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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2007
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-28275
PFSWEB, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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75-2837058
(I.R.S. Employer
Identification Number) |
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500 North Central Expressway, Plano, Texas
(Address of principal executive offices)
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75074
(Zip code) |
Registrant’s telephone number, including area code:
972-881-2900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or 15(d) of the Act. Yes o No þ
Indicate by a 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate
by check mark whether the registrant is a large accelerated filer an
accelerated filer, 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):
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Accelerated filer o |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller Reporting Company þ |
Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
The aggregate market value of the voting stock held by non-affiliates of the registrant as of
June 30, 2007 (based on the closing price as reported by the National Association of Securities
Dealers Automated Quotation System) was $32,274,635.
As of March 26, 2008, there were 46,579,564 shares of the registrant’s Common Stock, $.001 par
value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Annual Report, to the extent not set forth
herein, is incorporated herein by reference from the registrant’s definitive proxy statement
relating to the annual meeting of shareholders, which definitive proxy statement shall be filed
with the Securities and Exchange Commission within 120 days after the end of the fiscal year to
which this Annual Report relates.
INDEX
Unless otherwise indicated, all references to “PFSweb” “the Company,” “we,” “us” and “our”
refer to PFSweb, Inc., a Delaware corporation, and its subsidiaries.
PART I
Item 1. Business
General
PFSweb is an international provider of integrated business process outsourcing solutions to
major brand name companies seeking to maximize their supply chain efficiencies and to extend their
traditional business and e-commerce initiatives as well as a leading multi-category online discount
retailer of new, “close-out” and recertified brand-name merchandise. We derive our revenues from
three business segments: business process outsourcing, a master distributor and an online discount
retailer.
First, in our business process outsourcing business segment operated by our Priority
Fulfillment Services subsidiaries (“PFS”), we derive our revenues from a broad range of services as
we process individual business transactions on our clients’ behalf. These business transactions may
include the answering of a phone call or an e-mail, the design and hosting of a client web-site,
the receipt and storage of a client’s inventory, the kitting and assembly of products to meet a
client’s specifications, the shipping of products to our client’s customer base, the management of
a complex set of electronic data transactions designed to keep our client’s suppliers and customers
accounting records in balance, or the processing of a returned package. In the business process
outsourcing segment, we do not own the inventory or the resulting accounts receivable, but provide
management services for these client-owned assets.
In our second business segment operated by our Supplies Distributors’ subsidiaries we act as a
master distributor of product for InfoPrint Solutions Company (“IPS”), a joint venture company
owned by Ricoh and International Business Machines (“IBM”), and certain other clients. In this
capacity, we purchase and resell for our own account, IPS and other manufacturers’ inventory.
Accordingly, in this business segment, we recognize product revenue and own the accounts receivable
and inventory.
Our third business segment is eCOST.com (“eCOST”), an online discount retailer of new,
“close-out” and recertified brand-name merchandise. This web-commerce product revenue model is
focused on the sale of products to a broad range of consumer and business customers. We currently
offer approximately 170,000 products in several primary merchandise categories, including computer
hardware and software, home electronics, digital imaging, watches and jewelry, housewares, DVD
movies, video games and cellular/wireless.
We are headquartered in Plano, Texas where our executive and administrative offices, and our
primary technology operations and hosting facilities are located. We have an office in El Segundo,
CA which consists of sales, marketing and purchasing operations for our online discount retailer
segment. We operate state-of-the-art call centers from our U.S. facilities located in Plano,
Texas, and Memphis, Tennessee, and from our international facilities located in Markham, Canada,
Liege, Belgium and Manila, Philippines. We lease or manage warehouse facilities of approximately
2.0 million square feet of warehouse space, many containing highly automated and state of the art
material handling and communications equipment, in Memphis, TN, Southaven, MS, Grapevine, TX,
Markham, Canada and Liege, Belgium, allowing us to provide global distribution solutions.
BUSINESS PROCESS OUTSOURCING SEGMENT
PFS is a global provider of web commerce and business process outsourcing solutions. PFS’
service breadth includes logistics and fulfillment, freight and transportation management,
real-time order management, kitting and assembly, customer care, facility operations and
management, turn-key web-commerce infrastructure, payment processing and financial services and
more. Collectively, we define our offering as Business Process Outsourcing because we extend our
clients’ infrastructure and technology capabilities, addressing an entire business transaction
cycle from demand generation to product delivery. Our solutions support both business-to-business
(“B2B”) and business-to-consumer (“B2C”) sales channels.
PFS serves as the “brand behind the brand” for companies seeking to increase their operation’s
efficiencies. As a business process outsourcer, we offer scalable and cost-effective solutions for
manufacturers, distributors, online retailers and direct marketing organizations across a wide
range of industry segments, from consumer goods to
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aviation. We provide our clients with seamless and transparent solutions to support their
business strategies, allowing them to focus on their core competencies. Leveraging PFS’ technology,
expertise and proven methodologies, we enable client organizations to develop and deploy new
products and implement new business strategies or address new distribution channels rapidly and
efficiently through our optimized solutions. Our clients engage us both as a consulting partner to
assist them in the design of a business solution as well as a virtual and physical infrastructure
partner providing the mission critical operations required to build and manage their business
solution. Together, we not only help our clients define new ways of doing business, but also
provide them the technology, physical infrastructure and professional resources necessary to
quickly implement this new business model. We allow our clients to quickly and dramatically change
how they “go-to-market”.
Each client has a unique business model and unique strategic objectives that require highly
customized solutions. PFS supports clients in a wide array of industries including technology
products, consumer goods, aviation, collectibles, luxury goods, food and beverage, apparel and home
furnishings. These clients turn to PFS for help in addressing a variety of business issues that
include customer satisfaction and retention, time-definite logistics, vendor managed inventory and
integration, supply chain compression, cost model realignments, transportation management and
international expansion, among others. We also act as a constructive agent of change, providing
clients the ability to alter their current distribution model, establish direct relationships with
end-customers, and reduce the overall time and costs associated with existing distribution channel
strategies. Our clients are seeking solutions that will provide them with dynamic supply chain and
multi-channel marketing efficiencies, while ultimately delivering a world-class customer service
experience.
Our technology and business infrastructure offering is flexible, reliable and fully scalable.
This flexibility allows us to design custom, variable cost solutions to fit the business
requirements of our clients’ strategies.
Our capabilities are expansive. To offer the most necessary and resourceful solutions to our
clients, we are continually developing capabilities to meet the pressing business issues in the
marketplace. Our business objective is to focus on “Leading the Evolution of
OutsourcingTM.” As our tagline suggests, we will continue to evolve our service offering
to meet the needs of the marketplace and the demands of unique client requirements. We are most
successful when we provide a new capability to enable a client to pursue a new initiative and we
are then able to leverage that revolutionary development across other client or prospect solutions,
as it becomes “best practice” in the marketplace. Our team of experts design and build diverse
solutions for online retailers, technology and consumer goods manufacturers, aviation brands as
well as other major brand name clients around a flexible core of technology and physical
infrastructure that includes:
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Technology collaboration provided by our suite of technology services, called the
Entente Suite(SM), that are e-commerce and collaboration services that enable buyers and
suppliers to fully automate their business transactions within their supply chain. Entente
supports industry standard collaboration techniques including XML based protocols such as
BizTalk and RosettaNet, real-time application interfaces, text file exchanges via secured
FTP, and traditional electronic data interchange (“EDI”); |
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Managed hosting and Internet application development services, including web site
design, creation, integration and ongoing maintenance, support and enhancement of web
sites; |
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Order management, including order processing from any source of entry, back order
processing and future order processing, tracking and tracing, credit management, electronic
payment processing, calculation and collection of sales tax and VAT, comprehensive freight
calculation and email notification, all with multiple currency and language options; |
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Customer Relationship Management (“CRM”), including interactive voice response (“IVR”)
technology and web-enabled customer contact services through world-class call centers
utilizing voice, e-mail, voice over internet protocol (“VOIP”) and internet chat
communications that are fully integrated with real-time systems and historical data
archives to provide complete customer lifecycle management; |
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International fulfillment and distribution services, including warehouse management,
inventory management, vendor managed inventory, inventory postponement, product
warehousing, order picking and packing, freight and transportation management and reverse
logistics; |
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Facility Operations and Management (“FOM”) that includes process reengineering, facility
design and engineering and employee administration; |
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Kitting and assembly services, including light assembly, procurement services, supplier
relationship management, specialized kitting, and supplier consigned inventory hub in our
distribution facilities or co-located in other facilities; |
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Product management and inspection services, including management of coupon programs,
de-kitting and salvage operations and inspection, testing and repackaging services; |
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Information management, including real-time data interfaces, data exchange services and
data mining; |
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Financial services, including secure online credit card processing related services,
fraud protection, invoicing, credit management and collection, and working capital
solutions; and |
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Professional consulting services, including a consultative team of experts that
customize solutions to each client and continuously seek out ways to increase efficiencies
and produce benefits for the client. |
Industry Overview
Business activities in the public and private sectors continue to operate in an environment of
rapid technological advancement, increasing competition and continuous pressure to improve
operating and supply chain efficiency while decreasing costs. We currently see the following trends
within the industry:
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Manufacturers strive to restructure their supply chains to maximize efficiency and
reduce costs in both B2B and B2C markets and to create a variable-cost supply chain able to
support the multiple, unique needs of each of their initiatives, including traditional and
electronic commerce. |
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Companies in a variety of industries seek outsourcing as a method to address one or
more business functions that are not within their core business competencies, to reduce
operating costs or to improve the speed or cost of implementation. |
Supply Chain Management Trend
As companies maintain focus on improving their businesses and balance sheet financial ratios,
significant efforts and investments continue to be made identifying ways to maximize supply chain
efficiency and extend supply chain processes. Working capital financing, vendor managed inventory,
supply chain visibility software solutions, distribution channel skipping, direct to consumer
e-commerce sales initiatives, and complex upstream supply chain collaborative technology are
products that manufacturers seek to help them achieve greater supply chain efficiency.
A key business challenge facing many manufacturers and retailers as they evaluate their supply
chain efficiency is in determining how the trend toward increased direct-to-customer business
activity will impact their traditional B2B and B2C commerce business models. Order management and
small package fulfillment and distribution capabilities are becoming increasingly important
processes as this trend evolves. We believe manufacturers will look to outsource their non-core
competency functions to support this modified business model. We believe that companies will
continue to strategically plan for the impact that e-commerce and other new technology advancements
will have on their traditional commerce business models and their existing technology and
infrastructure capabilities.
Manufacturers, as buyers of materials, are also imposing new business practices and policies
on their supplier partners in order to shift the normal supply chain costs and risks associated
with inventory ownership away from their own balance sheets. Through techniques like Vendor Managed
Inventory or Consigned Inventory Programs (“CIP”), manufacturers are asking their suppliers, as a
part of the supplier selection process, to provide capabilities where the manufacturer need not
own, or even possess, inventory prior to the exact moment that unit of inventory is required as a
raw material component or for shipping to a customer. To be successful for all parties, business
models
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such as these often require a sophisticated collection of technological capabilities that
allow for complete integration and collaboration of the information technology environments of both
the buyer and supplier. For example, for an inventory unit to arrive at the precise required moment
in the manufacturing facility, it is necessary for the Manufacturing Resource Planning systems of
the manufacturer to integrate with the CRM systems of the supplier. When hundreds of supplier
partners are involved, this process can become quite complex and technologically challenging.
Buyers and suppliers are seeking solutions that utilize XML based protocols like BizTalk,
RosettaNet and other traditional EDI standards in order to ensure an open systems platform that
promotes easier technology integration in these collaborative solutions.
Outsourcing Trend
In response to growing competitive pressures and technological innovations, we believe many
companies, both large and small, are focusing their critical resources on the core competencies of
their business and utilizing business process outsourcing to accelerate their business plans in a
cost-effective manner and perform non-core business functions. Outsourcing can provide many key
benefits, including the ability to:
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Enter new business markets or geographic areas rapidly; |
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Increase flexibility to meet changing business conditions and demand for products and
services; |
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Enhance customer satisfaction and gain competitive advantage; |
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Reduce capital and personnel investments and convert fixed investments to variable
costs; |
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Improve operating performance and efficiency; and |
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Capitalize on skills, expertise and technology infrastructure that would otherwise be
unavailable or expensive given the scale of the business. |
Typically, many outsourcing service providers are focused on a single function, such as
information technology, call center management, credit card processing, warehousing or package
delivery. This focus creates several challenges for companies looking to outsource more than one of
these functions, including the need to manage multiple outsourcing service providers, to share
information with service providers and to integrate that information into their internal systems.
Additionally, the delivery of these multiple services must be transparent to the customer and
enable the client to maintain brand recognition and customer loyalty. Furthermore, traditional
commerce outsourcers are frequently providers of domestic-only services versus international
solutions. As a result, companies requiring global solutions must establish additional
relationships with other outsourcing parties.
Another vital point for major brand name companies seeking to outsource is the protection of
their brand. When looking for an outsourcing partner to provide infrastructure solutions, brand
name companies must find a company that can ensure the same quality performance and superior
experience that their customers expect from their brands. Working with an outsourcing partner
requires finding a partner that can maintain the consistency of their brand image, which is one of
the most valuable intangible assets that recognized brand name companies possess.
The PFS Solution
PFS serves as the “brand behind the brand” for companies seeking to increase the efficiencies
of all aspects of their supply chain.
Our value proposition is to become an extension of our clients’ businesses by delivering a
superior experience that increases and enhances sales and market growth, customer satisfaction and
customer retention. We act as both a virtual and a physical infrastructure for our clients’
businesses. By utilizing our services, our clients are able to:
Quickly Capitalize on Market Opportunities. Our solutions empower clients to rapidly
implement their supply chain and e-commerce strategies and to take advantage of opportunities
without lengthy integration and implementation efforts. We have ready built technology and a
physical infrastructure that is flexible in its design, which facilitates quick integration and
implementation. The PFS solution is designed to allow our clients to deliver consistent quality
service as transaction volumes grow and also to handle daily and seasonal peak periods. Through our
international locations, our clients can sell their products throughout the world.
Improve the Customer Experience. We enable our clients to provide their customers with a
high-touch, positive
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buying experience thereby maintaining and promoting brand loyalty. Through our use of advanced
technology, we can respond directly to customer inquiries by e-mail, voice or data communication
and assist them with online ordering and product information. We offer our clients a “world-class”
level of service, including 24-hour, seven-days-a-week, Web-enabled customer care service centers,
detailed CRM reporting and exceptional order accuracy. We have significant experience in the
development of Internet web sites that allows us to recommend features and functions that are
easily navigated and understood by our client’s customers. Our technology platform is designed to
ensure high levels of reliability and fast response times for our clients’ customers. Because our
technology is “world-class,” our clients benefit from being able to offer the latest in customer
communication and response conveniences to their customers.
Minimize Investment and Improve Operating Efficiencies. One of the most significant benefits
that outsourcing can provide is the ability to transform fixed costs into variable costs. By
eliminating the need to invest in a fixed capital infrastructure, our clients’ costs typically
become directly correlated with volume increases or declines. Further, as volume increases drive
the demand for greater infrastructure or capacity, we are able to quickly deploy additional
resources. We provide services to multiple clients, which enables us to offer our clients economies
of scale, and resulting cost efficiency, that they may not have been able to obtain on their own.
Additionally, because of the large number of daily transactions we process, we have been able to
justify investments in levels of automation, security surveillance, quality control processes and
transportation carrier interfaces that are typically outside the scale of investment that our
clients might be able to cost justify on their own. These additional capabilities can provide our
clients the benefits of enhanced operating performance and efficiency, reduced inventory shrinkage,
and expanded customer service options.
Access a Sophisticated Technology Infrastructure. We provide our clients with ready access to
a sophisticated technology infrastructure through our Entente Suite(SM), which is designed to
interface seamlessly with their systems. We provide our clients with vital product and customer
information that can be immediately available to them on their own systems or through web based
graphic user interfaces for use in data mining, analyzing sales and marketing trends, monitoring
inventory levels and performing other management functions.
PFS Services
We offer a comprehensive and integrated set of business infrastructure solutions that are
tailored to our clients’ specific needs and enable them to quickly and efficiently implement their
supply chain strategies. Our services include:
Technology Collaboration. We have created the Entente Suite(SM), which illustrates the level
of electronic cooperation that is possible when we construct solutions with our clients using this
technology service offering. This set of technology services encompasses a wide range of business
functions from order processing and inventory reporting to total e-commerce design and
implementation. The Entente Suite(SM) comprises five key services— EntenteWeb®, EntenteDirect®,
EntenteMessage®, EntenteReport® and EntentePartnerConnect™.
EntenteWeb® is a one-stop shop for the entire e-commerce process, particularly for companies
with unusual needs or specific requests that are not easily met by the typical e-commerce
development packages. EntenteWeb® is a service utilizing our revolutionary GlobalMerchant
Commerceware™ e-commerce software platform that is particularly focused to enable global commerce
strategies with its extensive currency and language functionality. EntenteDirect® provides clients
with a real-time, web service enabled user-friendly interface between their system and our order
processing, warehouse management and related functions. Using real-time or batch processes,
EntenteMessage® is a file exchange service for clients using our warehousing and distribution
facilities. EntenteReport® is a reporting and inquiry service particularly suited to companies
that need to put key e-commerce information into the hands of business users, but do not have the
IT resources to facilitate the necessary data extraction, manipulation and presentation.
EntenteReport® consists of an industry-standard browser-based report writer and a client-customized
data warehouse configuration.
EntentePartnerConnect™ is a data repository and retrieval service for providing our clients
with access to comprehensive product and service information across a wide variety of product and
service categories. This information is aggregated from multiple sources including PFS business
partners such as Etilize that specialize in creating product content in certain categories. We
also rely on other relationships and public-domain information
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sources to supply raw data for this service. Access to this information will be provided
through the other Entente Suite(SM) components including web sites created using EntenteWeb® and
real-time or batch interfaces available through EntenteDirect® and EntenteMessage®. We provide the
EntentePartnerConnect™ service to our wholly-owned subsidiary eCOST via the eCOST.com web site.
