,
2008, and interim periods within those fiscal years. SFAS 157 is effective for fiscal years
beginning after November 15, 2007
and we adopted SFAS 157 for financial assets and liabilities on January 1, 2008, with no
material impact to our consolidated financial statements. We adopted fair value measurement
treatment for nonfinancial assets and liabilities on January 1, 2009, which did not have a material
impact on our consolidated financial statements.
In December 2007, the FASB issued Statement No. 141R,
Business Combinations
, and Statement No.
160,
Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51
.
Statement No. 141R modified the accounting and disclosure requirements for business combinations
and broadens the scope of the previous standard to apply to all transactions in which one entity
obtains control over another business. Statement No. 160 establishes new accounting and reporting
standards for noncontrolling interests in subsidiaries. We applied the provisions of the new
standards in the first quarter of 2009. The adoption of the statement did not have a material
impact on our consolidated financial statements.
In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible
Assets (FSP No. 142-3). This guidance is intended to improve the consistency between the useful
life of a recognized intangible asset under SFAS No. 142,
Goodwill and Other Intangible Assets
(SFAS No. 142), and the period of expected cash flows used to measure the fair value of the asset
under SFAS No. 141(R) when the underlying arrangement includes renewal or extension of terms that
would require substantial costs or result in a material modification to the asset upon renewal or
extension. Companies estimating the useful life of a recognized intangible asset must now consider
their historical experience in renewing or extending similar arrangements or, in the absence of
historical experience, must consider assumptions that market participants would use about renewal
or extension as adjusted for SFAS No. 142s entity-specific factors. FSP No 142-3 was effective
beginning January 1, 2009 and will be applied prospectively to intangible assets acquired after the
effective date. The adoption of this FSP did not have a material impact on our consolidated
financial statements.
3.
COMPREHENSIVE INCOME (LOSS) (in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Net income (loss)
|
|
$
|
(248
|
)
|
|
$
|
414
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
|
(685
|
)
|
|
|
677
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
(933
|
)
|
|
$
|
1,091
|
|
|
|
|
|
|
|
|
4.
NET INCOME (LOSS) PER COMMON SHARE
Basic and diluted net income (loss) per share is computed by dividing net income (loss) by the
weighted-average number of common shares outstanding for the reporting period. For the three
months
10
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
ended March 31, 2008, common stock equivalents of 0.1 million are included in the diluted
weighted average number of shares outstanding. For the three months ended March 31, 2009 and 2008,
outstanding options to purchase common shares of 1.4 million and 0.5 million, respectively, 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):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Inventory and working capital financing agreements:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
21,623
|
|
|
$
|
23,885
|
|
Europe
|
|
|
16,199
|
|
|
|
16,422
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
37,822
|
|
|
$
|
40,307
|
|
|
|
|
|
|
|
|
Inventory and Working Capital Financing Agreement, United States
Supplies Distributors has a short-term credit facility with IBM Credit LLC to finance its
distribution of IPS products in the United States, providing financing for eligible IPS inventory
and certain receivables up to $30.5 million through its expiration in March 2010. As of March 31,
2009, Supplies Distributors had $4.8 million of available credit under this facility. The credit
facility contains cross default provisions, various restrictions upon the ability of Supplies
Distributors to, among others, merge, consolidate, sell assets, incur indebtedness, make loans and
payments to related parties (including entities directly or indirectly owned by PFSweb, Inc.),
provide guarantees, make investments and loans, pledge assets, make changes to capital stock
ownership structure and pay dividends, as well as financial covenants, such as annualized revenue
to working capital, net profit after tax to revenue, and total liabilities to tangible net worth,
as defined, and are secured by certain of the assets of Supplies Distributors, as well as a
collateralized guaranty of PFSweb. Additionally, PFS is required to maintain a minimum Subordinated
Note receivable balance from Supplies Distributors of $5.0 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 0.5% (3.75% as of March 31, 2009). The facility also includes
a monthly service fee. Given the structure of this facility and as outstanding balances, which
represent inventory purchases, are repaid within twelve months, the Company has classified the
outstanding amounts under this facility as accounts payable in the consolidated balance sheets.
Inventory and Working Capital Financing Agreement, Europe
Supplies Distributors European subsidiary has a short-term credit facility with IBM Belgium
Financial Services S.A. (IBM Belgium) to finance its distribution of IPS products in Europe. The
asset based credit facility with IBM Belgium provides up to 16.0 million euros (approximately $21.3
million) in financing for purchasing IPS inventory and for certain receivables through its
expiration in March 2010. As of March 31, 2009, Supplies Distributors European subsidiaries had
1.6 million euros ($2.1 million) of available credit under this facility. The credit facility
contains cross default provisions, various restrictions upon the ability of Supplies Distributors
and its European subsidiaries to, among others, merge, consolidate, sell assets, incur
indebtedness, make loans and payments to related parties (including entities directly or indirectly
owned by PFSweb, Inc.), provide guarantees, make investments and loans, pledge assets, make changes
to capital stock ownership structure and pay dividends, as well as financial covenants, such as
annualized revenue to working capital, net profit after tax to revenue, and total liabilities to
tangible net worth, as defined, and are secured by certain of the assets of Supplies Distributors
European subsidiary, as well as collateralized guaranties of Supplies Distributors and PFSweb.
Additionally, PFSweb is required to maintain a minimum Subordinated Note receivable balance from
Supplies Distributors of $5.0 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
11
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
1.94% or
Euribor plus 4.25%, depending on the type of borrowing utilized,
(Euribor was 1.5% as of March 31,
2009). Supplies Distributors European subsidiary pays a monthly service fee on the commitment.
Given the structure of this facility and as outstanding balances, which represent inventory
purchases, are repaid within twelve months, the Company has classified the outstanding amounts
under this facility as accounts payable in the consolidated balance sheets.
6.
DEBT AND CAPITAL LEASE OBLIGATIONS;
Outstanding obligations under debt and capital lease obligations consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Loan and security agreements, United States
|
|
|
|
|
|
|
|
|
Supplies Distributors
|
|
$
|
8,000
|
|
|
$
|
9,649
|
|
PFS
|
|
|
3,500
|
|
|
|
6,000
|
|
Credit facility eCOST
|
|
|
|
|
|
|
|
|
Factoring agreement, Europe
|
|
|
2,327
|
|
|
|
2,577
|
|
Taxable revenue bonds
|
|
|
2,400
|
|
|
|
3,200
|
|
Master lease agreements
|
|
|
4,165
|
|
|
|
4,657
|
|
Other
|
|
|
1,072
|
|
|
|
1,119
|
|
|
|
|
|
|
|
|
Total
|
|
|
21,464
|
|
|
|
27,202
|
|
Less current portion of long-term debt
|
|
|
17,783
|
|
|
|
22,251
|
|
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
$
|
3,681
|
|
|
$
|
4,951
|
|
|
|
|
|
|
|
|
Loan and Security Agreement Supplies Distributors
Supplies Distributors has a loan and security agreement with Wachovia Bank, N.A. (Wachovia)
to provide financing for up to $25 million of eligible accounts receivable in the United States and
Canada. As of March 31, 2009, Supplies Distributors had $0.7 million of available credit under this
agreement. The Wachovia facility expires on the earlier of March 2011 or the date on which the
parties to the IPS master distributor agreement no longer operate under the terms of such agreement
and/or IPS no longer supplies products pursuant to such agreement. Borrowings under the Wachovia
facility accrue interest at prime rate plus 0.25% to 0.75% or Eurodollar rate plus 2.5% to 3.0%,
dependent on excess availability, as defined, (3.75% as of March 31, 2009). This agreement
contains cross default provisions, various restrictions upon the ability of Supplies Distributors
to, among other things, merge, consolidate, sell assets, incur indebtedness, make loans and
payments to related parties (including entities directly or indirectly owned by PFSweb, Inc.),
provide guarantees, make investments and loans, pledge assets, make changes to capital stock
ownership structure and pay dividends, as well as financial covenants, such as minimum net worth,
as defined, and is secured by all of the assets of Supplies Distributors, as well as a
collateralized guaranty of PFSweb. Additionally, PFS is required to maintain a Subordinated Note
receivable balance from Supplies Distributors of no less than $5.0 million and may not maintain
restricted cash of more than $5.0 million, and is restricted with regard to transactions with
related parties, indebtedness and changes to capital stock ownership structure. Supplies
Distributors has entered into blocked account agreements with its banks and Wachovia pursuant to
which a security interest was granted to Wachovia for all U.S. and Canadian customer remittances
received in specified bank accounts. At March 31, 2009 and December 31, 2008, these bank accounts
held $0.4 million and $0.1 million, respectively, which was restricted for payment to Wachovia.
Loan and Security Agreement PFS
PFS has a Loan and Security Agreement (Comerica Agreement) with Comerica Bank (Comerica).
The Comerica Agreement provides for up to $10.0 million of eligible accounts receivable financing
through March 2010. Borrowings under the Comerica Agreement accrue interest at a defined rate,
which will
generally be prime rate plus 2%, with a minimum of 4.5% (5.25% at March 31, 2009). As of March 31,
2009, PFS had $3.7 million of available credit under this facility. The Comerica Agreement contains
cross default provisions, various restrictions upon PFS ability to, among other things, merge,
consolidate, sell
12
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
assets, incur indebtedness, make loans and payments to related parties (including entities directly
or indirectly owned by PFSweb, Inc.), make capital expenditures, make investments and loans, pledge
assets, make changes to capital stock ownership structure, as well as financial covenants of a
minimum tangible net worth of $20 million, as defined, a minimum earnings before interest and
taxes, plus depreciation, amortization and non-cash compensation accruals, if any, as defined, and
a minimum liquidity ratio, as defined. The Comerica Agreement restricts the amount of the
subordinated note receivable from Supplies Distributors to a maximum of $6.5 million. Comerica has
provided approval for PFS to advance incremental amounts subject to certain cash inflows to PFS, as
defined, to certain of its subsidiaries and/or affiliates, including eCOST, if needed. The
Comerica Agreement is secured by all of the assets of PFS, as well as a guarantee of PFSweb, Inc.