The content available for the wide-range of products offered on eCOST.com is provided by
EntentePartnerConnect™. The information available from EntentePartnerConnect™ for additional
product categories offers eCOST the opportunity to increase revenues through an expanded product
offering and potential future product category expansion. We use EntentePartnerConnect™ when we
host our clients’ web sites using our EntenteWeb® hosted web service and GlobalMerchant
Commerceware platform.
The Entente Suite(SM) operates in an open systems environment and features the use of
industry-standard XML and SOA web services, enabling customized e-commerce solutions with minimal
changes to a client’s systems or our Enterprise Resource Planning (“ERP”) systems. The result is a
faster implementation process. The Entente Suite(SM) offers companies a more robust electronic
information transfer option over the traditional methods. FTP or EDI, MQ Series, ALE, HTTP, and
HTTPS transfer methods are also supported.
EntenteWeb® Managed Hosting and Internet Application Development. Our EntenteWeb® service
provides a complete e-commerce website solution for our clients. We engage collaboratively with
our clients to design, build, host, and manage fully branded, fully customized and fully integrated
e-commerce web applications for B2C and B2B channels. As with all major brand name companies,
consistency within the brand image is vital; therefore, our web designers create online stores that
seamlessly integrate and mirror the exact brand image of our clients.
We offer a broad range of hosting and support plans that can be tailored to fit the needs of
each client. Utilizing IBM’s eServer xSeries servers, Microsoft’s.NET Technologies and our
proprietary GlobalMerchant Commerceware platform, we maintain a robust hosting environment for our
hosted client web site properties. Additionally, our EntenteWeb® service includes state-of-the-art
web analytics via Web Trends OnDemand — Enterprise Edition. This highly advanced and flexible
analytics tool delivers the critical e-business information that our clients need to maximize the
effectiveness of their online store.
EntenteWeb® is a complete front-to-back e-commerce service that incorporates components
ranging from the look of the user interface to specific business purchasing, warehousing and
shipping needs, enabling companies to define in exact terms their desired e-commerce site
functionality.
Order Management. Our order management solutions provide clients with interfaces that allow
for real-time information retrieval, including information on inventory, sales orders, shipments,
delivery, purchase orders, warehouse receipts, customer history, accounts receivable and credit
lines. These solutions are seamlessly integrated with our web-enabled customer contact centers,
allowing for the processing of orders through shopping cart, phone, fax, mail, email, web chat, and
other order receipt methods. As the information backbone for our total supply chain solution, order
management services can be used on a stand-alone basis or in conjunction with our other business
infrastructure offerings, including customer contact, financial or distribution services. In
addition, for the B2B market, our technology platform provides a variety of order receipt methods
that facilitate commerce within various stages of the supply chain. Our systems provide the ability
for both our clients and their customers to track the status of orders at any time. Our services
are transparent to our clients’ customers and are seamlessly integrated with our clients’ internal
systems platforms and web sites. By synchronizing these activities, we can capture and provide
critical customer information, including:
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Statistical measurements critical to creating a quality customer experience, containing
real-time order status, order exceptions, back order tracking, allocation of product based
on timing of online purchase and business rules, the ratio of customer inquiries to
purchases, average order sizes and order response time; |
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B2B supply chain management information critical to evaluating inventory positioning,
for the purpose of reducing inventory turns, and assessing product flow through and
end-consumer demand; |
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Reverse logistics information including customer response and reason for the return or
rotation of product and desired customer action; |
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Detailed marketing information about what was sold and to whom it was sold, by location
and preference; and |
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Web traffic reporting showing the number of visits (“hits”) received, areas visited,
and products and information requested. |
Customer Relationship Management. We offer a completely customized CRM solution for clients.
Our CRM solution encompasses a full-scale customer contact management service offering, as well as
a fully integrated customer analysis program. All customer contacts are captured and customer
purchases are documented. Full-scale reporting on all customer transactions is available for
evaluation purposes. Through each of our customer touch-points, information can be analyzed and
processed for current or future use in business evaluation, product effectiveness and positioning,
and supply chain planning.
An important feature of evolving commerce remains the ability for the customer to speak with a
live customer service representative. Our experience has been that a majority of consumers tell us
they visited the web location for information, but not all of those consumers chose to place their
order online. Our customer care services utilize features that integrate voice, e-mail, standard
mail, data and Internet chat communications to respond to and handle customer inquiries. Our
customer care representatives answer various questions, acting as virtual representatives of our
client’s organization, regarding order status, shipping, billing, returns and product information
and availability as well as a variety of other questions. For certain clients, we handle Level I
and Level II technical support. Level I technical support involves assisting clients’ customers
with basic technical issues, i.e. computer application issues. Level II support may involve a more
in-depth question and answer session with the customer. Our web-enabled customer care technology
identifies each customer contact automatically and routes it to the available customer care
representative who is individually certified in the client’s business and products.
Our web-enabled customer care centers are designed so that our customer care representatives
can handle several different clients and products in a shared environment, thereby creating economy
of scale benefits for our clients as well as highly customized dedicated support models that
provide the ultimate customer experience and brand reinforcement. Our advanced technology also
enables our representatives to up-sell, cross-sell and inform customers of other products and sales
opportunities. The web-enabled customer care center is fully integrated into the data management
and order processing system, allowing full visibility into customer history and customer trends.
Through this fully integrated system, we are able to provide a complete CRM solution.
With the need for efficiency and cost optimization for many of our clients, we have integrated
IVR as another option for customer contacts. IVR creates an “electronic workforce” with virtual
agents that can assist customers with vital information at any time of the day or night. IVR allows
for our clients’ customers to deal interactively with our system to handle basic customer
inquiries, such as account balance, order status, shipment status, catalog requests, product and
price inquiries, and routine order entry for established customers. The inclusion of IVR to our
service offering allows us to offer a cost effective way to handle high volume, low complexity
calls.
International Fulfillment and Distribution Services. An integral part of our solution is the
warehousing and distribution of inventory either owned by our clients or owned by us. We currently
have approximately 2 million square feet of leased or managed warehouse space domestically and
internationally to store and process our and our clients’ inventory. We receive client inventory in
our distribution centers, verify shipment accuracy, unpack and audit packages (a process that
includes spot-checking a small percentage of the client’s inventory to validate piece counts and
check for damages that may have occurred during shipping, loading and unloading). Upon request, we
inspect for other damages or defects, which may include checking fabric, stitching and zippers for
soft goods, or ‘testing’ power-up capabilities for electronic items. We generally stock for sale
within one business day of unloading. On behalf of our clients, we pick, pack and ship their
customer orders and can provide customized packaging, inserts and promotional literature for
distribution with customer orders. For many clients, we provide gift-wrapping services including
customized gift-wrapping paper, ribbon, gift-box and gift-messaging.
Our distribution facilities contain computerized sortation equipment, highly mobile
pick-to-light carts, powered material handling equipment, scanning and bar-coding systems and
automated conveyors, in-line scales and x-ray equipment used to inspect shipment contents for
automatic accuracy checking. Our international distribution complexes include several advanced
technology enhancements, such as radio frequency technology in product
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receiving processing to ensure accuracy, as well as an automated package routing and a
pick-to-light paperless order fulfillment system. Our advanced distribution systems provide us with
the capability to warehouse an extensive number of stock keeping units (SKUs) for our clients,
ranging from large high-end laser printers to small cosmetic compacts. Our facilities are flexibly
configured to process B2B and single pick B2C orders from the same central location.
In addition to our advanced distribution systems, our pick-to-light carts and conveyor system
controls provide real time productivity reporting, thereby providing our management team with the
tools to implement productivity standards. Our fleet of pick-to-light carts also fully integrates
with our Vertical Lift Module (VLM), which is capable of stocking more than two thousand SKUs.
This combination of computer-controlled equipment provides the seamless integration of our
pick-to-light and mass storage capabilities. This unique combination of technologies ensures high
order accuracy for each and every customer order.
Our primary B2B facility is in Southaven, MS, containing approximately 366,000 square feet of
space. The Southaven facility has clear height added cubic space utilization, state-of-the-art
lighting that increases the quality and volume of light while reducing energy costs, and certain
long-term tax incentives offered by the State of Mississippi. Southaven maintains the same
proximity to all modes of transportation compared with our Memphis facilities.
During 2006 we added an additional facility in Memphis, TN consisting of more than 160,000
square feet that was retrofitted for new client additions and became operational during the second
quarter of 2007. This space allows for additional growth.
During 2007, we warehoused, managed and fulfilled more than $2.9 billion in merchandise and
transactions. Much of this does not represent our revenue, but rather the revenue of our clients’
for whom we provided business process outsourcing solutions. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
Based upon our clients’ needs, we are able to take advantage of a variety of shipping and
delivery options, which range from next day service to zone skipping to optimize transportation
costs. Our facilities and systems are equipped with multi-carrier functionality, allowing us to
integrate with all leading package carriers and provide a comprehensive freight and transportation
management offering. In addition, an increasingly important function that we provide for our
clients is reverse logistics management. We offer a wide array of product return services,
including issuing return authorizations, receipt of product, crediting customer accounts, and
disposition of returned product.
Our domestic clients enjoy the benefits of having their inventory assets secured by a network
of trained law enforcement professionals, who have developed and continue to operate a world-class
security network from our security headquarters in Memphis, TN and Southaven, MS. As part of our
services for one of our clients, certain of our security plans and procedures are reviewed and
approved by a U.S. federal agency. Continual validation ensures that we employ the latest in
security processes and procedures to further enhance our surveillance and detection capabilities.
Our security program continues to gain trust and confidence from our clients as we protect their
product and assets.
Facility Operations and Management. Our FOM service offering includes distribution facility
design and optimization, business process reengineering and ongoing staffing and management. Along
with our operations in Mississippi and Tennessee, we also manage an aircraft parts distribution
center in Grapevine, TX on behalf of Hawker Beechcraft Corp. Our expertise in supply chain
management, logistics and customer-centric fulfillment operations extends through our management of
client-owned facilities, resulting in cost reductions, process improvements and technology-driven
efficiencies.
Kitting and Assembly Services. Our expanded kitting and assembly services enable our clients
to reduce the time and costs associated with managing multiple suppliers, warehousing hubs, and
light manufacturing partners. As a single source provider, we provide clients with the advantage of
convenience, accountability and speed. Our comprehensive kitting and assembly services provide a
quality one-stop resource for any international channel. Our kitting and assembly services include
light assembly, specialized kitting and supplier-consigned inventory hub either
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in our distribution facilities or co-located elsewhere. We also offer customized light
manufacturing and Supplier Relationship Management.
We will work with clients to re-sequence certain supply chain activities to aid in an
inventory postponement strategy. We can provide kitting and assembly services and build-to-stock
thousands of units daily to stock in a Just-in-Time (“JIT”) environment. This service, for example,
can entail the procurement of packaging materials including retail boxes, foam inserts and
anti-static bags. These raw material components would be shipped to us from domestic or overseas
manufacturers, and we will build the finished SKUs to stock for the client. Also included is the
custom configuration of high-end printers and servers. This strategy allows manufacturers to make
a smaller investment in base unit inventory while meeting changing customer demand for highly
customizable product.
Combining our assembly services with our supplier-owned inventory hub services allows our
clients to reduce cycle times, to compress their supply chains and to consolidate their operations
and supplier management functions. We have supplier inventory management, assembly and fulfillment
services all in one place, providing greater flexibility in product line utilization, as well as
rapid response to change orders or packaging development. Our standard capabilities include:
build-to-order, build-to-stock, expedited orders, passive and active electrostatic discharge
(“ESD”) controls, product labeling, serial number generation, marking and/or capture, lot number
generation, asset tagging, bill of materials (“BOM”) or computer automated design (“CAD”)
engineering change processing, SKU-level pricing and billing, manufacturing and metrics reporting,
first article approval processes, and comprehensive quality controls.
Our kitting and assembly services also include procurement. We work directly with client
suppliers to make JIT inventory orders for each component in client packages, thereby ensuring we
receive the appropriate inventory quantities at just the right time and we then turn them around
JIT to customers.
Kitting and inventory hub services enable clients to collapse supply chains into the minimal
steps necessary to prepare product for distribution to any channel, including wholesale, mass
merchant retail, or direct to consumer. Clients no longer have to employ multiple providers or
require suppliers to consign multiple inventory caches for each channel. We offer our clients the
opportunity to consolidate operations from a channel standpoint, as well as from a geographic
perspective. Our integrated, global information systems and international locations support client
business needs worldwide.
Product Management and Inspection Services. We also operate a coupon management system and
product management program. Coupons are managed and activated by a unique serial number that ties
the coupon to the individual sales order thus significantly reducing fraudulent activity. Our
capabilities also extend into de-kitting and salvage operations, allowing our clients to reclaim
valuable raw materials and components from discontinued or obsolete inventory.
We operate a test and repair center where we visually inspect items for cosmetic defects.
These items are put through rigorous testing that includes: functionality, durability, accessory
inspection and packaging. Items that pass the testing are repackaged and resold with a noted
exception of “open-box” merchandise. Items that fail the inspection are disassembled and working
spare parts are saved for future use in repairs.
Information Management. We have the ability to communicate with and transfer information to
and from our clients through a wide variety of technology services, including real-time web service
enabled data interfaces, file transfer methods and electronic data interchange. Our systems are
designed to capture, store and electronically forward to our clients critical information regarding
customer inquiries and orders, product shipments, inventory status (for example, levels of
inventory on hand, on backorder, on purchase order and inventory due dates to our warehouse),
product returns and other information. We maintain for our clients detailed product databases that
can be seamlessly integrated with their web sites utilizing the capabilities of the Entente
Suite(SM). Our systems are capable of providing our clients with customer inventory and order
information for use in analyzing sales and marketing trends and introducing new products. We also
offer customized reports and data analyses based upon specific client needs to assist them in their
budgeting and business decision process.
Financial Services. Our financial services are divided into two major areas: 1) billing,
credit and collection services for B2B and B2C clients and 2) working capital solutions, where we
act as a virtual and physical financial
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management department to fulfill our clients’ needs.
We offer secure credit and collections services for both B2B and B2C businesses.
Specifically, for B2C clients, we offer secure credit card processing related services for orders
made via a client web site or through our customer contact center. We offer manual credit card
order review as an additional level of fraud protection. We also calculate sales taxes, goods and
services taxes or value added taxes, if applicable, for numerous taxing authorities and on a
variety of products. Using third-party leading-edge fraud protection services and risk management
systems, we can offer high levels of security and reduce the level of risk for client transactions.
For B2B clients, we offer full-service accounts receivable management and collection
capabilities, including the ability to generate customized computer-generated invoices in our
clients’ names. We assist clients in reducing accounts receivable and days sales outstanding, while
minimizing costs associated with maintaining an in-house collections staff. We offer electronic
credit services in the format of EDI X.12 and XML communications direct from our clients to their
vendors, suppliers and retailers.
Professional Consulting Services. As part of the tailored solution for our clients, we offer
a full team of experts specifically designated to focus on our clients’ businesses. Team members
play a consultative role, providing constructive evaluation, analysis and recommendations for the
client’s business. This team creates customized solutions and devises plans that will increase
efficiencies and produce benefits for the client when implemented.
Comprised of industry experts from top-tier consulting firms and industry market leaders, our
team of professional consultants provides client service focus and logistics and distribution
expertise. They have built solutions for Fortune 1000 and Global 2000 market leaders in a wide
range of industries, including apparel, technology, telecommunications, cosmetics, aviation,
housewares, high-value collectibles, sporting goods, pharmaceuticals and several more. Focusing on
the evolving infrastructure needs of major corporations and their business initiatives, our team
has a solid track record providing consulting services in the areas of supply chain management,
distribution and fulfillment, technology interfacing, logistics and customer support.
Clients and Marketing
Our target clients include online retailers as well as leading technology, consumer goods and
aviation brands looking to quickly and efficiently implement or enhance business initiatives, adapt
their go-to-market strategies, or introduce new products or programs, without the burden of
modifying or expanding their technology, customer care, supply chain and logistics infrastructure.
Our solutions are applicable to a multitude of industries and company types and we have provided
solutions for such companies as:
IBM (printer supplies in several geographic areas), Adaptec (computer accessories), the United
States Government as a sub-contractor (high-value collectibles), CHiA’SSO (a contemporary home
furnishings and decor cataloguer), Xerox (printers and printer supplies), Nokia (cell phone
accessories), Roots Canada LTD. (apparel), Hewlett-Packard (printers and computer networking
equipment), MARS Drinks North America (formerly FLAVIA® Beverage Systems), Hawker Beechcraft Corp.
(formerly Raytheon Aircraft Company) (FOM and time-definite logistics supporting parts
distribution), Fathead (a consumer goods manufacturer), Riverbed Technologies (a wide-area data
services provider) and LEGO Brand Retail (a toy manufacturer) amongst many others.
We target potential clients through an extensive integrated marketing program that is
comprised of a variety of direct marketing techniques, trade event participation, search engine
marketing, public relations and a sophisticated outbound tele-sales lead generation model. We have
also developed an intricate messaging matrix that defines our various business process outsourcing
solutions and products, the vehicles we utilize to deliver marketing communication on these
solutions/products and the target audience segments that display a demand for these
solutions/products. This messaging matrix allows us to deploy highly targeted solution messages to
selected key vertical industry segments where we feel that we are able to provide significant
service differentiation and value. We also pursue strategic marketing alliances with consulting
firms, software manufacturers and other logistics providers to increase market awareness and
generate referrals and customer leads.