Credit Facility eCOST
eCOST has an asset-based line of credit facility of up to $7.5 million from Wachovia, through
May 2011, which is collateralized by substantially all of eCOSTs assets. Borrowings under the
facility are limited to a percentage of eligible accounts receivable and inventory. Outstanding
amounts under the facility bear interest at rates ranging prime rate plus 0.75% to 1.25% or
Eurodollar rate plus 3.0% to 4.0%, depending on eCOSTs financial results. There were no
outstanding amounts as of March 31, 2009. As of March 31, 2009, eCOST had $1.0 million of letters
of credit outstanding and $1.5 million of available credit under this facility. In connection with
the line of credit, eCOST entered into a cash management arrangement whereby eCOSTs operating
amounts are considered restricted and swept and used to repay outstanding amounts under the line of
credit. As of March 31, 2009 and December 31, 2008, the restricted cash amount was $0.2 million.
The credit facility restricts eCOSTs ability to, among other things, merge, consolidate, sell
assets, incur indebtedness, make loans, investments and payments to subsidiaries, affiliates and
related parties (including entities directly or indirectly owned by PFSweb, Inc.), make investments
and loans, pledge assets, make changes to capital stock ownership structure, and requires a minimum
tangible net worth of $0 million, as defined. PFSweb has guaranteed all current and future
obligations of eCOST under this line of credit.
Factoring Agreement
Supplies Distributors European subsidiary has a factoring agreement with Fortis Commercial
Finance N.V. (Fortis) to provide factoring for up to 7.5 million euros (approximately $10.0
million) of eligible accounts receivables through March 2010. As of March 31, 2009, Supplies
Distributors European subsidiary had approximately 0.4 million euros ($0.5 million) of available
credit under this agreement. Borrowings accrue interest at Euribor plus 0.6% (2.3% at March 31,
2009). This agreement contains various restrictions upon the ability of Supplies Distributors
European subsidiary to, among other things, merge, consolidate and incur indebtedness, as well as
financial covenants, such as minimum net worth. This agreement is secured by a guarantee of
Supplies Distributors, up to a maximum of 200,000 euros.
Taxable Revenue Bonds
PFS has a Loan Agreement with the Mississippi Business Finance Corporation (the MBFC) in
connection with the issuance by the MBFC of $5 million MBFC Taxable Variable Rate Demand Limited
Obligation Revenue Bonds, Series 2004 (Priority Fulfillment Services, Inc. Project) (the Bonds).
The MBFC loaned the proceeds of the Bonds to PFS for the purpose of financing the acquisition and
installation of equipment, machinery and related assets located in one of the Companys Southaven,
Mississippi distribution facilities. The Bonds bear interest at a variable rate (2.2% as of March
31, 2009), as determined by Comerica Securities, as Remarketing Agent. PFS, at its option, may
convert the Bonds to a fixed rate, to be determined by the Remarketing Agent at the time of
conversion.
The primary source of repayment of the Bonds is a letter of credit (the Letter of Credit) in
the initial face amount of $5.1 million issued by Comerica pursuant to a Reimbursement Agreement
between PFS and Comerica under which PFS is obligated to pay to Comerica all amounts drawn under
the Letter of
13
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
Credit. The Letter of Credit has a maturity date of April 2010 at which time, if not renewed or
replaced, will result in a draw on the undrawn face amount thereof. If the Letter of Credit is
renewed or replaced, the Bonds require future annual principal repayments of $800,000 in January of
each year through 2012. PFS obligations under the Reimbursement Agreement are secured by
substantially all of the assets of PFS, including restricted cash of $1.5 million and a Company
parent guarantee.
Debt Covenants
To the extent the Company or any of its subsidiaries fail to comply with covenants applicable
to its debt or vendor financing obligations, including the monthly financial covenant requirements
and required level of shareholders equity or net worth, and one or all of the lenders accelerate
the repayment of the credit facility obligations, the Company would be required to repay all
amounts outstanding thereunder. In
particular, in the event eCOST is unable to increase its revenue and/or gross profit from its
present levels, or if PFS service fee revenue declines from expected levels and it is unable to
reduce costs to correspond to such reduced revenue levels or if Supplies Distributors revenue or gross
profit declines from expected levels, such events may result in a breach of
one or more of the financial covenants required under its working
capital line of credit. In such event, absent a
waiver, the working capital lender would be entitled to accelerate all amounts outstanding
thereunder and exercise all other rights and remedies, including sale of collateral and demand for
payment under the Company parent guaranty. Any acceleration of the repayment of the credit
facilities would have a material adverse impact on the Companys financial condition and results of
operations and no assurance can be given that the Company would have the financial ability to repay
all of such obligations.
Master Lease Agreements
The Company has a Term Lease Master Agreement with IBM Credit Corporation (Master Lease
Agreement) that provides for leasing or financing transactions of equipment and other assets,
which generally have terms of three years. The amounts outstanding under this Master Lease
Agreement ($1.5 million as of March 31, 2009 and $1.7 million as of December 31, 2008) are secured
by the related equipment.
The Company has two other master agreements with financing companies that provide for leasing
or financing transactions of certain equipment. The amounts outstanding under these agreements were
$1.4 million and $1.5 million as of March 31, 2009 and December 31, 2008, respectively, and are
secured by the related equipment.
The Company has other leasing and financing agreements and will continue to enter into those
arrangements as needed to finance the purchasing or leasing of certain equipment or other assets.
Borrowings under these agreements are generally secured by the related equipment.
14
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
7
.
SEGMENT INFORMATION
The Company is organized into three operating segments: PFSweb is an international provider of
integrated eCommerce and business process outsourcing solutions and operates as a service fee
business; Supplies Distributors is a master distributor primarily of IPS products; and eCOST is a
multi-category online discount retailer of new, close-out and recertified brand-name merchandise.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Revenues (in thousands):
|
|
|
|
|
|
|
|
|
PFSweb
|
|
$
|
24,764
|
|
|
$
|
30,280
|
|
Supplies Distributors
|
|
|
45,331
|
|
|
|
62,322
|
|
eCOST
|
|
|
20,932
|
|
|
|
27,969
|
|
Eliminations
|
|
|
(2,090
|
)
|
|
|
(2,102
|
)
|
|
|
|
|
|
|
|
|
|
$
|
88,937
|
|
|
$
|
118,469
|
|
|
|
|
|
|
|
|
Income (loss) from operations (in
thousands):
|
|
|
|
|
|
|
|
|
PFSweb
|
|
$
|
(403
|
)
|
|
$
|
99
|
|
Supplies Distributors
|
|
|
1,416
|
|
|
|
1,652
|
|
eCOST
|
|
|
(475
|
)
|
|
|
(767
|
)
|
Eliminations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
538
|
|
|
$
|
984
|
|
|
|
|
|
|
|
|
Depreciation and amortization
(in thousands):
|
|
|
|
|
|
|
|
|
PFSweb
|
|
$
|
1,935
|
|
|
$
|
1,335
|
|
Supplies Distributors
|
|
|
10
|
|
|
|
4
|
|
eCOST
|
|
|
83
|
|
|
|
242
|
|
Eliminations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,028
|
|
|
$
|
1,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures (in thousands):
|
|
|
|
|
|
|
|
|
PFSweb
|
|
$
|
1,158
|
|
|
$
|
605
|
|
Supplies Distributors
|
|
|
|
|
|
|
6
|
|
eCOST
|
|
|
57
|
|
|
|
53
|
|
Eliminations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,215
|
|
|
$
|
664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Assets (in thousands):
|
|
|
|
|
|
|
|
|
PFSweb
|
|
$
|
99,322
|
|
|
$
|
108,436
|
|
Supplies Distributors
|
|
|
77,397
|
|
|
|
82,280
|
|
eCOST
|
|
|
13,760
|
|
|
|
13,489
|
|
Eliminations
|
|
|
(60,124
|
)
|
|
|
(59,684
|
)
|
|
|
|
|
|
|
|
|
|
$
|
130,355
|
|
|
$
|
144,521
|
|
|
|
|
|
|
|
|
8.
COMMITMENTS AND CONTINGENCIES
The Company receives municipal tax abatements in certain locations. During 2004 the Company
received notice from a municipality that it did not satisfy certain criteria necessary to maintain
the abatements. In December 2006, the Company received notice that the municipal authority planned
to make an adjustment to the Companys tax abatement. The Company has disputed the adjustment, but
if the
15
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
dispute is not resolved favorably, additional taxes of approximately $1.7 million could be assessed
against the Company.
The Company is subject to claims in the ordinary course of business, including claims of
alleged infringement by the Company or its subsidiaries of the patents, trademarks and other
intellectual property rights of third parties. If the party asserting such claims commences
litigation, the Company could be required to defend itself or its customers. The Company is not
aware of any such litigation.
16
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, 2008, could cause our results to differ
materially from those expressed in our forward-looking statements. These factors include:
|
|
|
our ability to retain and expand relationships with existing clients and attract and
implement new clients;
|
|
|
|
|
our reliance on the fees generated by the transaction volume or product sales of our
clients;
|
|
|
|
|
our reliance on our clients projections or transaction volume or product sales;
|
|
|
|
|
our dependence upon our agreements with International Business Machines Corporation
(IBM) and InfoPrint Solutions Company (IPS), a joint venture company owned by Ricoh and
IBM;
|
|
|
|
|
our dependence upon our agreements with our major clients;
|
|
|
|
|
our client mix, their business volumes and the seasonality of their business;
|
|
|
|
|
our ability to finalize pending contracts;
|
|
|
|
|
the impact of strategic alliances and acquisitions;
|
|
|
|
|
trends in e-commerce, outsourcing, government regulation both foreign and domestic and
the market for our services;
|
|
|
|
|
whether we can continue and manage growth;
|
|
|
|
|
increased competition;
|
|
|
|
|
our ability to generate more revenue and achieve sustainable profitability;
|
|
|
|
|
effects of changes in profit margins;
|
|
|
|
|
the customer and supplier concentration of our business;
|
|
|
|
|
the unknown effects of possible system failures and rapid changes in technology;
|
|
|
|
|
foreign currency risks and other risks of operating in foreign countries;
|
|
|
|
|
potential litigation;
|
|
|
|
|
impact of reverse stock split;
|
|
|
|
|
potential delisting;
|
|
|
|
|
our dependency on key personnel;
|
|
|
|
|
the impact of new accounting standards, and changes in existing accounting rules or the
interpretations of those rules;
|
|
|
|
|
our ability to raise additional capital or obtain additional financing;
|
|
|
|
|
our ability and the ability of our subsidiaries to borrow under current financing
arrangements and maintain compliance with debt covenants;
|
|
|
|
|
relationship with and our guarantees of certain of the liabilities and indebtedness of
our subsidiaries;
|
|
|
|
|
taxation on the sale of our products;
|
|
|
|
|
eCOSTs potential indemnification obligations to its former parent;
|
|
|
|
|
eCOSTs ability to maintain existing and build new relationships with manufacturers and
vendors and the success of its advertising and marketing efforts;
|
|
|
|
|
eCOSTs ability to increase its sales revenue and sales margin and improve operating
efficiencies; and
|
|
|
|
|
eCOSTs ability to generate projected cash flows sufficient to cover the values of its
intangible assets.
|
We have based these statements on our current expectations about future events. Although we
believe that the expectations reflected in our forward-looking statements are reasonable, we cannot
guarantee you
17
that these expectations actually will be achieved. In addition, some forward-looking statements
are based upon assumptions as to future events that may not prove to be accurate. Therefore, actual
outcomes and results may differ materially from what is expected or forecasted in such
forward-looking statements. We undertake no obligation to update publicly any forward-looking
statement for any reason, even if new information becomes available or other events occur in the
future.
Overview
We are an international provider of integrated eCommerce and business process outsourcing
solutions to major brand name companies seeking to optimize their supply chain efficiencies and to
extend their traditional business and e-commerce initiatives. Through our eCOST.com business unit,
we are a leading multi-category online discount retailer of new, close-out and recertified
brand-name merchandise. We derive our revenues from three business segments: as an eCommerce and
business process outsourcer, a master distributor and an online discount retailer.
First, in our eCommerce and business process outsourcing segment we derive our revenues from a
broad range of services, including professional consulting, technology collaboration, order
management, managed web hosting and web development, the development of an eCommerce technology
platform, customer relationship management, financial services including billing and collection
services and working capital solutions, kitting and assembly services, information management and
international fulfillment and distribution services. We offer our services as an integrated
solution, which enables our clients to outsource their complete infrastructure needs to a single
source and to focus on their core competencies. Our distribution services are conducted at
warehouses that we lease or manage and include real-time inventory management and customized
picking, packing and shipping of our clients customer orders. We currently offer the ability to
provide infrastructure and distribution solutions to clients that operate in a range of vertical
markets, including technology manufacturing, computer products, cosmetics, fragile goods,
contemporary home furnishings, apparel, aviation, telecommunications and consumer electronics,
among others.
In this eCommerce and business process outsourcing segment, we do not own the underlying
inventory or the resulting accounts receivable, but provide management services for these
client-owned assets. We typically charge our service fee revenue on a cost-plus basis, a percent
of shipped revenue basis or a per-transaction basis, such as a per-minute basis for web-enabled
customer contact center services and a per-item basis for fulfillment services. Additional fees are
billed for other services. We price our services based on a variety of factors, including the depth
and complexity of the services provided, the amount of capital expenditures or systems
customization required, the length of contract and other factors.
Many of our service fee contracts involve third-party vendors who provide additional services
such as package delivery. The costs we are charged by these third-party vendors for these services
are often passed on to our clients. Our billings for reimbursements of these and other
out-of-pocket expenses include travel, shipping and handling costs and telecommunication charges
are included in pass-through revenue.
Our second business segment is a product revenue model. In this segment, we are a master
distributor of product for IPS and certain other clients. In this capacity, we purchase, and thus
own, inventory and recognize the corresponding product revenue. As a result, upon the sale of
inventory, we own the accounts receivable. Freight costs billed to customers are reflected as
components of product revenue. This business segment requires significant working capital
requirements, for which we have senior credit facilities to provide for approximately $87 million
of available financing.
Our third business segment is a web-commerce product revenue model focused on the sale of
products to a broad range of consumer and small business customers. In this segment we operate as
a multi-category online discount retailer of new, close-out and recertified brand-name
merchandise. Our product line currently offers approximately 250,000 products in several primary
merchandise categories, primarily including computers, networking, electronics and entertainment,
TVs, plasmas and monitors, cameras and camcorders, memory and storage, For the Home and sports
and leisure.
Growth is a key element to achieving our future goals, including achieving and maintaining
sustainable profitability. Growth in our eCommerce and business process outsourcing segment is
driven by two main
18
elements: new client relationships and organic growth from existing clients. We focus our sales
efforts on larger contracts with brand-name companies within two primary target markets, online
brands and retailers and technology manufacturers, which, by nature, require a longer duration to
close but also have the potential to be higher-quality and longer duration engagements.
Growth within our product revenue business is primarily driven by our ability to attract new
master distributor arrangements with IPS or other manufacturers and the sales and marketing efforts
of the manufacturers and third party sales partners.
Growth within our web-commerce product revenue model is primarily driven by eCOSTs ability to
increase sales by generating organic growth, new customers and expand its product line.
We continue to monitor and control our costs to focus on profitability. While we are
targeting our new service fee contracts to yield increased gross profit, we also expect to incur
incremental investments to implement new contracts, investments in infrastructure and sales and
marketing to support our targeted growth and increased public company professional fees.
Our expenses comprise primarily four categories: 1) cost of product revenue, 2) cost of
service fee revenue, 3) cost of pass-through revenue and 4) operating expenses.
Cost of product revenues
consists of the purchase price of product sold and freight costs,
which are reduced by certain reimbursable expenses. These reimbursable expenses include
pass-through customer marketing programs, direct costs incurred in passing on any price decreases
offered by vendors to cover price protection and certain special bids, the cost of products
provided to replace defective product returned by customers and certain other expenses as defined
under the master distributor agreements. Vendor marketing programs, such as co-op advertising,
also reduce cost of product revenue.
Cost of service fee revenue
consists primarily of compensation and related expenses for our
web-enabled customer contact center services, international fulfillment and distribution services
and professional consulting services, and other fixed and variable expenses directly related to
providing services under the terms of fee based contracts, including certain occupancy and
information technology costs and depreciation and amortization expenses.
Cost of pass-through revenue
the related reimbursable costs for pass-through expenditures
are reflected as cost of pass-through revenue.
Operating expenses
consist primarily of selling, general and administrative (SG&A)
expenses such as compensation and related expenses for sales and marketing staff, advertising,
online marketing and catalog production, distribution costs (excluding freight) applicable to the
Supplies Distributors and eCOST businesses, executive, management and administrative personnel and
other overhead costs, including certain occupancy and information technology costs and depreciation
and amortization expenses.
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.
19
Results of Operations
For the Interim Periods Ended March 31, 2009 and 2008
The following table sets forth certain historical financial information from our unaudited
interim condensed consolidated statements of operations expressed as
a percent of net revenues (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net Revenues
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
2009
|
|
|
2008
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue, net
|
|
$
|
66.3
|
|
|
$
|
90.3
|
|
|
$
|
(24.0
|
)
|
|
|
74.5
|
%
|
|
|
76.2
|
%
|
Service fee revenue
|
|
|
17.1
|
|
|
|
20.8
|
|
|
|
(3.7
|
)
|
|
|
19.2
|
%
|
|
|
17.6
|
%
|
Pass-through revenue
|
|
|
5.5
|
|
|
|
7.4
|
|
|
|
(1.9
|
)
|
|
|
6.3
|
%
|
|
|
6.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
88.9
|
|
|
|
118.5
|
|
|
|
(29.6
|
)
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue (1)
|
|
|
60.9
|
|
|
|
84.0
|
|
|
|
(23.1
|
)
|
|
|
91.8
|
%
|
|
|
93.0
|
%
|
Cost of service fee revenue (2)
|
|
|
11.3
|
|
|
|
13.8
|
|
|
|
(2.5
|
)
|
|
|
66.1
|
%
|
|
|
66.5
|
%
|
Pass-through cost of revenue
(3)
|
|
|
5.5
|
|
|
|
7.4
|
|
|
|
(1.9
|
)
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
77.7
|
|
|
|
105.2
|
|
|
|
(27.5
|
)
|
|
|
87.4
|
%
|
|
|
88.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue gross profit
|
|
|
5.4
|
|
|
|
6.3
|
|
|
|
(0.9
|
)
|
|
|
8.2
|
%
|
|
|
7.0
|
%
|
Service fee gross profit
|
|
|
5.8
|
|
|
|
7.0
|
|
|
|
(1.2
|
)
|
|
|
33.9
|
%
|
|
|
33.5
|
%
|
Pass-through gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
|
11.2
|
|
|
|
13.3
|
|
|
|
(2.1
|
)
|
|
|
12.6
|
%
|
|
|
11.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
10.7
|
|
|
|
12.3
|
|
|
|
(1.6
|
)
|
|
|
12.0
|
%
|
|
|
10.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
0.5
|
|
|
|
1.0
|
|
|
|
(0.5
|
)
|
|
|
0.6
|
%
|
|
|
0.8
|
%
|
Interest expense, net
|
|
|
0.3
|
|
|
|
0.4
|
|
|
|
(0.1
|
)
|
|
|
0.4
|
%
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income
taxes
|
|
|
0.2
|
|
|
|
0.6
|
|
|
|
(0.4
|
)
|
|
|
0.2
|
%
|
|
|
0.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense, net
|
|
|
0.4
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.5
|
%
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(0.2
|
)
|
|
$
|
0.4
|
|
|
$
|
(0.6
|
)
|
|
|
(0.3
|
)%
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
% of net revenues represents the percent of Product revenue, net.
|
|
(2)
|
|
% of net revenues represents the percent of Service fee revenue.
|
|
(3)
|
|
% of net revenues represents the percent of Pass-through revenue.
|
Product Revenue, net.
eCOST product revenue was $20.9 million in the three months ended March
31, 2009, a 25.2% decrease as compared to $28.0 million in the comparable quarter of the prior
year. The decrease is primarily due to a decline in sales in its business to business channel
resulting from the impact of the current economic environment and eCOSTs reduced emphasis on this
lower margin channel. Partially offsetting this decrease was an increase in sales in the higher
margin business to consumer sales channel, primarily due to continued emphasis on growth through an
expanded product line, improved service capabilities and enhanced website capabilities.