Because of the highly complex nature of the solutions we provide, our clients demand
significant competence and experience from a variety of different business disciplines during the
sales cycle. As such, we utilize a selected
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member of our senior executive team to lead the design and proposal development of each
potential new client we choose to pursue. The senior executive is supported by a select group of
highly experienced individuals from our professional services group with specific industry
knowledge or experience to the solutions development process. We employ a team of highly trained
implementation managers whose responsibilities include the oversight and supervision of client
projects and maintaining high levels of client satisfaction during the transition process between
the various stages of the sales cycle and steady state operations.
Competition
We face competition from many different sources depending upon the type and range of services
requested by a potential client. Many other companies offer one or more of the same services we
provide on an individual basis. Our competitors include vertical outsourcers, which are companies
that offer a single function solution, such as call centers, public warehouses or credit card
processors. We occasionally compete with transportation logistics providers, known in the industry
as 3PL’s and 4PL’s (third or fourth party logistics providers), who offer product management
functions as an ancillary service to their primary transportation services. We also compete against
other business process outsourcing providers, who perform various services similar to our solution
offerings.
In many instances, we compete with the in-house operations of our potential clients
themselves. Occasionally, the operations departments of potential clients believe that they can
perform the same services we do, at similar quality levels and costs, while others are reluctant to
outsource business functions that involve direct customer contact. We cannot be certain that we
will be able to compete successfully against these or other competitors in the future.
Although many of our competitors offer one or more of our services, we believe our primary
competitive advantage is our ability to offer a wide array of customized services that cover a
broad spectrum of business processes, including web-site design and hosting, kitting and assembly,
order processing and shipment, credit card payment processing and customer service, thereby
eliminating any need for our clients to coordinate these services from many different providers. We
believe we can differentiate ourselves by offering our clients a very broad range of business
process services that address, in many cases, the entire value chain, from demand to delivery.
We also compete on the basis of many other important additional factors, including:
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operating performance and reliability; |
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ease of implementation and integration; |
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experience of the people required to successfully and efficiently design and implement
solutions; |
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experience operating similar solutions dynamically, |
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leading edge technology capabilities; |
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global reach; and |
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price. |
We believe that we can compete favorably with respect to many of these factors. However, the
market for our services is competitive and still evolving, and we may not be able to compete
successfully against current and future competitors.
MASTER DISTRIBUTOR SEGMENT
Our Supplies Distributors subsidiaries act as a master distributor of product for IPS and
certain other clients. In this capacity, we purchase and resell for our own account IPS and other
manufacturers’ inventory.
Through Supplies Distributors, we can create and implement client inventory solutions, which
may enable manufacturers to remove inventory and receivables from their balance sheets through the
use of third party financing. We have years of experience in dealing with the issues related to
inventory ownership, secure inventory management, replenishment and product distribution. We can
offer prospective clients a management solution for the entire customer relationship, including
ownership of inventory and receivables. Through CIP, we utilize technology resources to time the
replenishment purchase of inventory with the simultaneous sale of product to the end user. All
interfaces are done electronically and almost all processes regarding the financial transactions
are automated, creating significant supply chain advantages.
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We are experienced in the complex legal, accounting and governmental control issues that can
be hurdles in the successful implementation of working capital financing programs. Our knowledge
and experience help clients achieve supply chain benefits while reducing inventory-carrying costs.
Substantial benefits and improvement to a company’s balance sheet can be achieved through these
working capital solutions.
While we recognize product revenue as a result of our inventory ownership through these
relationships, operationally this segment is virtually the same as our Business Process Outsourcing
Segment. See the preceding discussion for an overview of that segment.
ONLINE DISCOUNT RETAILER SEGMENT
Through eCOST.com, we operate a leading multi-category online discount retailer of high
quality new, close-out and recertified brand-name merchandise. We currently offer approximately
170,000 products in several primary merchandise categories, including computer hardware and
software, home electronics, digital imaging, watches and jewelry, housewares, DVD movies, video
games and cellular/wireless. Additionally, we offer several other categories of products and
services, to consumer and small business customers through what we believe is a unique and convenient
buying experience, offering two shopping formats: every day low price and our proprietary Bargain
Countdown®. This combination of shopping formats helps attract value-conscious customers to our
eCOST.com website who are looking for high quality products at low prices. Additionally, we offer
a fee-based membership program to develop customer loyalty by providing subscribers exclusive
access to preferential offers. We also provide rapid response customer service utilizing a
strategically located distribution center and third-party fulfillment providers, as well as
customer support from online and on-call sales representatives. We offer suppliers an efficient
sales channel for merchandise in all stages of the product life cycle. We carry products from
leading manufacturers such as Sony, JVC, Canon, Hewlett-Packard, Denon, Onkyo, Garmin, Panasonic,
Toshiba and Microsoft and have access to a broad and deep selection of merchandise, including new
and deeply discounted close-out and recertified brand-name merchandise.
Our Strengths
We have developed a differentiated business model, which provides our customers and
vendors with numerous benefits. We provide consumers and businesses with quick and convenient
access to high quality, new, close-out and recertified brand-name merchandise at discount prices
similar to a traditional discount retailer without the stocking limitations and store location
constraints. We believe we are unlike many online retailers because we market multiple merchandise
categories and product types, serve both small businesses and consumers and offer two ways to
purchase products: every day low price and our proprietary Bargain Countdown®.
We offer the following key benefits to customers shopping on our website:
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Broad and deep product selection. We sell high quality products across
a broad selection of merchandise categories. Most of the products
offered on our website are from well-known, brand-name manufacturers.
We currently offer approximately 170,000 different products in several
categories. Our product offerings are updated continually to reflect
new product trends, keeping our merchandise selection relevant for our
customers so they continue to visit our website. |
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Compelling price-to-value proposition. As part of our strategy to
appeal to the high frequency value-oriented shopper, we offer low
prices on new products and deeper discounts on our assortment of
close-out and recertified merchandise. We employ aggressive
promotional strategies to provide incentives for our customers to
purchase merchandise on our website and build customer loyalty. We
also offer a fee-based membership program to reward customer loyalty
by providing exclusive access to preferential offers to subscribers. |
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Two shopping formats on our website. We appeal to a broad customer
base by offering two shopping formats designed to attract frequent
visits to our website: every day low price and our proprietary Bargain
Countdown®. For the shopper who wants new and recently released
products from leading manufacturers, we offer discounted merchandise
in an every day low price format. For the bargain shopper interested
in close-out and recertified merchandise, we market products using our
Bargain Countdown® format which features time- and quantity-limited
offers of selected merchandise that are more deeply discounted. |
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Rapid response order fulfillment. We ship a majority of customer
orders from inventory at our distribution facility located in Memphis, Tennessee. Substantially all orders in
stock at the Memphis facility placed before 4:00 p.m. Eastern Time
ship the same day and can be delivered at the customer’s request by
10:30 a.m. the next day for most domestic locations. We also utilize
virtual warehouse technology to access merchandise that is not in
stock at our distribution facility. |
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Responsive customer service and positive shopping experience. We
believe that our customer service differentiates the buying experience
for our customers. Our experienced team of inbound sales
representatives and customer service representatives assist our
consumer customers by telephone and e-mail. We also have relationship
managers who are assigned to many of our small business customers to
service their needs and increase future sales opportunities. Our
website contains helpful features such as in-depth product
information, inventory levels and order status. In addition, we
continually monitor website traffic and order activity and
periodically update our website to enhance the shopping experience for
our customers. |
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Appealing features for small business customers. We offer our small
business customers dedicated relationship managers to provide
personalized service to their unique business needs. |
We provide manufacturers and other vendors with a convenient channel to sell both large and
small quantities of new, close-out and recertified inventory. We offer manufacturers and vendors
the following key benefits:
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Single point of distribution. Manufacturers and other vendors often
use separate channels to sell new, recertified and close-out products
because most retailers offer products in only one stage of the product
life cycle. Through our two shopping formats, we offer manufacturers
and other vendors the flexibility to use eCOST.com to sell products in
a brand sensitive manner in any stage of the product life cycle. For
example, our Bargain Countdown® capabilities allow our vendors to
liquidate smaller, residual quantities of merchandise without
disappointing customers due to the limited availability of such
products. |
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Efficient distribution and sales channel. Our centralized distribution
capability reduces vendor costs in shipping product to us. Our ability
to rapidly sell inventory is a benefit to those vendors that offer us
protection against price erosion. Our centralized product management
and feedback to vendors on product sell-through and inventory position
allow vendors to efficiently monitor product movement and placement,
eliminating the need for frequent visits by vendor representatives to
physical retail locations. |
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Customized manufacturer stores. With our in-house design and
merchandising team, we provide manufacturers the opportunity to
showcase their full assortment of products and accessories by
establishing virtual stores on our website that are specific to
individual manufacturers. We believe this allows manufacturers to
maximize sales and branding of their products. We promote these
manufacturer stores to our customer base through our integrated
marketing strategy, including targeted e-mails highlighting a specific
manufacturer and its products and directing customers to that
manufacturer store on our website. |
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Speed to market for newly released products. We respond rapidly to new
product releases from manufacturers through our ability to quickly
post and market new products on our website and satisfy immediate
customer demand through our rapid response order fulfillment
capabilities. |
Our Customers
We focus on consumers and business customers. We believe our consumer customers are
savvy, online shoppers, who are brand and price conscious, and interested in new technology. Our
business customers include
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small and medium sized businesses that we believe are currently underserved by other multi-category online
retailers. While our business customer relationship managers focus on sales to small and medium sized businesses who are seeking to purchase products for use in their business,
they also service certain resellers of technology products. We offer these small and medium sized business customers superior and
personalized customer service and new and current, close-out and recertified merchandise at
competitive prices.
Our Website
Our website is comprehensive, easy to use and provides an exciting shopping experience
that encourages customer loyalty and repeat visits. We strive to add hundreds of new products to
our online product mix weekly. Our website features high-quality product images, detailed product
information and manufacturer specifications, as well as highlights of best-selling products and
suggested accessories. We continually incorporate new technologies to improve the ease of use of
our website.
Currently, the products available on the every day low price portion of our website are
organized into several primary product categories: computer hardware and software, home
electronics, digital imaging, watches and jewelry, housewares, DVD movies, video games and
cellular/wireless. Additionally, we offer several other categories of products and services through
various affiliate relationships. We also offer the same products, if they meet certain criteria, on
the proprietary Bargain Countdown® section of our website where we feature more than 100 limited time and limited quantity product “deals” across our broad merchandise categories. In addition to being able to use keyword
searches to locate specific products on our website, customers can browse or search the products
available on the every day low price portion of our website by navigating the subcategories
contained in our primary product categories and our featured manufacturer product showcases.
Products that fall within more than one subcategory on our website are often posted on more than
one web page, which we believe increases the visibility of the products and assists the customer in
finding desired merchandise.
Every day low price. Our multi-category merchandise assortment is available in an every
day low price retail format. Products are organized by subcategory under each major category tab.
Each major category includes informative and shopper-friendly “showcases” organized by
manufacturer, new technology, best sellers, seasonal gift guides, and new products. This shopping
format features discounted new products and recently released products from leading manufacturers.
Bargain Countdown®. Our proprietary Bargain Countdown® shopping format offers more than 100 close-out,
recertified and highly allocated “deal” products in limited quantities for a limited time. The Bargain
Countdown® feature is designed as a purchasing marketplace for consumers that creates purchase urgency by uniquely, indicating the quantity of items
remaining for a current offer and the time remaining to purchase the product. Based on the
popularity of an offer, an animated graphic icon will appear to alert the customer of the item’s
current sales velocity. After the offer has expired, the product is removed from Bargain Countdown®
and may no longer be available at the previously deeply discounted price. Our Bargain Countdown®
shopping format encourages repeat visits to our website due to the rapidly changing mix of
merchandise deals, the animated graphics, the unique collection of close-out deals and the search for
bargains. We also have theme-based Bargain Countdown® tabs throughout the year, including Holiday
Countdown, Watches and Jewelry Countdown, Game of the Year Countdown. Our Clearance Countdown tab
is primarily used to liquidate overstocked and excess inventory across all product categories. Our
Bargain Countdown Platinum Club® format is a version of Bargain Countdown® and offers exclusive
pricing on select merchandise to our fee-based members.
Other key features of our website include: advanced search, online order status
retrieval, online payment, shipping alternatives, online registration for promotions and catalogs
and online extended service agreement recommendations.
As a commitment to our small and medium sized business customers, we offer them; access to our business
customer relationship management team, up to net 30-day credit terms for qualified customers,
software licensing, computer system configurations and extended payment term alternatives.
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Our Merchandise
We strive to offer our customers an expansive selection of varied types of merchandise
and currently offer approximately 170,000 products in several primary merchandise categories. While
our product offerings change on a regular basis due to product availability and customer demand, we
continually offer a wide variety of merchandise.
Computer hardware and software. Our computer hardware and software product category
contains subcategories for computer systems, computer hardware and computer software. In these
subcategories customers can find products such as desktop, notebook and handheld computers;
servers; personal digital assistants; various hardware including CD and DVD drives and burners,
flat screen monitors, color laser printers, scanners and networking equipment and business,
education and entertainment software.
Home electronics. Our home electronics product category contains subcategories for
camcorders, DVD players, audio systems, speakers, big screen and plasma televisions, VCR and
digital video recorders, portables and accessories. Within these subcategories, customers can find
products such as video cameras in popular formats like DVD players; surround sound audio systems;
subwoofers, center channel and bookshelf speakers; LCD, plasma and projection screen televisions;
digital video recorders that pause, rewind and replay live television; digital music players and a
variety of accessories such as cables, remote controls and headphones.
Digital imaging. Our digital imaging product category contains products including
digital still cameras; video cameras and camcorders in MiniDV format; drawing tablets for digital
photo editing; digital photo and image editing software and photo printers.
Watches and jewelry. Our watches and jewelry product category offers customers the
ability to shop in subcategories dedicated to watches, jewelry and pens. Within these
subcategories, customers can find brand name men’s and women’s watches; gold, silver, platinum and
diamond jewelry such as rings, necklaces, pendants, earrings and bracelets and fountain and
ballpoint pens.
Housewares. Our housewares product category is dedicated to household appliances,
kitchenware, personal care appliances, home decor and luggage. Within this portion of our website
consumers can find products such as traditional household appliances including blenders, toasters
and vacuum cleaners; professional quality cookware and gourmet kitchen appliances such as coffee
grinders.
DVD movies. Our DVD movies product category offers consumers an array of new release and
classic DVDs in a wide range of genres, including action and adventure; animated; comedy;
documentary; drama; family; horror; music video and concerts; musicals and performing arts; mystery
and suspense; sci-fi and fantasy; sports and fitness and television.
Video games. Our video game product category includes hardware and software products
based on popular gaming platforms. Within subcategories dedicated to Sony PlayStation, Microsoft
Xbox, Nintendo GameCube and PC gaming, customers can find hardware products and accessories, as
well as action and adventure, role playing, simulation, sports, strategy and other types of video
games.
Cellular/Wireless. Within our cellular/wireless category, we offer customers select
cellular phones and service and a variety of cellular/wireless accessories including batteries,
headsets, vehicle adaptors and battery chargers. For the cellular phones and service portion of
this category, we have an arrangement with a third party cellular service provider under which we
receive commissions for service plans and phones purchased by linking through our eCOST.com
website.
We continually evaluate expanding into additional categories in order to attract new
customers and offer a broader variety of merchandise to our existing customers. Categories
currently under consideration include books, music, sporting goods/health and fitness and luggage.
We also plan to increase our depth in our current categories by adding new subcategories, brands
and products and continuing to develop and increase the number of affiliate categories.
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Sales and Marketing
We currently focus our advertising efforts on efficient and effective marketing
campaigns aimed at acquiring new customers, encouraging repeat purchases and establishing the
eCOST.com brand. Our online prospecting activities may include cost-per-click arrangements that
include displaying our products within various price comparison sites and search engines such as
CNET, PriceGrabber, Shopping.com and Google, strategic online banner advertising, affinity e-mail
programs and participation in various online affiliate marketing programs. From time to time we
test other prospecting vehicles including radio and magazine advertising. We send our current
customers targeted e-mails focused on new product and category launches, special promotions, and
product-related add-on and accessory offers, as well as cooperative manufacturer branding
campaigns. We also mail an eCOST.com branded catalog to selected customers.
We intend to continue to develop our small and medium sized business customer base. We seek to provide
personalized service for these customers and build deeper relationships, which will lead to a
growing share of the customer’s overall purchases. We believe small and medium sized business customers respond
favorably to a one-to-one relationship model with personalized, well-trained, relationship
managers. By contacting existing business customers on a systematic basis, we believe we have the
opportunity to increase overall sales to those customers. We also offer our business customers
multiple payment options including leasing and up to net 30-day credit terms for qualified
customers. High volume customers may also qualify for special volume pricing.
Vendors
We purchase products for resale both directly from manufacturers and indirectly through
distributors and other sources, all of whom we consider our vendors. We provide vendors with a
convenient channel to sell both large and small quantities of new, closeout and recertified
inventory. We offer significant advantages for vendors, including a single point of distribution,
efficient channel relationships, customized manufacturer stores and speedy release of their newest
merchandise. Our vendors provide us with brand name new and current products, close-out models and
manufacturer recertified products. We also have arrangements with third-party providers through
which we receive commissions for products in certain categories, such as cellular phones and
service, as well as other marketing and promotional services generated through our eCOST.com
website.
We offer products on our website from approximately 600 third-party vendors. In general, we
agree to offer products on our website and the manufacturers agree to provide us with information
about their products and honor our customer service policies. We have established direct vendor
relationships with many key suppliers and intend to continue to seek direct relationships with
vendors and suppliers.
Competition
The market for our products is intensely competitive, rapidly evolving and has
relatively low barriers to entry. New competitors can launch new websites at relatively low cost.
We believe that competition in our market is based predominantly on:
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price; |
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product selection, quality and availability; |
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shopping convenience; |
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customer service; and |
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brand recognition. |
We currently or potentially compete with a variety of companies that can be divided into
several broad categories:
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other multi-category online retailers and liquidation e-tailers; |
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online discount retailers of computer and consumer electronics merchandise such as Buy.com, NewEgg
and TigerDirect; |
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consumer electronics and office supply superstores such as Best Buy, Circuit City, CompUSA, Office
Depot, OfficeMax and Staples; and |
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manufacturers such as Apple, Dell, Gateway, Hewlett-Packard and IBM, who sell directly to customers. |
Our largest manufacturers have sold, and continue to intensify their efforts to sell, their
products directly to customers. To the extent additional manufacturers adopt this selling format or
this trend becomes more prevalent, it could adversely affect our sales growth and profitability.
Intellectual Property
We rely on a combination of laws and contractual restrictions with our employees,
customers, suppliers, affiliates and others to establish and protect our proprietary rights.
Despite these precautions, it is possible that third parties may copy or otherwise obtain and use
our intellectual property, including our domain names, without authorization. Although we regularly
assert our intellectual property rights when we learn that they are being infringed, these claims
can be time-consuming and may require litigation and/or administrative proceedings to be
successful. We have five trademarks and/or service marks that we consider to be material to the
successful operation of our business: eCOST®, eCOST.com®, eCOST.com Your Online Discount
Superstore!™, Bargain Countdown® and Bargain Countdown Platinum Club®. We currently use these marks
in connection with telephone, mail order, catalog, and online retail services. We have
registrations in the United States for eCOST®, and eCOST.com® for telephone, mail order, catalog,
and online retail order services and a registration for Bargain Countdown® for online retail order
services. We also have a registration in the United States for Bargain Countdown Platinum Club® for
business services, namely, promoting the goods and services of others by means of a customer
loyalty program featuring information, incentives, discounts and rewards. We have pending United
States applications for eCOST™, eCOST.com™, eCOST.com and Your Online Discount Superstore!™. We
have registrations in Canada and in the United Kingdom for eCOST®, eCOST.com®, and Bargain
Countdown®. We own an additional registration in the United Kingdom for eCOST.com Your Online
Discount Superstore!®. Additionally, we own two pending applications in Canada for Bargain
Countdown Platinum Club™, and eCOST.com Your Online Discount Superstore!™. In the event that our
applications are not granted, we may not be able to obtain protection for our trademarks and/or
service marks with the Trademark Offices in the United States and in Canada. We would still
potentially have common law rights in and to our trademarks and/or service marks based on use of
the marks in these respective territories.
We have filed an application with the U.S. Patent and Trademark Office seeking patent
protection for our proprietary Bargain Countdown® technology. We cannot provide any assurance that
a patent will issue from this patent application. In addition, effective patent and trademark
protection may not be available or may not be sought by us in every country in which our products
and services are made available online, including the United States.
From time to time, we may be subject to legal proceedings and claims in the ordinary
course of our business, including claims of alleged infringement of the patents, trademarks and
other intellectual property rights of third parties by our company. Third parties have asserted,
and may in the future assert, that our business or the technologies we use infringe their
intellectual property rights. We may be subject to intellectual property legal proceedings and
claims in the ordinary course of our business. We cannot predict whether third parties will assert
additional claims of infringement against us in the future, or whether any future claims will
prevent us from offering popular products or operating our business as planned.
ALL BUSINESS SEGMENTS
Technology
We maintain advanced management information systems and have automated key business functions
using online, real-time or batch systems. These systems enable us to provide information concerning
sales, inventory status, customer payments and other operations that are essential for us and our
clients to efficiently manage electronic commerce and supply chain business programs. Our systems
are designed to scale rapidly to handle the transaction processing demands of our clients and our
growth.
We employ technology from a selected group of partners, some of whom are also our clients. For
example, we
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deploy IBM e-servers and network printers in appropriate models to run web site functions as
well as order management and distribution functions. We utilize Avaya Communication for telephone
switch and call center management functions and to interact with customers via voice, e-mail or
chat. Avaya Communication technology also allows us to share web pages between customers and our
service representatives. We have the ability to transmit and receive voice, data and video
simultaneously on a single network connection to a customer to more effectively serve that customer
for our client. Clients’ interest in using this technology stems from its ability to allow shoppers
to consult with known experts in a way that the customer chooses prior to purchasing. Our
sophisticated computer-telephony integration has been accomplished by combining systems software
from IBM and Avaya Communication together with our own application development. We use AT&T for our
private enterprise network and long distance carrier. We use Oracle’s J.D. Edwards as the software
provider for the primary ERP applications that we use in our operational areas and financial areas.
We use Escalate Retail as the software provider for the primary multi-channel direct marketing
application we deploy for our catalog and direct marketing clients. We use Dematic/Rapistan
Materials Handling Automation for our automated order selection, automated conveyor and
“pick-to-light” (inventory retrieval) systems, and Symbol Technologies/Telxon for our warehouse
radio frequency applications. Our Warehouse Management System (“WMS”) and Distribution Requirements
Planning (“DRP”) system have been developed in-house to meet the varied unique requirements of our
vertical markets. Both the WMS and DRP are tightly integrated to both the North American and
European deployments of our J.D. Edwards’ system.
Many internal infrastructures are not sufficient to support the explosive growth in
e-business, e-marketplaces, supply chain compression, distribution channel realignment and the
corresponding demand for real-time information necessary for strategic decision-making and product
fulfillment. To address this need, we have created the Entente Suite(SM), which is a comprehensive
suite of technology services, with supporting software and hardware infrastructure, that enables
companies with little or no e-commerce infrastructure to speed their time to market and minimize
resource investment and risk, and allows all companies involved to improve the efficiency of their
supply chain. The Entente Suite(SM) is comprised of five distinct service offerings — EntenteWeb®,
EntenteDirect®, EntenteMessage® and, and EntenteReport® and EntentePartnerConnect™ — that can
stand alone or be combined for a fully customized e-commerce solution depending on the level of
direct involvement a company wants to maintain in their e-commerce initiative.
The components of the Entente Suite(SM) provide the open platform service infrastructure that
allows us to create complete e-commerce solutions. Using the various services of the Entente
Suite(SM), we can assist our clients in easily integrating their web sites or ERP systems to our
systems for real-time web service enabled transaction processing without regard for their hardware
platform or operating system. This high-level of systems integration allows our clients to
automatically process orders, customer data and other e-commerce information. We also can track
information sent to us by the client as it moves through our systems in the same manner a carrier
would track a package throughout the delivery process. Our systems enable us to track, at a
detailed level, information received, transmission timing, any errors or special processing
required and information sent back to the client. The transactional and management information
contained within our systems is made available to the client quickly and easily through the Entente
Suite(SM).
The Entente Suite(SM) serves as a transparent interface to our back-office productivity
applications including our customized J.D. Edwards order management and fulfillment application and
our Ecometry multi-channel direct marketing application that runs on IBM’s e-Server xSeries
servers. It also is designed to integrate with marketplace technologies offered by major
marketplace software companies. We utilize Gentran Integration Suite™ (“GIS”) as our technology
platform for Enterprise Application Integration with our clients and client’s trading partners.
With GIS, we have greatly increased our ability to quickly design and deploy customized B2B
e-commerce solutions for our clients by utilizing a robust business process modeling tool and a
highly scalable operating infrastructure. This platform facilitates the efficient and secure
exchange of electronic business transactions/documents in a wide variety of formats (i.e. XML, X.12
EDI, delimited text, IDOCS, RosettaNet) and communication protocols (i.e. FTP/SFTP, AS2/HTTP/HTTPS,
AS1 SMTP, MQ Series and Web Services).
We have invested in advanced telecommunications, computer telephony, electronic mail and
messaging, automated fax technology, IVR technology, barcode scanning, wireless technology, fiber
optic network communications and automated inventory management systems. We have also developed and
utilize telecommunications technology that provides for automatic customer call recognition and
customer profile recall for inbound customer service representatives.
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The primary responsibility of our systems development team of IT professionals is directed at
implementing custom solutions for new clients and maintaining existing client relationships. Our
development team can also produce proprietary systems infrastructure to expand our capabilities in
circumstances where we cannot purchase standard solutions from commercial providers. We also
utilize temporary resources when needed for additional capacity.
Our information technology operations and infrastructure are built on the premise of
reliability and scalability. We maintain diesel generators and un-interruptible power supply
equipment to provide constant availability to computer rooms, call centers and warehouses. Multiple
Internet service providers and redundant web servers provide for a high degree of availability to
web sites that interface with our systems. Capacity planning and upgrading is performed regularly
to allow for quick implementation of new clients and avoid time-consuming infrastructure upgrades
that could slow growth rates. We also have a Disaster Recovery Plan that provides geographically
separated and comparably equipped data centers, in the event of a disastrous situation and be able
to recover in a reasonable and effective manner.
Strategy
We continue to maintain our simple but effective strategy statement to drive our actions for
the year, QGP. This acronym stands for Quality, Growth and Profit. We believe that if we can
achieve outstanding performance on these three basic elements, they will provide for a stable
foundation for our future. As the evolution of our business model continues, we will remain focused
on these three fundamentals:
Quality: To exceed our client’s service level requirements and enhance the value of their
“brand” while providing their customers a positive, memorable and efficient experience.
Growth: To increase our revenue and gross profit from its current levels. To aggressively
market simplified product messages to drive new clients and revenue and profit growth. To become a
larger company and create career and additional employment opportunities. Embrace strategic
partnering to accentuate strengths and minimize weaknesses.
Profit: To generate positive cash flow and continue to strive for consistent profitable
results. To increase the value of our company for all of its stakeholders while rewarding our team
members with challenging, fun and memorable life experiences.
In alignment with these strategies, we completed a merger with eCOST on February 1, 2006. The
merger provided substantial strategic benefits by combining eCOST’s supplier relationships,
customer base and e-commerce platform with our advanced technology and operational infrastructure
thereby providing our combined company with the enhanced ability to expand its market share in the
fast growing web commerce market.
The successful balance of the execution of these fundamental strategies is targeted to result
in the formation of a solid strategic and financial foundation and provide us a sustainable and
profitable business model for the future.
See “Risk Factors” for a complete discussion of risk factors related to our ability to achieve
our objectives and fulfill our business strategies.
Employees
As of December 31, 2007, we had approximately 1,300 employees, of which approximately 1,200
were located in the United States. We have never suffered an interruption of business as a result
of a labor dispute. We consider our relationship with our employees to be good. In the U.S., Canada
and Philippines, we are not a party to any collective bargaining agreements and while our European
subsidiaries are not a party to a collective-bargaining agreement, they are required to comply with
the rules mentioned in collective bargaining agreements agreed upon by representatives of their
industry (logistics) and unions.
Our success in recruiting, hiring and training large numbers of skilled employees and
obtaining large numbers of
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hourly employees during peak periods for distribution and call center operations is critical
to our ability to provide high quality distribution and support services. Call center
representatives and distribution personnel receive feedback on their performance on a regular basis
and, as appropriate, are recognized for superior performance or given additional training.
Generally, our clients provide specific product training for our customer service representatives
and, in certain instances, on-site client personnel to provide specific technical support. To
maintain good employee relations and to minimize employee turnover, we offer competitive pay, hire
primarily full-time employees who are eligible to receive a full range of employee benefits, and
provide employees with clear, visible career paths.
Internet Access to Reports
We maintain an Internet website, www.pfsweb.com. Our annual reports on Form 10-K, quarterly
reports on Form 10-Q, and current reports on Form 8-K (and amendments, if any, to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934) are
made available, free of charge, through the investor relations section of this website as soon as
reasonably practicable after we electronically file such material, or furnish it to the Securities
and Exchange Commission. The information on this website is not incorporated in this report. We
also maintain an Internet website for our online discount retailer, www.ecost.com.
Government Regulation
We are subject to federal, state, local and foreign consumer protection laws, including laws
protecting the privacy of our customers’ personally identifiable information and other non-public
information and regulations prohibiting unfair and deceptive trade practices. Furthermore, the
growth and demand for online commerce has and may continue to result in more stringent consumer
protection laws that impose additional compliance burdens and greater penalties on online
companies. Moreover, there is a trend toward regulations requiring companies to provide consumers
with greater information regarding, and greater control over, how their personal data is used, and
requiring notification where unauthorized access to such data occurs. For example, many states
currently require us to notify each of our customers who is affected by any data security breach in
which an unauthorized person, such as a computer hacker, obtains such customer’s name and one or
more of the customer’s social security number, driver’s license number, credit or debit card number
or other similar personal information. In addition, several jurisdictions, including foreign
countries, have adopted privacy-related laws that restrict or prohibit unsolicited email
promotions, commonly known as “spam,” and that impose significant monetary and other penalties for
violations. One such law, the “CAN-SPAM” Act of 2003, became effective in the United States on
January 1, 2004 and imposes complex, burdensome and often ambiguous requirements in connection with
our sending commercial email to our customers and potential customers. Moreover, in an effort to
comply with these laws, Internet service providers may increasingly block legitimate marketing
emails. These consumer protection laws may become more stringent in the future and could result in
substantial compliance costs and could interfere with the conduct of our business.
We collect sales or other similar taxes for shipments of goods in certain states. One or more
local, state or foreign jurisdictions may seek to impose sales tax collection obligations on us and
other out-of-state companies that engage in online commerce. If sales tax obligations are
successfully imposed upon us by a state or other jurisdiction, we could be exposed to substantial
tax liabilities for past sales and fines and penalties for failure to collect sales taxes and we
could suffer decreased sales in that state or jurisdiction as the effective cost of purchasing
goods from us increases for those residing in that state or jurisdiction. In addition, new
legislation or regulation, the application of laws and regulations from jurisdictions whose laws do
not currently apply to our business or the application of existing laws and regulations to the
Internet and commercial online services could result in significant additional taxes or regulatory
restrictions on our business. These taxes could have an adverse effect on our cash flows and
results of operations. Furthermore, there is a possibility that we may be subject to significant
fines or other payments for any past failures to comply with these requirements.
RISK FACTORS
Our business, financial condition and operating results could be adversely affected by any or
all of the following factors, in which event the trading price of our common stock could decline,
and you could lose part or all of your investment.
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Risks Related to All Our Business Segments
Certain of our historical financial information may not be representative of our future results.
Effective February 1, 2006, we consolidate eCOST.com’s financial position and results of our
operations into our consolidated financial statements. As a result of our acquisition of eCOST,
our historical results of operations may not be indicative of our future operating or financial
performance.
We anticipate incurring significant expenses in the foreseeable future, which may reduce our
ability to achieve or maintain profitability.
To reach our business growth objectives, we may increase our operating and marketing expenses,
as well as capital expenditures. To offset these expenses, we will need to generate additional
profitable business. If our revenue grows slower than either we anticipate or our clients’
projections indicate, or if our operating and marketing expenses exceed our expectations, we may
not generate sufficient revenue to be profitable or be able to sustain or increase profitability on
a quarterly or an annual basis in the future. Additionally, if our revenue grows slower than either
we anticipate or our clients’ projections indicate, we may incur unnecessary or redundant costs and
our operating results could be adversely affected.
Changes to financial accounting standards may affect our reported results of operations.
We prepare our financial statements to conform to generally accepted accounting principles, or
GAAP. GAAP is subject to interpretation by the American Institute of Certified Public Accountants,
the SEC and various bodies formed to interpret and create appropriate accounting policies. A change
in those policies can have a significant effect on our reported results and may even affect our
reporting of transactions that were completed before a change is announced. Accounting rules
affecting many aspects of our business, including rules relating to accounting for asset
impairments, revenue recognition, arrangements involving multiple deliverables, employee stock
purchase plans and stock option grants, have recently been revised or are currently under review.
Changes to those rules or current interpretation of those rules may have a material adverse effect
on our reported financial results or on the way we conduct our business.
We operate with significant levels of indebtedness and are required to comply with certain
financial and non-financial covenants; we are required to maintain a minimum level of subordinated
loans to our subsidiary Supplies Distributors; and we have guaranteed certain indebtedness and
obligations of our subsidiaries Supplies Distributors and eCOST.
As of December 31, 2007, our total credit facilities outstanding, including debt, capital
lease obligations and our vendor accounts payable related to financing of IPS product inventory,
was approximately $65.6 million. Certain of the credit facilities have maturity dates in calendar
year 2009 or after, but are classified as current liabilities in our consolidated financial
statements. We cannot provide assurance that our credit facilities will be renewed by the lending
parties. Additionally, these credit facilities include both financial and non-financial covenants,
many of which also include cross default provisions applicable to other agreements. These covenants
also restrict our ability to transfer funds among our various subsidiaries, which may adversely
affect the ability of our subsidiaries to operate their businesses or comply with their respective
loan covenants. We cannot provide assurance that we will be able to maintain compliance with these
covenants. Any non-renewal or any default under any of our credit facilities would have a material
adverse impact upon our business and financial condition. In addition we have provided $6.0 million
of subordinated indebtedness to Supplies Distributors, the minimum level required under certain
credit facilities as of December 31, 2007. The maximum level of this subordinated indebtedness to
Supplies Distributors that may be provided without approval from our lenders is $6.5 million. The
restrictions on increasing this amount without lender approval may limit our ability to comply with
certain loan covenants or further grow and develop Supplies Distributors’ business. We have
guaranteed most of the indebtedness of Supplies Distributors. Furthermore, we are obligated to
repay any over-advance made to Supplies Distributors by its lenders to the extent Supplies
Distributors is unable to do so. We have also guaranteed eCOST’s $7.5 million credit line with
Wachovia, as well as certain of its vendor trade payables. We currently expect that it may be
necessary to provide additional guarantees of certain eCOST vendor trade payables in the future.
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We are dependent on our key personnel, and we need to hire and retain skilled personnel to sustain
our business.
Our performance is highly dependent on the continued services of our executive officers and
other key personnel, the loss of any of whom could materially adversely affect our business. In
addition, we need to attract and retain other highly-skilled, technical and managerial personnel
for whom there is intense competition. We cannot assure you that we will be able to attract and
retain the personnel necessary for the continuing growth of our business. Our inability to attract
and retain qualified technical and managerial personnel would materially adversely affect our
ability to maintain and grow our business.