Supplies Distributors product revenue of $45.4 million decreased $17.0 million, or 27.3% in
the three months ended March 31, 2009 as compared to the same quarter of the prior year. The
decrease is primarily due to decreased sales volume on certain products resulting from the impact
of the overall global economic pressures and inventory rationalization by customers. In addition,
product revenue in the March 2009 quarter was negatively impacted by a $1.4 million reduction of
revenue arising from a customer bankruptcy.
Service Fee Revenue
. Service fee revenue of $17.1 million decreased $3.7 million, or 17.7%,
in the three months ended March 31, 2009 as compared to the same quarter of the prior year. The
decrease in
20
service fee revenue for the three months ended March 31, 2009 is primarily due to the non-renewal of a certain
U.S. government agency client relationship partially offset by increased service fees generated
from the impact of new service
contract relationships. The change in service fee revenue
is shown below ($ millions):
|
|
|
|
|
|
|
Three
|
|
|
|
Months
|
|
Period ended March 31, 2008
|
|
$
|
20.8
|
|
New service contract relationships, including
certain incremental projects under new contracts
|
|
|
1.3
|
|
Change in existing client service fees
|
|
|
(4.1
|
)
|
Terminated clients not included in 2009 revenue
|
|
|
(0.9
|
)
|
|
|
|
|
Period ended March 31, 2009
|
|
$
|
17.1
|
|
|
|
|
|
Cost of Product Revenue.
The gross margin for eCOST was $2.1 million or 9.8% of product
revenue in the three months ended March 31, 2009 and $2.2 million or 8.0% of product revenue during
the comparable period of 2008. The increase in gross margin is primarily due to a shift in product
sales to the higher margin business-to-consumer channel. As we
continue to target an increasing percentage of eCOST revenues to be
generated from the business-to-consumer channel, we expect overall
gross margin for eCOST will continue to be higher than the prior year.
Supplies Distributors cost of product revenue decreased by $16.3 million, or 28.0%, to $42.0
million in the three months ended March 31, 2009, primarily as a result of decreased product sales.
The resulting gross profit margin was $3.4 million or 7.5% of product revenue for the three months
ended March 31, 2009 and $4.1 million or 6.5% of product revenue for the comparable 2008 period.
The increase in margin percentage is partially due to incremental gross margin earned on product
sales resulting from certain product price increases and the impact of certain incremental
inventory cost reductions, which were partially offset by the impact of a reduction in revenue
arising from a customer bankruptcy during the quarter.
Cost of Service Fee Revenue
. Gross profit as a percentage of service fees was 33.9% in the
three months ended March 31, 2009, relatively consistent with the 33.5% in the same period of the
prior year. Both periods included the benefit of incremental project work from a U.S. government
contract relationship that was not renewed and will be completed in the second quarter of 2009.
We target to earn an overall average gross profit of 25-30% on existing and new service fee
contracts, but we have and may continue to accept lower gross margin percentages on certain
contracts depending on contract scope and other factors.
Operating Expenses
. Operating expenses for the three months ended March 31, 2009 decreased
$1.6 million to $10.7 million from $12.3 million in the same 2008 period. As a percentage of total
net revenue, operating expenses were 12.0% in the three months ended March 31, 2009 and 10.4% in
the comparable period. The increase in percentage of total net sales is primarily due to the
reduction in total net revenues and the impact of certain personnel related expenses. During the
three months ended March 31, 2009, we implemented certain cost reductions to help reduce the impact
of the lower service fee revenue.
Income Taxes.
We recorded a tax provision associated primarily with state income taxes and our
subsidiary Supplies Distributors Canadian and European operations. A valuation allowance has been
provided for the majority of our net deferred tax assets as of March 31, 2009 and December 31,
2008, which are primarily related to our net operating loss carryforwards, and certain foreign
deferred tax assets. We expect that we will continue to record an income tax provision associated
with state income taxes and Supplies Distributors Canadian and European results of operations.
Liquidity and Capital Resources
Net cash provided by operating activities was $6.4 million for the three months ended March
31, 2009, and primarily resulted from cash income before working capital changes of $2.0 million
and an $11.2 million decrease in accounts receivable, partially offset by a $6.9 million decrease
in accounts payable, accrued expenses and other liabilities.
21
Net cash provided by operating activities was $11.4 million for the three months ended March
31, 2008, and primarily resulted from an $11.8 million of increase in accounts payable, accrued
expenses and other
liabilities, a $4.8 million decrease in accounts receivable and cash income before working
capital changes of $2.5 million. These benefits were offset by a $4.1 million increase in prepaid
expenses, other receivables and other assets, a $3.2 million increase in inventories and an
increase in restricted cash of $0.4 million.
Net cash used in investing activities for the three months ended March 31, 2009 and 2008
totaled $1.2 million and $0.7 million, respectively, resulting from capital expenditures.
Capital expenditures have historically consisted primarily of additions to upgrade our
management information systems, and general expansion and upgrades to our facilities, both domestic
and foreign. We expect to incur capital expenditures to support new contracts and anticipated
future growth opportunities. Based on our current client business activity and our targeted growth
plans, we anticipate our total investment in upgrades and additions to facilities and information
technology services for the upcoming twelve months will be approximately $3 to $5 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 we do not obtain the financing or
achieve the financial results necessary to support such investments.
Net cash used in financing activities was approximately $5.8 million for the three months
ended March 31, 2009, primarily representing payments on debt and capital lease obligations.
Net cash used in financing activities was approximately $11.6 million for the three months
ended March 31, 2008, primarily representing payments on debt and capital lease obligations
partially offset by an increase in restricted cash.
Our liquidity has been negatively impacted as a result of the merger with eCOST. Since the
merger, eCOST has experienced a net use of cash primarily due to operating losses. As a result,
PFSweb has had to support eCOSTs cash needs with the goal of reducing operating losses. The
amount of further cash needed to support eCOST operations will depend upon the financing available
as well as eCOSTs ability to improve its financial results. eCOSTs results, excluding the impact
of any non-cash impairment charges, have improved beginning in 2007, and we currently expect
improvement as a result of efforts to increase sales, improve product mix and further improve
operational efficiencies.
Our liquidity may also be negatively impacted by an expected decline in service fee revenue
due to the current general economic decline as well as the nonrenewal of a U.S. government agency
contract and certain other client contracts. To help minimize the impact of lower service fee
revenue, we have implemented certain measures that reduced variable costs and expenses and
redeployed existing infrastructure to other client activities. No assurance can be given that a
further decline in service fee revenue, beyond those noted, will not have a material adverse effect
upon our business, financial condition or results of operations.
During the three months ended March 31, 2009, our working capital decreased to $19.9 million
from $21.4 million at December 31, 2008. To obtain additional financing in the future, in addition
to our current cash position, we plan to evaluate various financing alternatives including the sale
of equity, utilizing capital or operating leases, borrowing under our credit facilities, expanding
our current credit facilities, entering into new debt agreements or transferring to third parties a
portion of our subordinated loan balance due from Supplies Distributors. In conjunction with
certain of these alternatives, we may be required to provide certain letters of credit to secure
these arrangements. We currently believe that our cash position, financing available under our
credit facilities and funds generated from operations (including cost reductions related to the
nonrenewal of our U.S. government contract) will satisfy our presently known operating cash needs,
our working capital and capital expenditure requirements, our current debt and lease obligations,
and additional loans to our subsidiaries Supplies Distributors and eCOST, if necessary, for at
least the next twelve months.
22
Recently, the credit markets and the financial services industry have been experiencing a
period of unprecedented turmoil and upheaval characterized by the bankruptcy, failure, collapse or
sale of various financial institutions and an unprecedented level of intervention from the United
States and foreign governments. While the ultimate outcome of these events cannot be predicted,
they may have a material
adverse effect on our liquidity, financial condition, results of operations and our ability to
renew our credit facilities.