We are subject to risks associated with our international operations.
We currently operate a 150,000 square foot distribution center in Liege, Belgium and a 22,000
square foot distribution center in Markham, Canada, near Eastern Toronto, both of which currently
have excess capacity. We also operate a 6,500 square foot facility in the Philippines to provide
primarily call center and customer service functions. We cannot assure you that we will be
successful in expanding in these or any additional international markets. In addition to the
uncertainty regarding our ability to generate revenue from foreign operations and expand our
international presence, there are risks inherent in doing business internationally, including:
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changing regulatory requirements; |
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legal uncertainty regarding foreign laws, tariffs and other trade barriers; |
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political instability; |
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potentially adverse tax consequences; |
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foreign currency fluctuations; and |
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cultural differences. |
Any one or more of these factors could materially adversely affect our business in a number of
ways, such as increased costs, operational difficulties and reductions in revenue.
We are uncertain about our need for and the availability of additional funds.
Our future capital needs are difficult to predict. We may require additional capital to take
advantage of unanticipated opportunities, including strategic alliances and acquisitions and to
fund capital expenditures, or to respond to changing business conditions and unanticipated
competitive pressures. We may also require additional funds to finance operating losses, including
continuing operating losses currently anticipated to be incurred by eCOST. Should these
circumstances arise, our existing cash balance and credit facilities may be insufficient and we may
need to raise additional funds either by borrowing money or issuing additional equity. We cannot
assure you that such resources will be adequate or available for all of our future financing needs.
Our inability to finance our growth, either internally or externally, may limit our growth
potential and our ability to execute our business strategy. If we are successful in completing an
additional equity financing, this could result in further dilution to our shareholders or reduce
the market value of our common stock.
We may engage in future strategic alliances or acquisitions that could dilute our existing
shareholders, cause us to incur significant expenses or harm our business.
We may review strategic alliance or acquisition opportunities that would complement our
current business or enhance our technological capabilities. Integrating any newly acquired
businesses, technologies or services may be expensive and time-consuming. To finance any
acquisitions, it may be necessary for us to raise additional funds through borrowing money or
completing public or private financings. Additional funds may not be available on terms that are
favorable to us and, in the case of equity financings, may result in dilution to our shareholders.
We may not be able to operate any acquired businesses profitably or otherwise implement our growth
strategy successfully. If we are unable to integrate any newly acquired entities or technologies
effectively, our operating results could suffer. Future acquisitions could also result in
incremental expenses and the incurrence of debt and contingent liabilities, any of which could harm
our operating results.
If we fail to maintain an effective system of internal controls, we may not be able to accurately
report our financial results or prevent fraud. As a result, current and potential shareholders
could lose confidence in our
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financial reporting, which could harm our business, and the trading price of our common stock.
Based on the current requirements, and our current public float, we were not required to
comply with Section 404 of the Sarbanes-Oxley Act as of December 31, 2007, as it relates to the
requirement to obtain a report by our independent auditors opining on management’s assessments of
the effectiveness of our internal controls over financial reporting. Under current law, and our
current public float, we will be subject to the independent auditor requirement for the year ending
December 31, 2009. If we fail to correct any issues in the design or operating effectiveness of
internal controls over financial reporting or fail to prevent fraud, current and potential
shareholders could lose confidence in our financial reporting, which could harm our business and
the trading price of our common stock.
Delivery of our and our clients’ products could be delayed or disrupted by factors beyond our
control, and we could lose customers and clients as a result.
We rely upon third party carriers for timely delivery of our and our clients’ product
shipments. As a result, we are subject to carrier disruptions and increased costs due to factors
that are beyond our control, including employee strikes, inclement weather and increased fuel
costs. Any failure to deliver products to our and our clients’ customers in a timely and accurate
manner may damage our reputation and brand and could cause us to lose customers and clients. We
cannot be sure that our relationships with third party carriers will continue on terms favorable to
us, if at all. If our relationship with any of these third party carriers is terminated or impaired
or if any of these third parties is unable to deliver products, we would be required to use
alternative carriers for the shipment of our and our clients’ products to customers. We may be
unable to engage alternative carriers on a timely basis or on favorable terms, if at all. Potential
adverse consequences include:
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reduced visibility of order status and package tracking; |
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delays in order processing and product delivery; |
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increased cost of delivery, resulting in reduced margins; and |
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reduced shipment quality, which may result in damaged products and customer
dissatisfaction. |
Our profitability could be adversely affected if the operation of our distribution or call center
facilities were interrupted or shut down as the result of a natural disaster.
We operate a majority of our distribution facilities in or around the Memphis, Tennessee area
and our call center operations are centered in Plano, Texas. Any natural disaster or other serious
disruption to these facilities due to fire, tornado, flood or any other cause would substantially
disrupt our operations and would impair our ability to adequately service our customers. In
addition, we could incur significantly higher costs during the time it takes for us to reopen or
replace any one or more of these facilities, which may or may not be reimbursed by insurance. As a
result, disruption at one or more of these facilities could adversely affect our profitability.
We may be a party to litigation involving our e-commerce intellectual property rights. If third
parties claim we are infringing their intellectual property rights, we could incur significant
litigation costs, be required to pay damages, or change our business or incur licensing expenses.
In recent years, there has been significant litigation in the United States involving patent
and other intellectual property rights. We may be a party to intellectual property litigation in
the future to protect our trade secrets or know-how. United States patent applications are
confidential until a patent is issued and most technologies are developed in secret. Accordingly,
we are not, and cannot be, aware of all patents or other intellectual property rights of which our
services may pose a risk of infringement. Others asserting rights against us could force us to
defend ourselves or our customers against alleged infringement of intellectual property rights. We
could incur substantial costs to prosecute or defend any such litigation.
Third parties such as MercExchange and others have asserted, and may in the future assert,
that our business or the technologies we use infringe on their intellectual property rights. As a
result, we may be subject to intellectual property legal proceedings and claims in the ordinary
course of business. We cannot predict whether third parties will assert claims of infringement in
the future or whether any future claims will prevent us from offering popular
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products or services. If we are found to infringe, we may be required to pay monetary damages,
which could include treble damages and attorneys’ fees for any infringement that is found to be
willful, and either be enjoined or required to pay ongoing royalties with respect to any
technologies found to infringe. Further, as a result of infringement claims either against us or
against those who license technology to us, we may be required, or deem it advisable, to develop
non-infringing technology, which could be costly and time consuming, or enter into costly royalty
or licensing agreements. Such royalty or licensing agreements, if required, may be unavailable on
terms that are acceptable, or at all. If a third party successfully asserts an infringement claim
against us and we are enjoined or required to pay monetary damages or royalties or we are unable to
develop suitable non-infringing alternatives or license the infringed or similar technology on
reasonable terms on a timely basis, our business, results of operations and financial condition
could be materially harmed.
A breach of our e-commerce security measures could reduce demand for its services. Credit card
fraud and other fraud could adversely affect our business.
A requirement of the continued growth of e-commerce is the secure transmission of confidential
information over public networks. A party who is able to circumvent our security measures could
misappropriate proprietary information or interrupt our operations. Any compromise or elimination
of our security could reduce demand for our services.
We may be required to expend significant capital and other resources to protect against
security breaches or to address any problem they may cause. Because our activities involve the
storage and transmission of proprietary information, such as credit card numbers, security breaches
could damage our reputation, cause us to lose clients, impact our ability to attract new clients
and we could be exposed to litigation and possible liability. Our security measures may not prevent
security breaches, and failure to prevent security breaches may disrupt our operations. In certain
circumstances, we do not carry insurance against the risk of credit card fraud and other fraud, so
the failure to adequately control fraudulent transactions on either our behalf or our client’s
behalf could increase our expenses.
We may be liable for misappropriation of our customers’ and our clients’ customers’ personal
information.
Data security laws are becoming more stringent in the United States and abroad. Third parties
are engaging in increased cyber attacks against companies doing business on the Internet and
individuals are increasingly subjected to identity and credit card theft on the Internet. If third
parties or unauthorized employees are able to penetrate our network security or otherwise
misappropriate our or our clients’ customers’ personal information or credit card information, or
if we give third parties or our employees improper access to customers’ personal information or
credit card information, we could be subject to liability. This liability could include claims for
unauthorized purchases with credit card information, impersonation or other similar fraud claims.
This liability could also include claims for other misuses of personal information, including
unauthorized marketing purposes. Liability for misappropriation of this information could decrease
our profitability. In such circumstances, we also could be liable for failing to provide timely
notice of a data security breach affecting certain types of personal information. In addition, the
Federal Trade Commission and state agencies have brought numerous enforcement actions against
Internet companies for alleged deficiencies in those companies’ privacy and data security
practices, and they may continue to bring such actions. We could incur additional expenses if new
regulations regarding the collection, use or storage of personal information are introduced or if
government agencies investigate our privacy or security practices.
We rely on encryption and authentication technology licensed from third parties to provide the
security and authentication necessary to effect secure transmission of sensitive customer
information such as customer credit card numbers. Advances in computer capabilities, new
discoveries in the field of cryptography or other events or developments may result in a compromise
or breach of the algorithms that we use to protect customer transaction data. If any such
compromise of security were to occur, it could subject us to liability, damage our reputation and
diminish the value of our brand-name. A party who is able to circumvent the security measures could
misappropriate proprietary information or cause interruptions in operations. We may be required to
expend significant capital and other resources to protect against such security breaches or to
alleviate problems caused by such breaches. Our security measures are designed to prevent security
breaches, but our failure to prevent such security breaches could subject us to liability, damage
our reputation and diminish the value of our brand-name.
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We also may provide non-secured channels for customers to communicate. Despite the increased
security risks, customers may use such channels to send personal information and other sensitive
data. In addition, “phishing” incidents are on the rise. Phishing involves an online company’s
customers being tricked into providing their credit card numbers or account information to someone
pretending to be the online company’s representative. Such incidents have recently given rise to
litigation against online companies for failing to take sufficient steps to police against such
activities by third parties, and may discourage customers from using online services.
We are subject to a dispute with a municipal authority, which, if not resolved in our favor, may
materially adversely affect our results of operations.
We receive municipal tax abatements in certain locations. During 2004 we received notice from
a municipal authority 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 approximately $1.7 million could be assessed against us.
Risks Related to Our PFS and Supplies Distributors Operating Segments
Our service fee revenue and gross margin is dependent upon our clients’ business and transaction
volumes and our costs; many of our client service agreements are terminable by the client at will;
we may incur financial penalties if we fail to meet contractual service levels under certain client
service agreements.
Our service fee revenue is primarily transaction based and fluctuates with the volume of
transactions or level of sales of the products by our clients for whom we provide transaction
management services. If we are unable to retain existing clients or attract new clients or if we
dedicate significant resources to clients whose business does not generate sufficient revenue or
whose products do not generate substantial customer sales, our business may be materially adversely
affected. Moreover, our ability to estimate service fee revenue for future periods is substantially
dependent upon our clients’ and our own projections, the accuracy of which has been, and will
continue to be, unpredictable. Therefore, our planning for client activity and targeted goals for
service fee revenue and gross margin may be materially adversely affected by incomplete, delayed or
inaccurate projections. In addition, many of our service agreements with our clients are terminable
by the client at will. Therefore, we cannot assure you that any of our clients will continue to use
our services for any period of time. The loss of a significant amount of service fee revenue due to
client terminations could have a material adverse effect on our ability to cover our costs and thus
on our profitability. Certain of our client service agreements contain minimum service level
requirements and impose financial penalties if we fail to meet such requirements. The imposition of
a substantial amount of such penalties could have a material adverse effect on our business and
operations.
Our business is subject to the risk of customer and supplier concentration.
For the year ended December 31, 2007 and 2006, a prime contractor (for whom we were a
subcontractor) to a U.S. government agency, a consumer products company and Xerox Corporation
represented approximately 27%, 12% and 11%, respectively, and approximately 23%, 19% and 12%,
respectively of our total service fee revenue, net of pass-through revenue. The loss of, or
non-payment of invoices by, any or all of such clients would have a material adverse effect upon
our business. In particular, the agreement under which we provide services to such clients are
terminable at will upon notice by such clients.
A substantial portion of our Supplies Distributors product revenue was generated by sales of
product purchased under master distributor agreements with the Printing System Division of IBM and
was dependent on IBM’s business and the continuing market for IBM products. Supplies Distributors
does not have its own sales force and relies upon a third party for sales force and product demand
generation services. In January 2007, IBM and Ricoh announced the planned formation of a joint
venture company to succeed the business of IBM’s Printing Systems Division. Upon closing of the
agreement in June 2007, Ricoh acquired 51% of the joint venture, which is called InfoPrint
Solutions Company (“IPS”), and stated its intentions to progressively acquire the remaining 49%
over the next three years. IPS is expected to eventually become a fully owned subsidiary of Ricoh.
Although our prior master distributor agreements with IBM have been assigned to IPS, these
agreements are terminable at will and no assurance can be given that InfoPrint Solutions Company
will continue the master distributor agreements with
25
Supplies Distributors. A termination of this relationship or a decline in customer demand for
these products would have a material adverse effect on Supplies Distributors’ business and the
Company’s financial condition.
Sales by Supplies Distributors to two customers accounted for approximately 28% of Supplies
Distributors’ total product revenue for the year ended December 31, 2007. Sales to the same two
customers accounted for approximately 27% of Supplies Distributors’ product revenue for the year
ended December 31, 2006. The loss of any one or more of such customers, or non-payment of any
material amount by these or any other customer, would have a material adverse effect upon Supplies
Distributors’ business. Supplies Distributors also relies upon outsourced sales force and product
demand generation services and the termination of such services would have a material impact upon
Supplies Distributors’ business.
Our operating results are materially impacted by our client mix and the seasonality of their
business.
Our business is materially impacted by our client mix and the seasonality of their business.
Based upon our current client mix and their current projected business volumes, we anticipate our
service fee revenue business activity will be at its lowest in the first quarter of our fiscal year
and that our master distributor product revenue business activity will be at its highest in the
fourth quarter of our fiscal year. We are unable to predict how the seasonality of future clients’
business may affect our quarterly revenue and whether the seasonality may change due to
modifications to a client’s business. As such, we believe that results of operations for a
quarterly period may not be indicative of the results for any other quarter or for the full year.
Our systems may not accommodate significant growth in our number of clients.
Our success depends on our ability to handle a large number of transactions for many different
clients in various product categories. We expect that the volume of transactions will increase
significantly as we expand our operations. If this occurs, additional stress will be placed upon
the network hardware and software that manages our operations. We cannot assure you of our ability
to efficiently manage a large number of transactions. If we are not able to maintain an appropriate
level of operating performance, we may develop a negative reputation, and impair existing and
prospective client relationships and our business would be materially adversely affected.
We may not be able to recover all or a portion of our start-up costs associated with one or more of
our clients.
We generally incur start-up costs in connection with the planning and implementation of
business process solutions for our clients. Although we generally attempt to recover these costs
from the client in the early stages of the client relationship, or upon contract termination if the
client terminates without cause prior to full amortization of these costs, there is a risk that the
client contract may not fully cover the start-up costs. To the extent start-up costs exceed the
start-up fees received, excess costs will be expensed as incurred. Additionally, in connection with
new client contracts we generally incur capital expenditures associated with assets whose primary
use is related to the client solution. There is a risk that the contract may end before expected
and we may not recover the full amount of our capital costs.
Our revenue and margins may be materially impacted by client transaction volumes that differ from
client projections and business assumptions.
Our pricing for client transaction services, such as call center and fulfillment, is often
based upon volume projections and business assumptions provided by the client and our anticipated
costs to perform such work. In the event the actual level of activity or cost is substantially
different from the projections or assumptions, we may have insufficient or excess staffing,
incremental costs or other assets dedicated for such client that may negatively impact our margins
and business relationship with such client. In the event we are unable to meet the service levels
expected by the client, our relationship with the client will suffer and may result in financial
penalties and/or the termination of the client contract.
We face competition from many sources that could adversely affect our business.
Many companies offer, on an individual basis, one or more of the same services we do, and we
face competition from many different sources depending upon the type and range of services
requested by a potential client. Our
26
competitors include vertical outsourcers, which are companies that offer a single function,
such as call centers, public warehouses or credit card processors. We compete against
transportation logistics providers who offer product management functions as an ancillary service
to their primary transportation services. We also compete against other business process
outsourcing providers, who perform many similar services as us. Many of these companies have
greater capabilities than we do for the single or multiple functions they provide. In many
instances, our competition is the in-house operations of its potential clients themselves. The
in-house operations of potential clients often believe that they can perform the same services we
do, while others are reluctant to outsource business functions that involve direct customer
contact. We cannot be certain that we will be able to compete successfully against these or other
competitors in the future.
Our sales and implementation cycles are highly variable and our ability to finalize pending
contracts may cause our operating results to vary widely.
The sales cycle for our services is variable, typically ranging between several months to up
to a year or longer from initial contact with the potential client to the signing of a contract.
Occasionally the sales cycle requires substantially more time. Delays in signing and executing
client contracts may affect our revenue and cause our operating results to vary widely. A potential
client’s decision to purchase our services is discretionary, involves a significant commitment of
the client’s resources and is influenced by intense internal and external pricing and operating
comparisons. To successfully sell our services, we generally must educate our potential clients
regarding the use and benefit of our services, which can require significant time and resources.
Consequently, the period between initial contact and the purchase of our services is often long and
subject to delays associated with the lengthy approval and competitive evaluation processes that
typically accompany significant operational decisions. Additionally, the time required to finalize
pending contracts and to implement our systems and integrate a new client can range from several
weeks to many months. Delays in signing and integrating new clients may affect our revenue and
cause our operating results to vary widely.
Our business could be adversely affected by a systems or equipment failure, whether that of us or
our clients.
Our operations are dependent upon our ability to protect our distribution facilities, customer
service centers, computer and telecommunications equipment and software systems against damage and
failures. Damage or failures could result from fire, power loss, equipment malfunctions, system
failures, natural disasters and other causes. If our business is interrupted either from accidents
or the intentional acts of others, our business could be materially adversely affected. In
addition, in the event of widespread damage or failures at our facilities, our short-term disaster
recovery and contingency plans and insurance coverage may not be sufficient.
Our clients’ businesses may also be harmed from any system or equipment failures we
experience. In that event, our relationship with these clients may be adversely affected, we may
lose these clients, our ability to attract new clients may be adversely affected and we could be
exposed to liability.
Interruptions could also result from the intentional acts of others, like “hackers.” If our
systems are penetrated by computer hackers, or if computer viruses infect our systems, our
computers could fail or proprietary information could be misappropriated.
If our clients suffer similar interruptions in their operations, for any of the reasons
discussed above or for others, our business could also be adversely affected. Many of our clients’
computer systems interface with our systems. If our clients suffer interruptions in their systems,
the link to our systems could be severed and sales of the client’s products could be slowed or
stopped.
Risks Related to the Business Process Outsourcing Industry
If the trend toward outsourcing does not continue, our business will be adversely affected.
Our business could be materially adversely affected if the trend toward outsourcing declines
or reverses, or if corporations bring previously outsourced functions back in-house. Particularly
during general economic downturns, businesses may bring in-house previously outsourced functions to
avoid or delay layoffs. The continued threat of terrorism within the United States and abroad and
the potential for sustained military action may cause disruption to
27
commerce and economic conditions, both domestic and foreign, which could have a material
adverse effect upon our business and new client prospects.
Our market is subject to rapid technological change and to compete we must continually enhance our
systems to comply with evolving standards.
To remain competitive, we must continue to enhance and improve the responsiveness,
functionality and features of our services and the underlying network infrastructure. If we are
unable to adapt to changing market conditions, client requirements or emerging industry standards,
our business could be adversely affected. The internet and e-commerce environments are
characterized by rapid technological change, changes in user requirements and preferences, frequent
new product and service introductions embodying new technologies and the emergence of new industry
standards and practices that could render our technology and systems obsolete. Our success will
depend, in part, on our ability to both internally develop and license leading technologies to
enhance our existing services and develop new services. We must continue to address the
increasingly sophisticated and varied needs of our clients and respond to technological advances
and emerging industry standards and practices on a cost-effective and timely basis. The development
of proprietary technology involves significant technical and business risks. We may fail to develop
new technologies effectively or to adapt our proprietary technology and systems to client
requirements or emerging industry standards.
Risks Related to our Merger with eCOST
We may fail to realize the anticipated synergies, cost savings, growth opportunities and other
benefits expected from the merger.
We entered into a merger with eCOST with the expectation that the merger will result in
synergies, cost savings, growth opportunities and other benefits to the combined company. However,
there can be no assurance that we will realize these anticipated benefits. The combination of our
businesses may not result in combined financial performance that is better than what our company
would have achieved independently if the merger had not occurred.
eCOST may be liable to PC Mall for taxes arising as a result of the merger.
In connection with the consummation of the merger, eCOST received a written opinion from its
legal counsel to the effect that the merger should not cause Section 355(e) of the Internal Revenue
Code to apply to the April 2005 spin-off of eCOST from its former parent, PC Mall. Such opinion was
based on certain factual representations made by PC Mall and eCOST and certain factual and legal
assumptions made by eCOST’s legal counsel. Such opinion represented such legal counsel’s best
judgment regarding the application of the U.S. federal income tax laws, but is not binding on the
IRS or the courts. No assurance can be given that the IRS will not assert a contrary position or
that any such contrary position would not be sustained by a court. If the merger does cause Section
355(e) to apply to the April 2005 spin-off of eCOST from PC Mall, eCOST will be liable to PC Mall
for any resulting tax-related liabilities.
Risks Related to eCOST, our Online Discount Retailer Segment
We may not be able to achieve or maintain profitability.
We have incurred continuing operating losses and may not be able to achieve or maintain
profitability on a quarterly or annual basis. Our ability to achieve or maintain profitability
depends on a number of factors, including our ability to:
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increase sales; |
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maintain and expand vendor relationships; |
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obtain additional and increase existing trade credit with key suppliers; |
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generate sufficient gross profit; and |
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control costs and generate the expected synergies applicable to the merger. |
We may need additional financing and may not be able to obtain additional financing on favorable
terms or at
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all, which could increase our costs and limit our ability to grow.
We may need to obtain additional financing and there can be no assurance that we will be able
to obtain additional financing on commercially reasonable terms or at all. Our failure to obtain
additional financing or our inability to obtain financing on acceptable terms will materially
adversely affect our ability to achieve profitability and grow our business.
Our operating results are difficult to predict.
Our operating results have fluctuated in the past and are likely to vary significantly in the
future based upon a number of factors, many of which we cannot control. We operate in a highly
dynamic industry and future results could be subject to significant fluctuations. Revenue and
expenses in future periods may be greater or less than revenue and expenses in the immediately
preceding period or in the comparable period of the prior year. Therefore, period-to-period
comparisons of our operating results are not necessarily a good indication of our future
performance. Some of the factors that could cause our operating results to fluctuate include:
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price competition that results in lower sales volumes, lower profit margins, or net
losses; |
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our ability to prevent credit card fraud and reduce chargeback activity; |
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the amount, timing and impact of advertising and marketing costs; |
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our ability to successfully implement new technologies or software systems; |
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our ability to obtain sufficient financing; |
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changes in the number of visitors to our website or our inability to convert those
visitors into customers; |
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technical difficulties, including system or Internet failures; |
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fluctuations in the demand for our products or overstocking or under-stocking of
products; |
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fluctuations in revenues and shipping costs, particularly during the holiday season; |
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economic conditions generally or economic conditions specific to the Internet, online
commerce, the retail industry or the mail order industry; |
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changes in the mix of products that we sell; and |
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fluctuations in levels of inventory theft, damage or obsolescence. |
The failure to improve our financial and operating performance may result in a failure to comply
with our financial covenants.
In the event we are unable to increase our revenue and/or gross profit from our present levels
and do not achieve a sufficient level of operating efficiencies, we may fail to comply with one or
more of the financial covenants required under our 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 the parent guaranty.
If we fail to accurately predict our inventory risk, our margins may decline as a result of
write-downs of our inventory due to lower prices obtained for older or obsolete products.
Some of the products we sell on our website are characterized by rapid technological change,
obsolescence and price erosion (for example, computer hardware, software and consumer electronics),
and because we may sometimes stock large quantities of particular types of inventory, inventory
reserves may be required or may subsequently prove insufficient, and additional inventory
write-downs may be required.
Increased product returns or a failure to accurately predict product returns could decrease our
revenues and impact profitability.
We make allowances for product returns based on historical return rates. We are responsible
for returns of certain products ordered through our website from our distribution center as well as
products that are shipped to our customers directly from our vendors. If our actual product returns
significantly exceed our allowances for returns, especially as we expand into new product
categories, our revenues and profitability could decrease. In addition, because our allowances are
based on historical return rates, the introduction of new merchandise categories, new products,
changes in our product mix, or other factors may cause actual returns to exceed return allowances,
perhaps
29
significantly. In addition, any policies intended to reduce the number of product returns
may result in customer
dissatisfaction, increased credit card chargeback activity and fewer repeat customers.
Our ability to offer a broad selection of products at competitive prices is dependent on our
ability to maintain existing and build new relationships with manufacturers and vendors. We do not
have long-term agreements with our manufacturers or vendors and some of our manufacturers and
vendors compete directly with us.
We purchase products for resale both directly from manufacturers and indirectly through
distributors and other sources, all of whom we consider our vendors. We do not have any long-term
agreements with any of these vendors. Any agreements with vendors governing our purchase of
products are generally terminable by either party upon 30 days’ notice or less. In general, we
agree to offer products on our website and the vendors agree to provide us with information about
their products and honor our customer service policies. If we do not maintain relationships with
vendors on acceptable terms, including favorable product pricing and vendor consideration, we may
not be able to offer a broad selection of products or continue to offer products at competitive
prices, and customers may choose not to shop at our website. In addition, some vendors may decide
not to offer particular products for sale on the Internet, and others may avoid offering their new
products to retailers like us who offer a mix of close-out and recertified products in addition to
new products. From time to time, vendors may terminate our right to sell some or all of our
products, change the applicable terms and conditions of sale or reduce or discontinue the
incentives or vendor consideration that they offer. Any such termination or the implementation of
such changes could have a negative impact on our operating results. Additionally, some products are
subject to manufacturer or distributor allocation, which limits the number of units of those
products that are available to us and other resellers.
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 49% of eCOST’s net revenues (11% of our consolidated net revenues) in
2007, 33% of eCOST’s net revenues (7% of our consolidated net revenues whereby eCOST had 11 months
of activity) in 2006 and 28% of eCOST’s net revenues in 2005. 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.
We are dependent on the success of our advertising and marketing efforts, which are costly and may
not achieve desired results, and on our ability to attract customers on cost-effective terms.
Our revenues depend on our ability to advertise and market our products effectively. Increases
in the costs of advertising and marketing, including costs of online advertising, paper and postage
costs, costs and fees of third-party service providers and the costs of complying with applicable
regulations, may limit our ability to advertise and market our business without impacting our
profitability. If our advertising and marketing efforts prove ineffective or do not produce a
sufficient level of sales to cover their costs, or if we decrease our advertising or marketing
activities due to increased costs, restrictions enacted by regulatory agencies or for any other
reason, our revenues and profit margins may decrease. Our success depends on our ability to attract
customers on cost-effective terms. We have relationships with online services, search engines,
shopping engines, directories and other websites and e-commerce businesses through which we provide
advertising banners and other links that direct customers to our website. We expect to rely on
these relationships as significant sources of traffic to our website and to generate new customers.
If we are unable to develop or maintain these relationships on acceptable terms, our ability to
attract new customers on a cost-effective basis could be harmed. In addition, certain of our
existing online marketing agreements require us to pay fixed placement fees or fees for directing
visits to our eCOST website, neither of which may convert into sales.
Because we experience seasonal fluctuations in our revenues, our quarterly results may fluctuate.
Our 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 revenues
occur during the first and fourth fiscal quarters. We believe that our historical revenue growth
makes it difficult to predict the effect of seasonality on our future revenues and results of
operations. In anticipation of increased sales activity during the first and fourth quarters, we
incur additional expenses, including higher inventory and staffing costs. If sales for the first
and fourth quarters do not meet anticipated levels, then increased expenses may not be offset which
could decrease our profitability. If we
30
were to experience lower than expected sales during our
first or fourth quarters, for any reason, it would decrease
our profitability.
Our business may be harmed by fraudulent activities on our website.
We have received in the past, and anticipate that we will receive in the future,
communications from customers due to purported fraudulent activities on our eCOST website. Negative
publicity generated as a result of fraudulent conduct by third parties could damage our reputation
and diminish the value of our brand name. Fraudulent activities on our eCOST website could also
subject us to losses. We expect to continue to receive requests from customers for reimbursement
due to purportedly fraudulent activities or threats of legal action if no reimbursement is made.
If we do not successfully expand our eCOST website and processing systems to accommodate higher
levels of traffic and changing customer demands, we could lose customers and our revenues could
decline.
To remain competitive, we must continue to enhance and improve the functionality and features
of our website. If we fail to upgrade our website in a timely manner to accommodate higher volumes
of traffic, our website performance could suffer and we may lose customers. The Internet and the
e-commerce industry are subject to rapid technological change. If competitors introduce new
features and website enhancements embodying new technologies, or if new industry standards and
practices emerge, our existing eCOST website and systems may become obsolete or unattractive.
Developing our eCOST website and other systems entails significant technical and business risks. We
may face material delays in introducing new services, products and enhancements. If this happens,
customers may forgo the use of our eCOST website and use those of our competitors. We may use new
technologies ineffectively, or we may fail to adapt our website, transaction processing systems and
computer network to meet customer requirements or emerging industry standards.
If we fail to successfully expand our merchandise categories and product offerings in a
cost-effective and timely manner, our reputation and the value of our new and existing brands could
be harmed, customer demand for our products could decline and our profit margins could decrease.
Historically, we have generated the substantial majority of our revenues from the sale of
computer hardware, software and accessories and consumer electronics products. In recent years, we
have added several new product categories, including digital imaging, watches and jewelry,
housewares, DVD movies, video games and cellular/wireless. While our merchandising platform has
been incorporated into and tested in the online computer and consumer electronics retail markets,
we cannot predict with certainty whether it can be successfully applied to other product
categories. In addition, expansion of our business strategy into new product categories may require
us to incur significant marketing expenses, develop relationships with new vendors and comply with
new regulations. We may lack the necessary expertise in a new product category to realize the
expected benefits of that new category. These requirements could strain managerial, financial and
operational resources. Additional challenges that may affect our ability to expand into new product
categories include our ability to:
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establish or increase awareness of new brands and product categories; |
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acquire, attract and retain customers at a reasonable cost; |
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achieve and maintain a critical mass of customers and orders across all product
categories; |
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attract a sufficient number of new customers to whom new product categories are
targeted; |
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successfully market new product offerings to existing customers; |
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maintain or improve gross margins and fulfillment costs; |
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attract and retain vendors to provide an expanded line of products to customers on
terms that are acceptable; and |
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manage inventory in new product categories. |
We cannot be certain that we will be able to successfully address any or all of these
challenges in a manner that will enable us to expand our business into new product categories in a
cost-effective or timely manner. If our new categories of products or services are not received
favorably, or if our suppliers fail to meet our customers’ expectations, our results of operations
would suffer and our reputation and the value of the applicable new brand and other brands could be
damaged. The lack of market acceptance of our new product categories or inability to generate
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satisfactory revenues from any expanded product categories to offset our cost could harm our
business.
Credit card fraud could materially adversely affect our business.
We do not currently carry insurance against the risk of credit card fraud, so the failure to
adequately control fraudulent credit card transactions could reduce our revenues and gross margin.
We may suffer losses as a result of orders placed with fraudulent credit card data even though the
associated financial institution approved payment of the orders. Under current credit card
practices, we may be liable for fraudulent credit card transactions because we did not obtain a
cardholder’s signature. If we are unable to detect or control credit card fraud, or if credit card
companies require more burdensome terms, refuse to accept credit card charges or assess financial
penalties, our business could be materially adversely affected.
If we are unable to provide satisfactory customer service, we could lose customers.
Our ability to provide satisfactory levels of customer service depends, to a large degree, on
the efficient and uninterrupted operation of our customer service operations. Any material
disruption or slowdown in our order processing systems resulting from labor disputes, telephone or
Internet failures, power or service outages, natural disasters or other events could make it
difficult or impossible to provide adequate customer service and support. If we are unable to
continually provide adequate staffing and training for our customer service operations, our
reputation could be seriously harmed and we could lose customers. Because our success depends in
large part on keeping our customers satisfied, any failure to provide high levels of customer
service would likely impair our reputation and decrease our revenues.
We may not be able to compete successfully against existing or future competitors.
The market for online sales of the products we offer is intensely competitive and rapidly
evolving. We principally compete with a variety of online retailers, specialty retailers and other
businesses that offer products similar to or the same as our products. Increased competition is
likely to result in price reductions, reduced revenue and gross margins and loss of market share.
We expect competition to intensify in the future because current and new competitors can enter the
market with little difficulty and can launch new websites at a relatively low cost. In addition,
some of our product vendors have sold, and continue to intensify their efforts to sell, their
products directly to customers. We currently or potentially compete with a variety of businesses,
including:
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other multi-category online retailers and liquidation e-tailers; |
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online discount retailers of computer and consumer electronics merchandise such as
Buy.com, NewEgg and TigerDirect; |
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consumer electronics and office supply superstores such as Best Buy, Circuit City,
CompUSA, Office Depot, OfficeMax and Staples; and |
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manufacturers such as Apple, Dell, Gateway, Hewlett-Packard and IBM, that sell directly
to customers. |
Many of the current and potential competitors described above have longer operating histories,
larger customer bases, greater brand recognition and significantly greater financial, marketing and
other resources than we do. In addition, online retailers may be acquired by, receive investments
from or enter into other commercial relationships with larger, well-established and well-financed
companies. Some of our competitors may be able to secure products from manufacturers or vendors on
more favorable terms, devote greater resources to marketing and promotional campaigns, adopt more
aggressive pricing or inventory availability policies and devote substantially more resources to
website and systems development than we are able to.
If the protection of our trademarks and proprietary rights is inadequate, our eCOST brand and
reputation could be impaired and we could lose customers.
We have five trademarks and/or service marks that we consider to be material to the successful
operation of our business: eCOST®, eCOST.com®, eCOST.com Your Online Discount Superstore!™, Bargain
Countdown® and Bargain Countdown Platinum Club™. We currently use all of these marks in connection
with telephone, mail order, catalog, and online retail services. We also have several additional
pending trademark applications. We rely on trademark and copyright law, trade secret protection and
confidentiality agreements with our employees,
32
consultants, suppliers and others to protect our
proprietary rights. Our applications may not be granted, and we may
not be able to secure significant protection for our service marks or trademarks. Our
competitors or others could adopt trademarks or service marks similar to our marks, or try to
prevent us from using our marks, thereby impeding our ability to build brand identity and possibly
leading to customer confusion. Any claim by another party against us for customer confusion caused
by use of our trademarks or service marks, or our failure to obtain registrations for our marks,
could negatively affect our competitive position and could cause us to lose customers.
We have also filed an application with the U.S. Patent and Trademark Office for patent
protection for our proprietary Bargain Countdown™ technology. We may not be granted a patent for
this technology and may not be able to enforce our patent rights if our competitors or others use
infringing technology. If this occurs, our competitive position, revenues and profitability could
be negatively affected.