The following is a schedule of our total contractual cash obligations which is comprised of
operating leases, debt, vendor financing and capital leases (including interest) as of March 31,
2009, (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period
|
|
|
|
|
|
|
|
Less than
|
|
|
1-3
|
|
|
3-5
|
|
|
More than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
Debt and vendor financing
|
|
$
|
56,716
|
|
|
$
|
54,003
|
|
|
$
|
2,489
|
|
|
$
|
224
|
|
|
$
|
|
|
Capital lease obligations
|
|
|
3,141
|
|
|
|
1,898
|
|
|
|
1,203
|
|
|
|
40
|
|
|
|
|
|
Operating leases
|
|
|
19,957
|
|
|
|
8,333
|
|
|
|
9,415
|
|
|
|
2,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
79,814
|
|
|
$
|
64,234
|
|
|
$
|
13,107
|
|
|
$
|
2,473
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In support of certain debt instruments and leases, as of March 31, 2009, we had $2.2 million
of cash restricted for repayment to lenders. In addition, as described above, we have provided
collateralized guarantees to secure the repayment of certain of our subsidiaries credit
facilities. Many of these facilities include both financial and non-financial covenants, and also
include cross default provisions applicable to other credit facilities and agreements. These
covenants include minimum levels of net worth for the individual borrower subsidiaries and
restrictions on the ability of the borrower subsidiaries to advance funds to other borrower
subsidiaries. As a result, it is possible for one or more of these borrower subsidiaries to fail
to meet their respective covenants even if another borrower subsidiary otherwise has available
excess funds, which, if not restricted, could be used to cure the default. To the extent we fail
to comply with our debt covenants, including the monthly financial covenant requirements and our
required level of shareholders equity, and the lenders accelerate the repayment of the credit
facility obligations, we would be required to repay all amounts outstanding thereunder. In
particular, in the event eCOST is unable to increase its revenue and/or gross profit from its
present levels, or if PFS service fee revenue declines from expected levels and it is unable to
reduce costs to correspond to such reduced revenue levels or if Supplies Distributors revenue or gross
profit declines from expected levels, such events may result in a breach of
one or more of the financial covenants required under its working
capital line of credit. In such
event, absent a waiver, the working capital lender would be entitled to accelerate all amounts
outstanding thereunder and exercise all other rights and remedies, including sale of collateral and
payment under our parent guaranty. A requirement to accelerate the repayment of the credit
facility obligations would have a material adverse impact on our financial condition and results of
operations. We can provide no assurance that we will have the financial ability to repay all of
such obligations. As of March 31, 2009, we were in compliance with all debt covenants. We do not
have any other material financial commitments, although future client contracts may require capital
expenditures and lease commitments to support the services provided to such clients.
In the future, we may attempt to acquire other businesses or seek an equity or strategic
partner to generate capital or expand our services or capabilities in connection with our efforts
to grow our business. Acquisitions involve certain risks and uncertainties and may require
additional financing. Therefore, we can give no assurance with respect to whether we will be
successful in identifying businesses to acquire or an equity or strategic partner, whether we or
they will be able to obtain financing to complete a transaction, or whether we or they will be
successful in operating the acquired business.
To finance their distribution of IPS products, Supplies Distributors and its subsidiaries have
short-term credit facilities with IBM Credit LLC (IBM Credit) and IBM Belgium Financial Services
S.A. (IBM Belgium). We have provided a collateralized guaranty to secure the repayment of these
credit facilities. These asset-based credit facilities provided financing for up to $30.5 million
and up to 16.0 million euros (approximately $21.3 million) with IBM Credit and IBM Belgium,
respectively. These agreements expire in March 2010.
23
Supplies Distributors also has a loan and security agreement with Wachovia Bank, N.A.
(Wachovia) to provide financing for up to $25 million of eligible accounts receivables in the
United States and Canada. The Wachovia facility expires on the earlier of March 2011 or the date on
which the parties to the IPS master distributor agreement no longer operate under the terms of such
agreement and/or IPS no longer supplies products pursuant to such agreement.
Supplies Distributors European subsidiary has a factoring agreement with Fortis Commercial
Finance N.V. (Fortis) to provide factoring for up to 7.5 million euros (approximately $10.0
million) of eligible
accounts receivables through March 2010.
These credit facilities contain cross default provisions, various restrictions upon the
ability of Supplies Distributors and its subsidiaries to, among other things, merge, consolidate,
sell assets, incur indebtedness, make loans, investments and payments to related parties (including
entities directly or indirectly owned by PFSweb, Inc.), provide guarantees, make investments and
loans, pledge assets, make changes to capital stock ownership structure and pay dividends, as well
as financial covenants, such as cash flow from operations, annualized revenue to working capital,
net profit after tax to revenue, minimum net worth and total liabilities to tangible net worth, as
defined, and are secured by all of the assets of Supplies Distributors, as well as a collateralized
guaranty of PFSweb. Additionally, we are required to maintain a subordinated loan to Supplies
Distributors of no less than $5.0 million, not maintain restricted cash of more than $5.0 million,
are restricted with regard to transactions with related parties, indebtedness and changes to
capital stock ownership structure and a minimum shareholders equity of at least $18.0 million.
Furthermore, we are obligated to repay any over-advance made to Supplies Distributors or its
subsidiaries under these facilities if they are unable to do so. We have also provided a guarantee
of the obligations of Supplies Distributors and its subsidiaries to IBM and IPS, excluding the
trade payables that are financed by IBM credit.
Our subsidiary, Priority Fulfillment Services, Inc. (PFS), has a Loan and Security Agreement
(Agreement) with Comerica Bank (Comerica), which provides for up to $10.0 million of eligible
accounts receivable financing through March 2010. We entered this Agreement to supplement our
existing cash position, and provide funding for our current and future operations, including our
targeted growth. The Agreement contains cross default provisions, various restrictions upon our
ability to, among other things, merge, consolidate, sell assets, incur indebtedness, make loans and
payments to subsidiaries, affiliates and related parties (including entities directly or indirectly
owned by PFSweb, Inc.), make capital expenditures, make investments and loans, pledge assets, make
changes to capital stock ownership structure, as well as financial covenants of a minimum tangible
net worth of $20 million, as defined, a minimum earnings before interest and taxes, plus
depreciation, amortization and non-cash compensation accruals, if any, as defined, and a minimum
liquidity ratio, as defined. The agreement also limits PFS ability to increase the subordinated
loan to Supplies Distributors to more than $6.5 million and permits PFS to advance incremental
amounts subject to certain cash inflows to PFS, as defined, to certain of its subsidiaries and/or
affiliates, including eCOST. The Agreement is secured by all of the assets of PFS, as well as a
guarantee of PFSweb.
eCOST currently has an asset-based line of credit facility of up to $7.5 million with
Wachovia, which is collateralized by substantially all of eCOSTs assets and expires in May 2011.
Borrowings under the facility are limited to a percentage of eligible accounts receivable and
letter of credit availability is limited to a percentage of accounts receivable and inventory. As
of March 31, 2009, eCOST had $1.0 million of letters of credit outstanding and $1.5 million of
available credit under this facility. The credit facility restricts eCOSTs ability to, among
other things, merge, consolidate, sell assets, incur indebtedness, make loans, investments and
payments to subsidiaries, affiliates and related parties, make investments and loans, pledge
assets, make changes to capital stock ownership structure, as well as a minimum tangible net worth
of $0 million, as defined. PFSweb has guaranteed all current and future obligations of eCOST under
this line of credit.
In 2004, PFS incurred more than $5 million in capital expenditures to support incremental
business from a distribution facility in Southaven, MS. PFS financed a significant portion of
these expenditures through a Loan Agreement with the Mississippi Business Finance Corporation (the
MBFC) pursuant to which the MBFC issued $5 million MBFC Taxable Variable Rate Demand Limited
Obligation Revenue Bonds, Series 2004 (Priority Fulfillment Services, Inc. Project) (the Bonds).
The MBFC loaned PFS the proceeds of the Bonds for the purpose of financing the acquisition and
installation of equipment,
24
machinery and related assets located in the Southaven, Mississippi
distribution facility. The primary source of repayment of the Bonds is a letter of credit (the
Letter of Credit) in the initial face amount of $5.1 million issued by Comerica pursuant to a
Reimbursement Agreement between us and Comerica under which PFS is obligated to pay to Comerica all
amounts drawn under the Letter of Credit. The Letter of Credit has a maturity date of April 2010
at which time, if not renewed or replaced, will result in a draw on the undrawn face amount
thereof. The amount outstanding on this Loan Agreement as of March 31, 2009 was $2.4 million.
PFS obligations under the Reimbursement Agreement are secured by substantially all of its assets,
including restricted cash of $1.5 million and a Company parent guarantee.
To the extent we fail to comply with the various debt covenants described above, and the
lenders accelerate the repayment of the credit facility obligations, we would be required to repay
all amounts 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, 2009, we were in compliance with all debt covenants.
eCOST has historically incurred significant operating losses and used cash to fund its
operations. As a result, we have been required to invest cash to fund eCOSTs operations, which we
may not be able to continue to do without approval from our lenders. The amount of further cash
needed to support eCOST operations depends upon the financing available under its credit line as
well as eCOSTs ability to improve its financial results. Through March 31, 2009, we have advanced
$15.3 million to eCOST to fund eCOSTs cash flow requirements and have lender approval to advance
incremental amounts subject to certain cash inflows to PFS, as defined, to certain of our
subsidiaries and/or affiliates, including eCOST. In the event we need to invest further cash to
eCOST, we may be required to seek approval from our lenders to provide such funds. We can provide
no assurance that we will receive such approval from our lenders or any terms or conditions
required by our lenders in order to obtain such approval. In addition, PFSweb has provided a
guaranty of eCOSTs bank line of credit and certain eCOST vendor trade payables.
We receive municipal tax abatements in certain locations. During 2004 we received notice from
a municipality that we did not satisfy certain criteria necessary to maintain the abatements. In
December 2006, we received notice that the municipal authority planned to make an adjustment to our
tax abatement. We have disputed the adjustment, but if the dispute is not resolved favorably,
additional taxes of $1.7 million could be assessed against us.
Seasonality
The seasonality of our service fee business is dependent upon the seasonality of our clients
business and sales of their products. Accordingly, our management must rely upon the projections of
our clients in assessing quarterly variability. We believe with our current client mix and their
current business volumes, our run rate service fee business activity will be at it lowest in the
quarter ended March 31. We anticipate our Supplies Distributors product revenue will be highest
during the quarter ended December 31. Our eCOST business is moderately seasonal, reflecting the
general pattern of peak sales for the retail industry during the holiday shopping season.
Typically, a larger portion of our eCOST revenues occur during the fourth fiscal quarter. We
believe our historical revenue growth makes it difficult to predict the effect of seasonality on
our future revenues and results of operations.
We believe that results of operations for a quarterly period may not be indicative of the
results for any other quarter or for the full year.
Inflation
Management believes that inflation has not had a material effect on our operations.