Effective trademark, service mark, patent, copyright and trade secret protection may not be
available in every country in which we will sell our products and offer our services. In addition,
the relationship between regulations governing domain names and laws protecting trademarks and
similar proprietary rights is unclear. Therefore, we may be unable to prevent third parties from
acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our
trademarks and other proprietary rights. If we are unable to protect or preserve the value of our
trademarks, copyrights, trade secrets or other proprietary rights for any reason, our competitive
position could be negatively affected and we could lose customers.
We also rely on technologies that we license from related and third parties. These licenses
may not continue to be available to us on commercially reasonable terms, or at all, in the future.
As a result, we may be required to develop or obtain substitute technology of lower quality or at
greater cost, which could negatively affect our competitive position, cause us to lose customers
and decrease our profitability.
We may be subject to product liability claims that could be costly and time consuming.
We sell products manufactured and distributed by third parties, some of which may be defective
or may not comply with applicable laws or regulations, such as laws or regulations requiring
warning labels. If any product that we sell were to cause physical injury or damage to property or
otherwise not comply with applicable laws or regulations, we may be subject to claims being
asserted against us as the retailer of the product. Our insurance coverage may not be available or
adequate to cover every claim that could be asserted. If a successful claim were brought against us
in excess of its insurance coverage, it could expose us to significant liability. Even unsuccessful
claims could result in the expenditure of funds and management time and could decrease
profitability.
eCOST may be subject to future impairment charges related to eCOST’s intangible assets.
The valuation of intangible assets related to eCOST is dependent upon, among other things, the
estimated value of eCOST’s projected cash flows for its business. In the event eCOST is unable
to meet such projections, or such estimated values are otherwise less than the carrying value of
such intangibles, we may be required under current accounting rules to record an impairment charge
in connection with the write-down of such intangibles.
Risks Related to Our eCOST Online Retailer Operating Segment’s Industry
Additional sales and use taxes could be imposed on past or future sales of our products or other
products sold on our eCOST website, which could adversely affect our revenues and profitability.
In accordance with current industry practice and our interpretation of applicable law, we
collect and remit sales taxes only with respect to physical shipments of goods into states where we
have a physical presence. If any state or other jurisdiction successfully challenges this practice
and imposes sales taxes on orders on which we do not collect and remit sales taxes, we could be
exposed to substantial tax liabilities for past sales and could suffer decreased sales in that
state or jurisdiction in the future. In addition, a number of states, as well as the U.S. Congress,
have been considering various legislative initiatives that could result in the imposition of
additional sales and use taxes on Internet sales. If any of these initiatives are enacted, we could
be required to collect sales taxes in states where we do not have a physical presence. Future
changes in the operation of our business also could result in the imposition of additional sales
tax obligations. The imposition of additional sales and use taxes on past or future sales could
33
adversely affect our revenues and profitability.
Existing or future government regulation could expose us to liabilities and costly changes in our
business operations, and could reduce customer demand for our products.
We are subject to general business regulations and laws, as well as regulations and laws
specifically governing the Internet and e-commerce. Such existing and future laws and regulations
may impede the growth of the Internet or other online services. These regulations and laws may
cover taxation, user privacy, marketing and promotional practices, database protection, pricing,
content, copyrights, distribution, electronic contracts, email and other communications, consumer
protection, product safety, the provision of online payment services, intellectual property rights,
unauthorized access (including the Computer Fraud and Abuse Act), and the characteristics and
quality of products and services. It is unclear how existing laws governing issues such as property
ownership, sales and other taxes, libel, trespass, data mining and collection, and personal privacy
apply to the Internet and e-commerce. Unfavorable resolution of these issues may expose us to
liabilities and costly changes in our business operations, and could reduce customer demand. The
growth and demand for online commerce has and may continue to result in more stringent consumer
protection laws that impose additional compliance burdens on online companies. For example, the
laws of many states require notice to customers if certain personal information about them is
obtained by an unauthorized person, such as a computer hacker. These consumer protection laws could
result in substantial compliance costs and could decrease profitability.
Risks Related to Our Stock
The market price of our common stock may be volatile. You may not be able to sell your shares at or
above the price at which you purchased such shares.
The trading price of our common stock may be subject to wide fluctuations in response to
quarter-to-quarter fluctuations in operating results, announcements of material adverse events,
general conditions in our industry or the public marketplace and other events or factors. In
addition, stock markets have experienced extreme price and trading volume volatility in recent
years. This volatility has had a substantial effect on the market prices of securities of many
technology related companies for reasons frequently unrelated to the operating performance of the
specific companies. These broad market fluctuations may adversely affect the market price of our
common stock. In addition, if our operating results differ from our announced guidance or the
expectations of equity research analysts or investors, the price of our common stock could decrease
significantly.
Our stock price could decline if a significant number of shares become available for sale.
As of December 31, 2007, we had issued and outstanding 0.6 million warrants to purchase common
stock (having a weighted average exercise price of $2.29 per share). In addition, as of
December 31, 2007, we have an aggregate of 6.1 million stock options outstanding to employees,
directors and others with a weighted average exercise price of $1.23 per share. The shares of
common stock that may be issued upon exercise of these warrants and options may be resold into the
public market. Sales of substantial amounts of common stock in the public market as a result of the
exercise of these warrants or options, or the perception that future sales of these shares could
occur, could reduce the market price of our common stock and make it more difficult to sell equity
securities in the future.
Our common stock could be delisted from the Nasdaq Capital Market.
Historically, the price of our common stock has traded below $1.00 per share. If the price of
our common stock declines below $1.00 per share for 30 consecutive trading days, we may fail to
meet Nasdaq’s maintenance criteria, which may result in the delisting of our common stock from the
Nasdaq Capital Market.
In the event of such delisting, trading, if any, in our common stock may then continue to be
conducted in the non-Nasdaq over-the-counter market in what are commonly referred to as the
electronic bulletin board and the ‘‘pink sheets.’’ As a result, an investor may find it more
difficult to dispose of or obtain accurate quotations as to the market value of our common stock.
In addition, we would be subject to a Rule promulgated by the SEC that, if we fail to meet criteria
set forth in such Rule, imposes various practice requirements on broker-dealers who sell
34
securities
governed by the Rule to persons other than established customers and accredited investors. For
these types of transactions, the broker-dealer must make a special suitability determination for
the purchaser and have received
the purchaser’s written consent to the transactions prior to the sale. Consequently, the Rule
may have a material adverse effect on the ability of broker-dealers to sell our securities, which
may materially affect the ability of shareholders to sell our securities in the secondary market.
A delisting from the Nasdaq Capital Market will also make us ineligible to use Form S-3 to
register the sale of shares of our common stock or to register the resale of our securities with
the SEC, thereby making it more difficult and expensive for us to register our common stock or
other securities and raise additional capital.
Our certificate of incorporation, our bylaws, our shareholder rights plan and Delaware law make it
difficult for a third party to acquire us, despite the possible benefit to our shareholders.
Provisions of our certificate of incorporation, our bylaws, our shareholder rights plan
and Delaware law could make it more difficult for a third party to acquire us, even if doing so
would be beneficial to our shareholders. For example, our certificate of incorporation provides for
a classified board of directors, meaning that only approximately one-third of our directors may be
subject to re-election at each annual shareholder meeting. Our certificate of incorporation also
permits our Board of Directors to issue one or more series of preferred stock, which may have
rights and preferences superior to those of the common stock. The ability to issue preferred stock
could have the effect of delaying or preventing a third party from acquiring us. We have also
adopted a shareholder rights plan. These provisions could discourage takeover attempts and could
materially adversely affect the price of our stock. In addition, because we are incorporated in
Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law,
which may prohibit large shareholders from consummating a merger with, or acquisition of us. These
provisions may prevent a merger or acquisition that would be attractive to shareholders and could
limit the price that investors would be willing to pay in the future for our common stock.
There are limitations on the liabilities of our directors and executive officers.
Pursuant to our bylaws and under Delaware law, our directors are not liable to us or our
shareholders for monetary damages for breach of fiduciary duty, except for liability for breach of
a director’s duty of loyalty, acts or omissions by a director not in good faith or which involve
intentional misconduct or a knowing violation of law, or any transaction in which a director has
derived an improper personal benefit.
35
Item 2. Properties
Our general corporate headquarters and the corporate headquarters of our PFS service fee and
Supplies Distributors businesses are located in Plano, Texas, a Dallas suburb. Our eCOST corporate
headquarters is located in El Segundo, California.
In the U.S., we operate two distribution facilities in Memphis, Tennessee, with aggregated
floor and mezzanine space of more than 800,000 square feet. We also operate approximately 1
million square feet of distribution facilities in Southaven, Mississippi. Both of these complexes
are located approximately five miles from the Memphis International Airport. We also manage a
200,000 square foot distribution facility in Grapevine, Texas.
We operate a 150,000 square foot distribution center in Liege, Belgium, which contains
advanced distribution systems and equipment. We operate a 22,000 square foot distribution center in
Markham, Canada, near Eastern Toronto. We also operate a 6,500 square foot facility in the
Philippines to provide call center and customer service functions. We operate customer service
centers in Tennessee, Texas, Belgium and the Philippines. Our call center technology permits the
automatic routing of calls to available customer service representatives in several of our call
centers.
Except for the Grapevine, Texas facility, which we manage on our client’s behalf, all of our
facilities are leased and the material lease agreements contain one or more renewal options.
Item 3. Legal Proceedings
On May 9, 2005, a lawsuit was filed in the District Court of Collin County, Texas, by J. Gregg
Pritchard, as Trustee of the D.I.C. Creditors Trust, naming the former directors of Daisytek
International Corporation and the Company as defendants. Daisytek filed for bankruptcy in May 2003
and the Trust was created pursuant to Daisytek’s Plan of Liquidation. The complaint alleged, among
other things, that the spin-off of the Company from Daisytek in December 1999 was a fraudulent
conveyance and that Daisytek was damaged thereby in the amount of at least $38 million. On May 3,
2007, the Court granted the Company’s motions for summary judgment and all of the claims against
the Company have been dismissed. In December 2007, the remaining parties to the litigation agreed
to a settlement pursuant to which all of the remaining claims have been dismissed.
On July 25, 2007 a purported class action lawsuit entitled Darral Frank and Joseph F. Keeley,
Jr. v. PC Mall, Inc. dba eCOST.com and eCOST.com, Inc. was filed in the Superior Court of
California, Los Angeles County. The purported class consists of all of current and former sales
representatives who worked for the defendants in California from July 24, 2003 through July 24,
2007. The lawsuit alleges that the defendants failed to pay overtime compensation and interest
thereon, failed to timely pay compensation to terminated employees and failed to provide meal and
rest periods, all in violation of the California Labor Code and Business and Professions Code. The
complaint seeks unpaid overtime, statutory penalties, interest, attorneys’ fees, punitive damages,
restitution and injunctive relief. We intend to vigorously contest this action and do not believe
the claims have any merit. The matter has been submitted to arbitration.
In February 2008, eCOST and the Company were served with a Complaint For Civil Penalties and
Injunctive Relief filed by Jamie Te’o in the Superior Court of California, Alameda County, alleging
violation of California Proposition 65 arising from the sale by eCOST of certain computer
components. We intend to vigorously contest this action and do not believe the claims have any
merit. We may also seek indemnification for these claims from the manufacturers of these products.
Item 4. Submission of Matters to a Vote of Security Holders
None.
36
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities
Our common stock is listed and currently trades on the NASDAQ Capital Market under the symbol
“PFSW.” The following table sets forth for the period indicated the high and low sale price for the
common stock as reported by NASDAQ:
| |
|
|
|
|
|
|
|
|
| |
|
Price |
| |
|
High |
|
Low |
Year Ended December 31, 2007 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
1.33 |
|
|
$ |
0.91 |
|
Second Quarter |
|
$ |
1.03 |
|
|
$ |
0.81 |
|
Third Quarter |
|
$ |
1.50 |
|
|
$ |
0.82 |
|
Fourth Quarter |
|
$ |
1.56 |
|
|
$ |
1.04 |
|
Year Ended December 31, 2006 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
1.80 |
|
|
$ |
1.20 |
|
Second Quarter |
|
$ |
1.31 |
|
|
$ |
0.92 |
|
Third Quarter |
|
$ |
1.03 |
|
|
$ |
0.67 |
|
Fourth Quarter |
|
$ |
1.34 |
|
|
$ |
0.61 |
|
As of March 3, 2008, there were approximately 4,400 shareholders of which approximately 160
were record holders of the common stock.
We have never declared or paid cash dividends on our common stock and do not anticipate the
payment of cash dividends on our common stock in the foreseeable future. We are also restricted
from paying dividends under our debt agreements, without the prior approval of our lenders. We
currently intend to retain all earnings to finance the further development of our business. The
payment of any future cash dividends will be at the discretion of our Board of Directors and will
depend upon, among other things, future earnings, operations, capital requirements, the general
financial condition of the Company and general business conditions and the approval of our lenders.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations —
Liquidity and Capital Resources.”
The following table summarizes information with respect to equity compensation plans under
which equity securities of the registrant are authorized for issuance as of December 31, 2007:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Number of securities |
|
Weighted-average |
|
Number of |
| |
|
to be issued upon |
|
exercise price of |
|
securities |
| |
|
exercise of |
|
outstanding |
|
remaining |
| |
|
outstanding options |
|
options and |
|
available for |
| Plan category (1) |
|
and warrants |
|
warrants |
future issuance |
Equity compensation
plans approved by
security holders |
|
|
5,680,698 |
|
|
$ |
1.25 |
|
|
|
2,484,947 |
|
Equity compensation
plans not approved
by security holders |
|
|
429,219 |
|
|
$ |
0.94 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
6,109,917 |
|
|
|
|
|
|
|
2,484,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
See Note 5 to the Consolidated Financial Statements for more detailed information
regarding the registrant’s equity compensation plans. |
Item 6. Selected Consolidated Financial Data
Historical Presentation
The selected consolidated historical statement of operations data for the years ended December
31, 2007, 2006, and 2005, and the selected consolidated balance sheet data as of December 31, 2007
and 2006 have been derived from our audited consolidated financial statements, and should be read
in conjunction with those statements and notes, which are included in this Form 10-K. The selected
consolidated statement of operations data for the years ended December 31, 2004 and 2003 and the
selected consolidated balance sheet data as of December 31, 2005, 2004
37
and 2003 have been derived
from our audited consolidated financial statements, and should be read in conjunction
with those statements, which are not included in this Form 10-K.
The selected consolidated financial data should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” “Risks Related to Our
Business – Certain of our historical financial information may not be representative of our future
results,” and the consolidated financial statements and notes thereto that are included elsewhere
in this Form 10-K.