Critical Accounting Policies
A description of our critical accounting policies, including goodwill and long-lived assets,
is included in Note 2 of the consolidated financial statements in our December 31, 2008 Annual
Report on Form 10-K.
25
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
We are exposed to various market risks including interest rates on financial instruments and
foreign exchange rates.
Interest Rate Risk
Our interest rate risk exists from our outstanding balances on our inventory and working
capital financing agreements, taxable revenue bonds, factoring agreement, and loan and security
agreements for the financing of inventory, accounts receivable and certain other receivables and
certain equipment, which amounted to $55.1 million at March 31, 2009. 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, 2009.
Foreign Exchange Risk
Currently, our foreign currency exchange rate risk is primarily limited to the Canadian Dollar
and the Euro. In the future, our foreign currency exchange risk may also include other currencies
applicable to certain of our international operations. We have and may continue, from time to
time, to employ derivative financial instruments to manage our exposure to fluctuations in foreign
currency rates. To hedge our net investment and intercompany payable or receivable balances in
foreign operations, we may enter into forward currency exchange contracts.
ITEM 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain a system of controls and procedures designed to provide reasonable assurance as to
the reliability of the financial statements and other disclosures included in this report, as well
as to safeguard assets from unauthorized use or disposition. We evaluated the effectiveness of the
design and operation of our disclosure controls and procedures under the supervision and with the
participation of management, including our Chief Executive Officer and Principal Financial and
Accounting Officer. Based upon the evaluation, our Chief Executive Officer and Principal Financial
and Accounting Officer concluded that our disclosure controls and procedures are effective in
timely alerting them to material information required to be included in our periodic Securities and
Exchange Commission filings. No significant changes were made to our internal controls or other
factors that could significantly affect these controls subsequent to the date of their evaluation.
Changes in Internal Control over Financial Reporting
There
have been no changes in our internal controls over financial
reporting (as defined in Rule 13(a)-15(f) or Rule 15-d-15(f) of the Exchange Act) during the three months ended March 31,
2009 that have materially affected, or are reasonable likely to materially affect, our internal
controls over financial reporting.
26
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
None.
ITEM 1A. Risk Factors
There have been no material changes with regard to the risk factors set forth in Part I, Item
1A of the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008 filed
with the Securities and Exchange Commissions on March 31, 2009 other than those as set forth below.
Risks Related to All Our Business Segments
Our business and future growth depend on our continued access to bank and commercial financing.
The current economic crisis may negatively impact our business, results of operations, financial
condition or liquidity.
Recently, the credit markets and the financial services industry have been experiencing a
period of unprecedented turmoil and upheaval characterized by the bankruptcy, failure, collapse or
sale of various financial institutions and an unprecedented level of intervention from the United
States and foreign governments. The current economic crisis could also adversely impact our
customers operations or ability to maintain liquidity which may negatively impact our business and
results of operations.
Our business and future growth currently depend on our ability to access bank and commercial
lines of credit. We currently depend on an aggregate of approximately $106.7 million in credit
facilities provided by various banks and commercial lenders. These facilities currently mature at
various dates through May 2011 and are secured by substantially all our assets. Our ability to
renew our credit facilities depends upon various factors, including the availability of bank loans
and commercial credit in general, as well as our financial condition and prospects. Therefore, we
cannot guarantee that these credit facilities will continue to be available beyond their current
maturity on reasonable terms or at all. Our inability to renew or replace our credit facilities or
find alternative financing would materially adversely affect our business, financial condition,
operating results and cash flow.
Risks Related to Our PFS and Supplies Distributors Operating Segments
Our business is subject to the risk of customer and supplier concentration.
For the three months ended March 31, 2009 and 2008, a U.S. government agency and Xerox
Corporation represented the source of approximately 22% and 13%, respectively, and approximately
39% and 10%, respectively of our total service fee revenue, excluding pass-through revenue. The
loss of, or non-payment of invoices by, any or all such clients would have a material adverse
effect upon our business. In particular, the agreements under which we provide services to such
clients are terminable at will upon notice by such clients. Most of our activity under our
contract with the U.S. government agency concluded in the first quarter of 2009 and the nonrenewal
of that contract, as well as the loss of, or non-payment of invoices by, any or all of such other
clients are likely to have a material adverse effect upon our business.
A substantial portion of our Supplies Distributors product revenue is generated by sales of
product purchased under master distributor agreements with IPS. These agreements are terminable at
will and no assurance can be given that IPS will continue the master distributor agreements with
Supplies Distributors. Supplies Distributors does not have its own sales force and relies upon IPS
sales force and product demand generation activities. Discontinuance of such activities would have
a material adverse effect on Supplies Distributors business and the Companys financial condition.
Sales by Supplies Distributors to two customers accounted for approximately 32% and 30% of
Supplies Distributors total product revenue for the three months ended March 31, 2009 and 2008,
respectively, (16% of our consolidated net revenues in each three month period). The loss of any
one or both of such customers, or non-payment of any material amount by these or any other
customer, are likely to have a material adverse effect upon Supplies Distributors business.
27
Risks Related to eCOST, our Online Discount Retailer Segment
Our business is subject to the risk of supplier concentration.
Our business is dependent on sales of Hewlett Packard (HP) and HP-related products, which
represented approximately 42% of eCOSTs net revenues (10% of our consolidated net revenues) in the
three months ended March 31, 2009 and 57% of eCOSTs net revenues (13% of our consolidated net
revenues) in the comparable period of 2008. If our ability to purchase direct from HP is
terminated or restricted, or if the demand for HP and HP-related products declines, our business
will be materially adversely affected.
ITEM 2. Changes in Securities and Use of Proceeds
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits
a) Exhibits:
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Exhibits
|
3.1(1)
|
|
Amended and Restated Certificate of Incorporation
|
|
|
|
3.2(1)
|
|
Amended and Restated Bylaws
|
|
|
|
10.1
|
|
Seventh Amended and Restated Notes Payable Subordination Agreement
by and between Priority Fulfillment Services, Inc., Supplies
Distributors, Inc. and IBM Credit Corporation.
|
|
|
|
10.2
|
|
Amendment 10 to Agreement for Inventory Financing.
|
|
|
|
10.3
|
|
Amendment 9 to Amended and Restated Platinum Plan Agreement.
|
|
|
|
10.4
|
|
Agreement for IBM Global Financing Platinum Plan Invoice
Discounting Schedule.
|
|
|
|
10.5
|
|
Seventh Amendment to First Amended and Restated Loan and Security
Agreement by and between Comerica Bank and Priority Fulfillment
Services, Inc.
|
|
|
|
10.6
|
|
2009 Management Bonus Plan
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
32.1
|
|
Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
28
|
|
|
(1)
|
|
Incorporated by reference from PFSweb, Inc. Registration Statement on Form S-1 (Commission
File No. 333-87657) and Annual Report on Form 10-K for the Fiscal Year ended December 31, 2005
filed on March 31, 2006.
|
29
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 15, 2009
|
|
|
|
|
|
PFSweb, Inc.
|
|
|
By:
|
/s/ Thomas J. Madden
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Thomas J. Madden
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Chief Financial Officer,
Chief Accounting Officer,
Executive Vice President
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Exhibit 10.5
SEVENTH AMENDMENT TO FIRST AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
THIS SEVENTH AMENDMENT TO FIRST AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (herein
called this Amendment) made as of the 31st day of March, 2009 by and between Priority Fulfillment
Services, Inc. (Borrower) and Comerica Bank (Bank),
WITNESSETH:
WHEREAS, Borrower and Bank have entered into that certain First Amended and Restated Loan and
Security Agreement dated as of December 29, 2004 (as from time to time amended or modified, the
Original Agreement) for the purposes and consideration therein expressed, pursuant to which Bank
became obligated to make loans to Borrower as therein provided; and
WHEREAS, Borrower and Bank desire to amend the Original Agreement to provide for term loans
and for the other purposes set forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements
contained herein and in the Original Agreement, in consideration of the loans which may hereafter
be made by Bank to Borrower, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto do hereby agree as follows:
ARTICLE I.
Definitions and References
§ 1.1
Terms Defined in the Original Agreement
. Unless the context otherwise requires or
unless otherwise expressly defined herein, the terms defined in the Original Agreement shall have
the same meanings whenever used in this Amendment.
§ 1.2
Other Defined Terms
. Unless the context otherwise requires, the following terms when
used in this Amendment shall have the meanings assigned to them in this § 1.2.
Amendment
means this Seventh Amendment to First Amended and Restated Loan and
Security Agreement.
Loan Agreement
means the Original Agreement as amended hereby.
ARTICLE II.
Amendments to Original Agreement
§ 2.1
Defined Terms
.
(a) The definition of Revolving Maturity Date in Exhibit A to the Original Agreement
is hereby amended in its entirety to read as follows:
Revolving Maturity Date means March 31, 2010.
(b) The definition of Inflow Transfer in Exhibit A to the Original Agreement is
hereby amended in its entirety to read as follows:
Inflow Transfer means the receipt by Borrower of cash payments after March 31,
2009, which are dividend payments or subordinated debt payments from BSD Holdings,
Inc., dividend payments or interest payments from SPRL PFSweb B.V, or other cash
payments made to Borrower by a Subsidiary or Affiliate, excluding payments made in
the ordinary course of business.
(c) Clause (c) of the definition of Permitted Indebtedness in Exhibit A to the
Original Agreement is hereby amended in its entirety to read as follows:
(c) Indebtedness secured by a lien described in clause (c) of the defined term
Permitted Liens, provided (i) such Indebtedness does not exceed the lesser of the
cost or fair market value at acquisition date of the equipment financed with such
Indebtedness and (ii) the aggregate amount of such Indebtedness incurred in each
fiscal year of Borrower shall not exceed $4,000,000.
(d) The definition of Permitted Distribution in Exhibit A to the Original Agreement
is hereby amended in its entirety to read as set forth below:
Permitted Distribution means any cash dividend or cash distribution by
Borrower to any entity that is an Affiliate of Borrower, provided that such cash
dividend or cash distribution is made from Inflow Transfer received by Borrower
after March 31, 2009, in excess of $5,175,000.
(e) Clauses (e), (f) and (g) of the definition of Permitted Investment in Exhibit A
to the Original Agreement are hereby amended in their entirety to read as follows:
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(e)
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Advances by Borrower to Supplies Distributor, Inc. pursuant to
the Subordinated Demand Note, so long as (1) the aggregate outstanding
principal amount of such Indebtedness does not exceed $6,500,000 (excluding
accrued and unpaid interest) at any time, and (2) before and after giving
effect to such advances no Event of Default has occurred and is continuing;
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(f)
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Incremental cash Investments by Borrower in or cash advances
to SPRL PFSweb B.V., Priority Fulfillment Services of Canada, Inc., eCOST
Philippine Services LLC, PFSM, LLC and eCOST.com, not to exceed $150,000,
provided that (1) the aggregate amount of all Inflow Transfers after March 30,
2009 and prior to April 30, 2009 equals or exceeds $500,000, and (2) at the
time of each such incremental cash Investment and after giving effect thereto,
no Event of Default has occurred and is continuing.
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(g)
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Investments which constitute Permitted Distributions,
provided that before and after giving effect to each such Investment, no Event
of Default has occurred and is continuing.
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§ 2.2
Interest Rates and Payments
. Section 2.3 of the Original Agreement is hereby amended
in its entirety to read as follows:
§ 2.3
Interest Rates, Payments and Calculations
. Interest shall accrue on the
Advances and shall be payable as set forth in the Prime References Rate Addendum to Loan and
Security Agreement attached hereto and made a part hereof.
§ 2.3
Fees
. Section 2.5(a) of the Original Agreement is hereby amended in its entirety to
read as follows:
(a)
Facility Fee
. A facility fee in the aggregate amount of $50,000 to be paid
on April 1, 2009.
§ 2.4
Financial Statements
.
(a) The due date for the financial statements due for the calendar month of January 2009 under
Section 6.2(a) of the Original Agreement is hereby extended to March 31, 2009.
(b) Section 6.2(j) of the Original Agreement is hereby amended to read as follows:
(j) within 30 days after the last day of each month, Borrower shall deliver to Bank a
Borrowing Base Certificate signed by a Responsible Officer, together with aged listings by
invoice date of accounts receivable and accounts payable; provided that if the average
outstanding amount of Advances during any fiscal quarter of Borrower exceeds forty percent
(40%) of the Committed Revolving Line then in effect, Borrower shall deliver its Borrowing
Base Certificate on a semi-monthly basis during the immediately following fiscal quarter,
such certificates being due within 15 days and 30 days after the
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last day of each month during such fiscal quarter;
(b) Section 6.2 of the Original Agreement is hereby amended to add the following clause (u)
thereto:
(u) as soon as available, but in any event within 30 days after the end of each
calendar month, a preliminary company prepared income statement of Borrower for such
calendar month.
§ 2.5
Financial Covenants
.
(a) Section 6.7(a) of the Original Agreement is hereby amended in its entirety to read as
follows:
(a)
Liquidity Ratio
. A ratio of (i) Cash (including all pledged Cash with Bank
for repayment of the Bonds) plus Eligible Accounts to (ii) all Indebtedness to Bank of at
least 1.25 to 1.00.
(b) Section 6.7(d) of the Original Agreement is hereby amended in its entirety to read as
follows:
(d)
EBITDA
. As of the last day of each calendar month, the variance, if
negative, then expressed as a positive number, between Borrowers EBITDA and the EBITDA set
forth in the Approved Projections for the twelve (12) calendar month period ending on such
date, shall not exceed $350,000. As used herein, EBITDA shall mean, for any period of
calculation, Borrowers earnings for such period before interest and taxes plus
depreciation, amortization and non-cash stock compensation accruals to the extent deducted
in the calculation of such earnings. Approved Projections means for any period of time,
the projections for such period that have been reviewed by Borrowers Board of Directors and
delivered to Bank. Borrower shall deliver to Bank (i) a preliminary draft of the
projections for the next fiscal year of Borrower by January 31 of each year and (ii) the
updated projections reviewed by Borrowers Board of Directors for the next fiscal year not
later than March 10 of each year.
§ 2.6
Affirmative Covenants
. The following Section 6.12 is hereby added to the
Original Agreement:
6.12
Inflow Transfers
. Borrower shall receive not less than $5,175,000 in
aggregate Inflow Transfers during the period beginning March 31, 2009 and ending on July 2,
2009.
§ 2.7
Negative Covenants
. Section 7.12 of the Original Agreement is hereby amended in its
entirety to read as follows:
7.12
Capital Expenditures
. Make capital expenditures in an aggregate amount
greater than $4,000,000 in each fiscal year of Borrower, provided that the aggregate amount
of such expenditures purchased with cash (and not financed) shall not exceed
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$650,000; provided further, that any capital expenditures made by Borrower exclusively from
the proceeds of Permitted Distributions shall not be subject to the foregoing limitations.
As used herein, the term capital expenditures does not include (i) any software that is
internally developed by Borrower, whether or not Borrower capitalized the development costs,
and (ii) any equipment ordered, but not yet accepted or paid for, by Borrower.
§ 2.8
Exhibits
. The Original Agreement is hereby amended to add the Prime Referenced Rate
Addendum to Loan and Security Agreement thereto in the form attached hereto.
ARTICLE III.
Conditions of Effectiveness
§ 3.1
Effective Date
. This Amendment shall become effective as of the date first above
written when and only when Bank shall have received, at Banks office, a counterpart of this
Amendment executed and delivered by Borrower.
ARTICLE IV.
Representations and Warranties
§ 4.1
Representations and Warranties of Borrower
. In order to induce Bank to enter into
this Amendment, Borrower represents and warrants to Bank that:
(a) The representations and warranties contained in Article 5 of the Original Agreement
are true and correct at and as of the time of the effectiveness hereof.
(b) Borrower is duly authorized to execute and deliver this Amendment and is and will
continue to be duly authorized to borrow and to perform its obligations under the Loan
Agreement. Borrower has duly taken all corporate action necessary to authorize the
execution and delivery of this Amendment and to authorize the performance of the obligations
of Borrower hereunder.
(c) The execution and delivery by Borrower of this Amendment, the performance by
Borrower of its obligations hereunder and the consummation of the transactions contemplated
hereby do not and will not conflict with any provision of law, statute, rule or regulation
or of the organizational documents of Borrower, or of any material agreement, judgment,
license, order or permit applicable to or binding upon Borrower, or result in the creation
of any lien, charge or encumbrance upon any assets or properties of Borrower. Except for
those which have been duly obtained, no consent, approval, authorization or order of any
court or governmental authority or third party is required in connection with the execution
and delivery by Borrower of this Amendment or to consummate the transactions contemplated
hereby.
(d) When duly executed and delivered, each of this Amendment and the Loan Agreement
will be a legal and binding instrument and agreement of Borrower,
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enforceable in accordance with its terms, except as limited by bankruptcy, insolvency
and similar laws applying to creditors rights generally and by principles of equity
applying to creditors rights generally.
ARTICLE V.
Miscellaneous
§ 5.1
Ratification of Agreements
. The Original Agreement as hereby amended is hereby
ratified and confirmed in all respects. Any reference to the Loan Agreement in any Loan Document
shall be deemed to be a reference to the Original Agreement as hereby amended. The execution,
delivery and effectiveness of this Amendment shall not, except as expressly provided herein,
operate as a waiver of any right, power or remedy of Bank under the Loan Agreement or any other
Loan Document nor constitute a waiver of any provision of the Loan Agreement or any other Loan
Document.
§ 5.2
Survival of Agreements
. All representations, warranties, covenants and agreements of
Borrower herein shall survive the execution and delivery of this Amendment and the performance
hereof, including without limitation the making or granting of the Advances, and shall further
survive until all of the Obligations are paid in full. All statements and agreements contained in
any certificate or instrument delivered by Borrower hereunder or under the Loan Agreement to Bank
shall be deemed to constitute representations and warranties by, or agreements and covenants of,
Borrower under this Amendment and under the Loan Agreement.
§ 5.3
Loan Documents
. This Amendment is a Loan Document, and all provisions in the Loan
Agreement pertaining to Loan Documents apply hereto.
§ 5.4
Governing Law
. This Amendment shall be governed by and construed in accordance with
the laws of the State of California and any applicable laws of the United States of America in all
respects, including construction, validity and performance.
§ 5.5
Counterparts
. This Amendment may be separately executed in counterparts and by the
different parties hereto in separate counterparts, each of which when so executed shall be deemed
to constitute one and the same Amendment.
THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES
AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF
THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS OF THE PARTIES.
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IN WITNESS WHEREOF, this Amendment is executed as of the date first above written.
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PRIORITY FULFILLMENT SERVICES, INC.
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By:
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Name:
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Title:
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COMERICA BANK
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By:
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Name:
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Title:
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CONSENT AND AGREEMENT
PFSWEB, INC., a Delaware corporation, hereby consents to the provisions of this Amendment and
the transactions contemplated herein, and hereby ratifies and confirms the Guaranty dated as of
December 29, 2004, made by it for the benefit of Bank, and agrees that its obligations and
covenants thereunder are unimpaired hereby and shall remain in full force and effect.
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PFSWEB, INC.
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By:
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Name:
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Title:
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Prime Referenced Rate Addendum To
Loan and Security Agreement
This Prime Referenced Rate Addendum to Loan and Security Agreement (this Addendum) is
entered into as of March ___, 2009, by and between Comerica Bank (Bank) and Priority Fulfillment
Services, Inc. (Borrower). This Addendum supplements the terms of the First Amended and Restated
Loan and Security Agreement dated as of December 29, 2004 (as the same may be amended, modified,
supplemented, extended or restated from time to time, collectively, the Agreement).
1.
Definitions
. As used in this Addendum, the following terms shall have the
following meanings. Initially capitalized terms used and not defined in this Addendum shall have
the meanings ascribed thereto in the Agreement.
a. Applicable Margin means two percent (2.00%) per annum.
b. Business Day means any day, other than a Saturday, Sunday or any other day designated as
a holiday under Federal or applicable State statute or regulation, on which Bank is open for all or
substantially all of its domestic and international business (including dealings in foreign
exchange) in San Jose, California, and, in respect of notices and determinations relating the Daily
Adjusting LIBOR Rate, also a day on which dealings in dollar deposits are also carried on in the
London interbank market and on which banks are open for business in London, England.
c. Daily Adjusting LIBOR Rate means, for any day, a per annum interest rate which is equal
to the quotient of the following:
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(1)
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for any day, the per annum rate of interest determined on the basis
of the rate for deposits in United States Dollars for a period equal to one (1)
month appearing on Page BBAM of the Bloomberg Financial Markets Information
Service as of 8:00 a.m. (California time) (or as soon thereafter as practical) on
such day, or if such day is not a Business Day, on the immediately preceding
Business Day. In the event that such rate does not appear on Page BBAM of the
Bloomberg Financial Markets Information Service (or otherwise on such Service) on
any day, the Daily Adjusting LIBOR Rate for such day shall be determined by
reference to such other publicly available service for displaying eurodollar
rates as may be reasonably selected by Bank, or in the absence of such other
service, the Daily Adjusting LIBOR Rate for such day shall, instead, be
determined based upon the average of the rates at which Bank is offered dollar
deposits at or about 8:00 a.m. (California time) (or as soon thereafter as
practical), on such day, or if such day is not a Business Day, on the immediately
preceding Business Day, in the interbank eurodollar market in an amount
comparable to the principal amount of the Obligations and for a period equal to
one (1) month;
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divided by
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(2)
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1.00 minus the maximum rate (expressed as a decimal) on such day at
which Bank is required to maintain reserves on Euro-currency Liabilities as
defined in and pursuant to Regulation D of the Board of Governors of the Federal
Reserve System or, if such regulation or definition is modified, and as long as
Bank is required to maintain reserves against a category of liabilities which
includes eurodollar deposits or includes a category of assets which includes
eurodollar loans, the rate at which such reserves are required to be maintained
on such category.
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d. Prime Rate means the per annum interest rate established by Bank as its prime rate for
its borrowers, as such rate may vary from time to time, which rate is not necessarily the lowest
rate on loans made by Bank at any such time.
e. Prime Referenced Rate means, for any day, a per annum interest rate which is equal to the
Prime Rate in effect on such day, but in no event and at no time shall the Prime Referenced Rate be
less than the sum of the Daily Adjusting LIBOR Rate for such day plus two and one-half percent
(2.50%) per annum. If, at any time, Bank determines that it is unable to determine or ascertain the
Daily Adjusting LIBOR Rate for any day, the Prime Referenced Rate for each such day shall be the
Prime Rate in effect at such time, but not less than two and one-half percent (2.50%) per annum.
2.
Interest Rate
. Subject to the terms and conditions of this Addendum, the
Obligations under the Agreement shall bear interest at the Prime Referenced Rate plus the
Applicable Margin.
3.
Payment of Interest
. Accrued and unpaid interest on the unpaid balance of the
Obligations outstanding under the Agreement shall be payable monthly, in arrears, on the 15th day
of each month, until maturity (whether as stated herein, by acceleration, or otherwise). In the
event that any payment under this Addendum becomes due and payable on any day which is not a
Business Day, the due date thereof shall be extended to the next succeeding Business Day, and, to
the extent applicable, interest shall continue to accrue and be payable thereon during such
extension at the rates set forth in this Addendum. Interest accruing hereunder shall be computed
on the basis of a year of 360 days, and shall be assessed for the actual number of days elapsed,
and in such computation, effect shall be given to any change in the applicable interest rate as a
result of any change in the Prime Referenced Rate on the date of each such change.
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4.
Banks Records
. The amount and date of each advance under the Agreement, its
applicable interest rate, and the amount and date of any repayment shall be noted on Banks
records, which records shall be conclusive evidence thereof, absent manifest error;
provided
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however
, any failure by Bank to make any such notation, or any error in
any such notation, shall not relieve Borrower of its obligations to repay Bank all amounts payable
by Borrower to Bank under or pursuant to this Addendum and the Agreement, when due in accordance
with the terms hereof.
5.
Default Interest Rate
. From and after the occurrence of any Event of Default, and
so long as any such Event of Default remains unremedied or uncured thereafter, the Obligations
outstanding under the Agreement shall bear interest at a per annum rate of five percent (5%) above
the otherwise applicable interest rate hereunder, which interest shall be payable upon demand. In
addition to the foregoing, a late payment charge equal to five percent (5%) of each late payment
hereunder may be charged on any payment not received by Bank within ten (10) calendar days after
the payment due date therefor, but acceptance of payment of any such charge shall not constitute a
waiver of any Event of Default under the Agreement. In no event shall the interest payable under
this Addendum and the Agreement at any time exceed the maximum rate permitted by law.
6.
Prepayment
. Borrower may prepay all or part of the outstanding balance of any
Obligations at any time without premium or penalty. Any prepayment hereunder shall also be
accompanied by the payment of all accrued and unpaid interest on the amount so prepaid. Borrower
hereby acknowledges and agrees that the foregoing shall not, in any way whatsoever, limit,
restrict, or otherwise affect Banks right to make demand for payment of all or any part of the
Obligations under the Agreement due on a demand basis in Banks sole and absolute discretion.
7.
Regulatory Developments or Other Circumstances Relating to the Daily Adjusting LIBOR
Rate
.
a. If the adoption after the date hereof, or any change after the date hereof in, any
applicable law, rule or regulation (whether domestic or foreign) of any governmental authority,
central bank or comparable agency charged with the interpretation or administration thereof, or
compliance by Bank with any request or directive (whether or not having the force of law) made by
any such authority, central bank or comparable agency after the date hereof: (a) shall subject Bank
to any tax, duty or other charge with respect to this Addendum or any Obligations under the
Agreement, or shall change the basis of taxation of payments to Bank of the principal of or
interest under this Addendum or any other amounts due under this Addendum in respect thereof
(except for changes in the rate of tax on the overall net income of Bank imposed by the
jurisdiction in which Banks principal executive office is located); or (b) shall impose, modify or
deem applicable any reserve (including, without limitation, any imposed by the Board of Governors
of the Federal Reserve System), special deposit or similar requirement against assets of, deposits
with or for the account of, or credit extended by Bank, or shall impose on Bank or the foreign
exchange and interbank markets any other condition affecting this Addendum or the Obligations
hereunder; and the result of any of the foregoing is to increase the cost to Bank of maintaining
any part of the Obligations hereunder or to reduce the amount of any sum received or receivable by
Bank under this Addendum by an amount deemed by the Bank to be material, then Borrower shall pay to
Bank, within fifteen (15) days of Borrower=s receipt of written notice from Bank demanding such
compensation, such additional amount or amounts as will compensate Bank for such increased cost or
reduction. A certificate of Bank, prepared in good faith and in reasonable detail by Bank and
submitted by Bank to Borrower, setting forth the basis for determining such additional amount or
amounts necessary to compensate Bank shall be conclusive and binding for all purposes, absent
manifest error.
b. In the event that any applicable law, treaty, rule or regulation (whether domestic or
foreign) now or hereafter in effect and whether or not presently applicable to Bank, or any
interpretation or administration thereof by any governmental authority charged with the
interpretation or administration thereof, or compliance by Bank with any guideline, request or
directive of any such authority (whether or not having the force of law), including any risk-based
capital guidelines, affects or would affect the amount of capital required or expected to be
maintained by Bank (or any corporation controlling Bank), and Bank determines that the amount of
such capital is increased by or based upon the existence of any obligations of Bank hereunder or
the maintaining of any Obligations hereunder, and such increase has the effect of reducing the rate
of return on Banks (or such controlling corporations) capital as a consequence of such
obligations or the maintaining of such Obligations hereunder to a level below that which Bank (or
such controlling corporation) could have achieved but for such circumstances (taking into
consideration its policies with respect to capital adequacy), then Borrower shall pay to Bank,
within fifteen (15) days of Borrowers receipt of written notice from Bank demanding such
compensation, additional amounts as are sufficient to compensate Bank (or such controlling
corporation) for any increase in the amount of capital and reduced rate of return which Bank
reasonably determines to be allocable to the existence of any obligations of the Bank hereunder or
to maintaining any Obligations hereunder. A certificate of Bank as to the amount of such
compensation, prepared in good faith and in reasonable detail by the Bank and submitted by Bank to
the undersigned, shall be conclusive and binding for all purposes absent manifest error.
8.
Commitment Fee
. In consideration of Banks commitment to make Advances, Borrower
will pay to Bank a commitment fee determined on a daily basis by applying the per annum rate of
0.50% to the Unused Borrowing Base determined at the end of each day. The commitment fee shall be
due and payable in arrears on the last day of each fiscal quarter and at the Revolving Maturity
Date. The term Unused Borrowing Base means, at any time of determination, the Borrowing Base
minus the aggregate amount of outstanding Advances and amounts outstanding under the Letter of
Credit Sublimit
9.
Legal Effect
. Except as specifically modified hereby, all of the terms and
conditions of the Agreement remain in full force and effect.
10.
Conflicts
. As to the matters specifically the subject of this Addendum, in the
event of any conflict between this Addendum and the Agreement, the terms of this Addendum shall
control.
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IN WITNESS WHEREOF, the parties have agreed to the foregoing as of the date first set forth above.
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COMERICA BANK
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PRIORITY FULFILLMENT SERVICES, INC.
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By:
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By:
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Name:
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Name:
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Title:
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Title:
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