38
Historical Selected Condensed Consolidated Financial Data
(In thousands, except per share data)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended |
|
| |
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Condensed Consolidated Statements of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue, net |
|
$ |
339,500 |
|
|
$ |
333,311 |
|
|
$ |
252,902 |
|
|
$ |
267,470 |
|
|
$ |
249,230 |
|
Service fee revenue |
|
|
74,480 |
|
|
|
67,056 |
|
|
|
60,783 |
|
|
|
42,076 |
|
|
|
33,771 |
|
Pass-through revenue |
|
|
32,822 |
|
|
|
22,886 |
|
|
|
17,972 |
|
|
|
12,119 |
|
|
|
3,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
446,802 |
|
|
|
423,253 |
|
|
|
331,657 |
|
|
|
321,665 |
|
|
|
286,436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue |
|
|
313,835 |
|
|
|
311,417 |
|
|
|
235,584 |
|
|
|
251,968 |
|
|
|
235,317 |
|
Cost of service fee revenue |
|
|
53,375 |
|
|
|
49,274 |
|
|
|
45,597 |
|
|
|
28,067 |
|
|
|
23,159 |
|
Cost of pass-through revenue |
|
|
32,822 |
|
|
|
22,886 |
|
|
|
17,972 |
|
|
|
12,119 |
|
|
|
3,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of revenues |
|
|
400,032 |
|
|
|
383,577 |
|
|
|
299,153 |
|
|
|
292,154 |
|
|
|
261,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
46,770 |
|
|
|
39,676 |
|
|
|
32,504 |
|
|
|
29,511 |
|
|
|
24,525 |
|
Percent of revenues |
|
|
10.5 |
% |
|
|
9.4 |
% |
|
|
9.8 |
% |
|
|
9.2 |
% |
|
|
8.6 |
% |
Selling, general and
administrative expenses (A) |
|
|
44,057 |
|
|
|
45,189 |
|
|
|
30,521 |
|
|
|
27,091 |
|
|
|
25,699 |
|
Merger integration expenses |
|
|
150 |
|
|
|
1,495 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Amortization of identifiable intangibles |
|
|
806 |
|
|
|
749 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Goodwill impairment |
|
|
— |
|
|
|
3,507 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
45,013 |
|
|
|
50,940 |
|
|
|
30,521 |
|
|
|
27,091 |
|
|
|
25,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
1,757 |
|
|
|
(11,264 |
) |
|
|
1,983 |
|
|
|
2,420 |
|
|
|
(1,174 |
) |
Percent of revenues |
|
|
0.4 |
% |
|
|
(2.7 |
)% |
|
|
0.6 |
% |
|
|
0.8 |
% |
|
|
(0.4 |
)% |
Interest expense (income), net |
|
|
2,342 |
|
|
|
2,112 |
|
|
|
1,729 |
|
|
|
1,460 |
|
|
|
2,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(585 |
) |
|
|
(13,376 |
) |
|
|
254 |
|
|
|
960 |
|
|
|
(3,174 |
) |
Income tax expense |
|
|
799 |
|
|
|
1,154 |
|
|
|
1,001 |
|
|
|
734 |
|
|
|
572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(1,384 |
) |
|
$ |
(14,530 |
) |
|
$ |
(747 |
) |
|
$ |
226 |
|
|
$ |
(3,746 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.03 |
) |
|
$ |
(0.34 |
) |
|
$ |
(0.03 |
) |
|
$ |
0.01 |
|
|
$ |
(0.20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(0.03 |
) |
|
$ |
(0.34 |
) |
|
$ |
(0.03 |
) |
|
$ |
0.01 |
|
|
$ |
(0.20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
46,480 |
|
|
|
42,762 |
|
|
|
22,394 |
|
|
|
21,332 |
|
|
|
19,011 |
|
Diluted |
|
|
46,480 |
|
|
|
42,762 |
|
|
|
22,394 |
|
|
|
23,468 |
|
|
|
19,011 |
|
|
|
|
| (A) |
|
Includes stock based compensation expense of $764, $899, $16, $14 and $6 in the years
ended December 31, 2007, 2006, 2005, 2004 and 2003, respectively. |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of December 31, |
| |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
Consolidated Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
$ |
22,507 |
|
|
$ |
20,703 |
|
|
$ |
23,359 |
|
|
$ |
22,608 |
|
|
$ |
21,407 |
|
Total assets |
|
|
158,173 |
|
|
|
164,152 |
|
|
|
131,726 |
|
|
|
130,327 |
|
|
|
108,359 |
|
Long-term obligations |
|
|
7,680 |
|
|
|
7,604 |
|
|
|
8,102 |
|
|
|
8,749 |
|
|
|
3,760 |
|
Shareholders’ equity |
|
|
48,842 |
|
|
|
48,840 |
|
|
|
29,934 |
|
|
|
29,926 |
|
|
|
28,417 |
|
39
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
We believe the following discussion and analysis provides information that is relevant to an
assessment and understanding of our consolidated results of operations and financial condition. The
discussion and analysis should be read in conjunction with the consolidated financial statements
and related notes thereto appearing elsewhere in this Form 10-K. This Management’s Discussion and
Analysis will help you understand:
| |
• |
|
The impact of forward looking statements; |
| |
| |
• |
|
Our financial structure, including our historical financial presentation; |
| |
| |
• |
|
Our results of operations for the last three years; |
| |
| |
• |
|
Our relationship with our subsidiaries Supplies Distributors and eCOST; |
| |
| |
• |
|
Our liquidity and capital resources; |
| |
| |
• |
|
The impact of seasonality, inflation and recently issued accounting standards on our
financial statements; and |
| |
| |
• |
|
Our critical accounting policies and estimates. |
Forward-Looking Information
We have made forward-looking statements in this Report on Form 10-K. These statements are
subject to risks and uncertainties, and there can be no guarantee that these statements will prove
to be correct. Forward-looking statements include assumptions as to how we may perform in the
future. When we use words like “seek,” “strive,” “believe,” “expect,” “anticipate,” “predict,”
“potential,” “continue,” “will,” “may,” “could,” “intend,” “plan,” “target” and “estimate” or
similar expressions, we are making forward-looking statements. You should understand that the
following important factors, in addition to the Risk Factors set forth above or elsewhere in this
Report on Form 10-K, could cause our results to differ materially from those expressed in our
forward-looking statements. These factors include:
| |
• |
|
our ability to retain and expand relationships with existing clients and attract and
implement new clients; |
| |
| |
• |
|
our reliance on the fees generated by the transaction volume or product sales of our
clients; |
| |
| |
• |
|
our reliance on our clients’ projections or transaction volume or product sales; |
| |
| |
• |
|
our dependence upon our agreements with International Business Machines Corporation
(“IBM”) and InfoPrint Solutions Company (“IPS”), 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; |
| |
| |
• |
|
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; |
| |
| |
• |
|
whether outstanding warrants issued in a prior private placement will be exercised in
the future; |
| |
| |
• |
|
our ability to successfully achieve the anticipated benefits of our merger with eCOST; |
| |
| |
• |
|
eCOST’s potential indemnification obligations to its former parent; |
40
| |
• |
|
eCOST’s ability to maintain existing and build new relationships with manufacturers and
vendors and the success of its advertising and marketing efforts; |
| |
| |
• |
|
eCOST’s ability to increase its sales revenue and sales margin and improve operating
efficiencies; and |
| |
| |
• |
|
eCOST’s 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 that these expectations actually will be achieved. In addition, some forward-looking
statements are based upon assumptions as to future events that may not prove to be accurate.
Therefore, actual outcomes and results may differ materially from what is expected or forecasted in
such forward-looking statements. We undertake no obligation to update publicly any forward-looking
statement for any reason, even if new information becomes available or other events occur in the
future. There may be additional risks that we do not currently view as material or that are not
presently known. In evaluating these statements, you should consider various factors, including the
risks set forth in the section entitled “Risk Factors.”
Overview
We are an international provider of integrated business process outsourcing solutions to major
brand name companies seeking to maximize their supply chain efficiencies and to extend their
traditional business and e-commerce initiatives as well as a leading multi-category online discount
retailer of new, “close-out” and recertified brand-name merchandise. We derive our revenues from
three business segments: business process outsourcing, a master distributor and a discount online
retailer.
First, in our business process outsourcing business segment, we derive our revenues from a
broad range of services, including professional consulting, technology collaboration, order
management, managed web hosting and web development, customer relationship management, financial
services including billing and collection services and working capital solutions, kitting and
assembly services, information management and international fulfillment and distribution services.
We offer our services as an integrated solution, which enables our clients to outsource their
complete infrastructure needs to a single source and to focus on their core competencies. Our
distribution services are conducted at warehouses that we lease or manage and include real-time
inventory management and customized picking, packing and shipping of our clients’ customer orders.
We currently offer the ability to provide infrastructure and distribution solutions to clients that
operate in a range of vertical markets, including technology manufacturing, computer products,
cosmetics, fragile goods, high security collectibles, contemporary home furnishings, apparel,
aviation, telecommunications and consumer electronics, among others.
In this business process outsourcing segment, we do not own the underlying inventory or the
resulting accounts receivable, but provide management services for these client-owned assets. We
typically charge our service fee revenue on a cost-plus basis, a percent of shipped revenue basis
or a per-transaction basis, such as a per-minute basis for web-enabled customer contact center
services and a per-item basis for fulfillment services. Additional fees are billed for other
services. We price our services based on a variety of factors, including the depth and complexity
of the services provided, the amount of capital expenditures or systems customization required, the
length of contract and other factors.
Many of our service fee contracts involve third-party vendors who provide additional services
such as package delivery. The costs we are charged by these third-party vendors for these services
are often passed on to our clients. Our billings for reimbursements of these and other
‘out-of-pocket’ expenses include travel, shipping and handling costs and telecommunication charges
and are included in pass-through revenue.
Our second business segment is a product revenue model. In this segment, we are a master
distributor of product for IPS and certain other clients. In this capacity, we purchase, and thus
own, inventory and recognize the corresponding product revenue. As a result, upon the sale of
inventory, we own the accounts receivable. Freight costs billed to customers are reflected as
components of product revenue. This business segment requires significant working capital
requirements, for which we have senior credit facilities to provide for more than $85 million of
available financing.
Our third business segment is a web-commerce product revenue model focused on the sale of
products to a broad
41
range of consumer and small business customers. In this segment we operate as a
multi-category online discount retailer of new, “close-out” and recertified brand-name merchandise.
Our product line currently offers approximately 170,000 products in several primary merchandise
categories, primarily including computer hardware and software, home electronics, digital imaging,
watches and jewelry, housewares, DVD movies, video games and cellular/wireless.
Growth is a key element to us achieving our future goals, including achieving and maintaining
sustainable profitability. Growth in our business process outsourcing segment is driven by two
main elements: new client relationships and organic growth from existing clients. We focus our
sales efforts on larger contracts with brand-name companies within two primary target markets,
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.
Our 2007 results include approximately $6.6 million of revenue from new service contract
relationships, including certain incremental projects, which we estimate is approximately 50% of
the approximately $12 to $14 million we believe will ultimately be the fully operational annual fee
revenue under new client relationships entered into in late 2006 and during 2007.
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 eCOST’s ability to
increase sales by generating organic growth, new customers and expanding its product line.
We continue to monitor and control our costs to focus on profitability. While we are targeting
our new service fee contracts to yield increased gross profit, we also expect to incur incremental
investments to implement new contracts, investments in infrastructure and sales and marketing to
support our targeted growth and increased public company professional fees.
Our expenses comprise primarily four categories: 1) cost of product revenue, 2) cost of
service fee revenue, 3) cost of pass-through revenue and 4) operating expenses.
Cost of product revenue –consists of the purchase price of product sold and freight costs,
which are reduced by certain reimbursable expenses. These reimbursable expenses include
pass-through customer marketing programs, direct costs incurred in passing on any price decreases
offered by vendors to cover price protection and certain special bids, the cost of products
provided to replace defective product returned by customers and certain other expenses as defined
under the master distributor agreements. 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. In recent years we have added to our available cash and liquidity
positions through various transactions.
42
| |
• |
|
Each of our primary operating subsidiaries has one or more asset-based working
capital financing agreements with various lenders. |
| |
| |
• |
|
Between 2003 and 2006, we raised approximately $9.3 million in net proceeds from the
sale of approximately 7 million shares of common stock in private placements to certain
investors. |
Historical Financial Presentation
As a result of our acquisition of eCOST.com in February 2006, we believe our historical
financial statements may not provide a meaningful comparison to our current and future financial
performance.
Results of Operations
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
The following table discloses certain financial information for the periods presented,
expressed in terms of dollars, dollar change, percentage change and as a percentage of total
revenue (in millions).
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total |
|
| |
|
|
|
|
|
|
|
|
|
Change |
|
|
Revenue |
|
| |
|
2007 |
|
|
2006 |
|
|
$ |
|
|
% |
|
|
2007 |
|
|
2006 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue, net |
|
$ |
339.5 |
|
|
$ |
333.3 |
|
|
$ |
6.2 |
|
|
|
1.9 |
% |
|
|
76.0 |
% |
|
|
78.8 |
% |
Service fee revenue |
|
|
74.5 |
|
|
|
67.1 |
|
|
|
7.4 |
|
|
|
11.1 |
% |
|
|
16.7 |
% |
|
|
15.8 |
% |
Pass-through revenue |
|
|
32.8 |
|
|
|
22.9 |
|
|
|
9.9 |
|
|
|
43.4 |
% |
|
|
7.3 |
% |
|
|
5.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
446.8 |
|
|
|
423.3 |
|
|
|
23.5 |
|
|
|
5.6 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue |
|
|
313.8 |
|
|
|
311.4 |
|
|
|
2.4 |
|
|
|
0.8 |
% |
|
|
92.4 |
%(1) |
|
|
93.4 |
%(1) |
Cost of service fee revenue |
|
|
53.4 |
|
|
|
49.3 |
|
|
|
4.1 |
|
|
|
8.3 |
% |
|
|
71.7 |
%(2) |
|
|
73.5 |
%(2) |
Pass-through cost of revenue |
|
|
32.8 |
|
|
|
22.9 |
|
|
|
9.9 |
|
|
|
43.4 |
% |
|
|
100.0 |
%(3) |
|
|
100.0 |
%(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
|
400.0 |
|
|
|
383.6 |
|
|
|
16.4 |
|
|
|
4.3 |
% |
|
|
89.5 |
% |
|
|
90.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue gross profit |
|
|
25.7 |
|
|
|
21.9 |
|
|
|
3.8 |
|
|
|
17.2 |
% |
|
|
7.6 |
%(1) |
|
|
6.6 |
%(1) |
Service fee gross profit |
|
|
21.1 |
|
|
|
17.8 |
|
|
|
3.3 |
|
|
|
18.7 |
% |
|
|
28.3 |
%(2) |
|
|
26.5 |
%(2) |
Pass-through gross profit |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
% |
|
|
- |
%(3) |
|
|
- |
%(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit |
|
|
46.8 |
|
|
|
39.7 |
|
|
|
7.1 |
|
|
|
17.9 |
% |
|
|
10.5 |
% |
|
|
9.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses |
|
|
45.0 |
|
|
|
50.9 |
|
|
|
(5.9 |
) |
|
|
(11.6 |
)% |
|
|
10.1 |
% |
|
|
12.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
1.8 |
|
|
|
(11.2 |
) |
|
|
13.0 |
|
|
|
115.6 |
% |
|
|
0.4 |
% |
|
|
(2.6 |
)% |
Interest expense, net |
|
|
2.4 |
|
|
|
2.1 |
|
|
|
0.3 |
|
|
|
10.9 |
% |
|
|
0.5 |
% |
|
|
(0.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(0.6 |
) |
|
|
(13.3 |
) |
|
|
12.7 |
|
|
|
(95.6 |
)% |
|
|
(0.1 |
)% |
|
|
(3.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense, net |
|
|
0.8 |
|
|
|
1.2 |
|
|
|
0.4 |
|
|
|
30.8 |
% |
|
|
0.3 |
% |
|
|
0.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(1.4 |
) |
|
$ |
(14.5 |
) |
|
$ |
13.1 |
|
|
|
90.5 |
% |
|
|
(0.4 |
)% |
|
|
(3.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Represents the percent of Product revenue, net. |
| |
| (2) |
|
Represents the percent of Service fee revenue. |
| |
| (3) |
|
Represents the percent of Pass-through revenue. |
Product
Revenue, net. eCOST product revenue was $104.1 million in
2007, a 17.9% increase as compared to $88.3
million in the prior year. Fiscal 2007 includes a full year of eCOST activity as compared to eleven
months in 2006 following the acquisition of eCOST in February 2006.
43
Supplies Distributors product revenue of $235.4 million decreased $9.6 million, or 3.9% in
2007 as compared to the prior year. This decrease was primarily due to the decreased sales volume
of certain products as a result of improvement in the products’ useful lives, which slowed
consumer’s demand for replenishment, the impact of foreign currency fluctuations which created
alternative purchasing channels for certain customers, and incremental vendor promotion activity in
the March 2006 quarter, which did not occur in 2007.
We currently expect our 2008 annual product revenue for Supplies Distributors to remain the
same or grow slightly and for eCOST annual product revenue to be higher than 2007.
Service Fee Revenue. The increase in service fee revenue for the years ended December 31,
2007 and 2006 reflects the favorable impact from new clients that were added late in calendar year
2006 and increased project activity in 2007 as compared to 2006. The change in service fee
revenue, excluding pass-through revenue, is shown below ($ millions):
| |
|
|
|
|
Year ended December 31, 2006 |
|
$ |
67.1 |
|
New service contract relationships, including certain
incremental projects under new contracts |
|
|
6.6 |
|
Change in existing client service fees and certain
incremental projects with existing clients |
|
|
3.3 |
|
Terminated clients not included in 2007 revenue |
|
|
(2.5 |
) |
|
|
|
|
Year ended December 31, 2007 |
|
$ |
74.5 |
|
|
|
|
|
Service fee revenue for the year ended December 31, 2007 included approximately $4.2 million
of fees earned from client contracts terminated during 2007.
Based on historical activity and current projection of existing clients, including new clients
signed in 2007, we currently anticipate that 2008 service fee revenue will be higher than 2007
service fee revenue.
Cost of Product Revenue. Cost of product revenue for year ended December 31, 2007 includes a
full year of activity for eCOST as compared to eleven months in 2006 following the acquisition of
eCOST in February 2006. The gross margin for eCOST was $8.9 million or 8.6% of product revenue in
2007 and $4.2 million or 4.8% of product revenue during 2006. Gross margin for eCOST for the
period ended December 31, 2006 included elevated levels of fraudulent credit card chargeback
activity, an increased provision for excess and obsolete inventory and the impact of a loss
applicable to a sales transaction with a former eCOST customer. In addition, gross margin for
eCOST increased from the prior year due to improved product pricing controls, freight initiatives
and increased sales of higher margin product through virtual warehouse agreements with its vendors.
Supplies Distributors cost of product revenue decreased by $8.8 million, or 3.8%, to $218.6
million in 2007, primarily as a result of reduced product sales. The resulting gross profit margin
was $16.7 million or 7.1% of product revenue for the year ended December 31, 2007 and $17.7 million
or 7.2% of product revenue for 2006. The gross profit margin for the 2007 and 2006 periods include
certain incremental inventory cost reductions.
Cost of Service Fee Revenue. The increase in gross profit as a percentage of service fees to
28.3% in 2007 from 26.5% in 2006 is primarily due to improved cost
controls and productivity on certain clients and additional higher
margin client project activity compared to 2006. We
expect to earn an average gross profit of 25-30% on 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 year ended December 31, 2007 include a full
year of activity for eCOST as compared to only eleven months of activity in the year ended December
31, 2006 following the acquisition of eCOST in February 2006. eCOST’s operating expenses declined
during 2007 by $8.0 million as compared to the prior year primarily due to the realization of
savings through the reduction of certain advertising and overhead expenses, reduced merger and
integration related expenses, changes in corporate infrastructure expenses and operating
efficiencies attained as a result of the eCOST integration.
44
Operating expenses in 2006 also include a goodwill impairment charge of $3.5 million resulting
from the annual analysis pursuant to Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets.
Under this analysis, we determined that the carrying value of goodwill exceeded the fair
value, which resulted in a $3.5 million non-cash write-off of goodwill.
Excluding eCOST, operating expenses were $32.7 million, or 9.5% of total net revenues in the
2007 period and $30.6 million, or 9.1% of total net revenues in the comparable prior year period.
The increase in operating expenses is primarily due to increased facility and personnel related
expenses partially offset by the favorable impact of exchange rates on intercompany accounts during
the 2007 period.
In 2008, we anticipate incremental operating expenses for certain of our facilities to support
our anticipated growth in revenue; however, as a percentage of net revenues, we expect operating
expenses to remain relatively constant.
Income Taxes. We recorded a tax provision associated primarily with our subsidiary Supplies
Distributors’ Canadian and European operations. We did not record a federal income tax benefit
associated with our consolidated net loss in our U.S. operations or for our PFSweb Canadian pre-tax
losses in the current or prior periods. A valuation allowance has been provided for the majority of
our net deferred tax assets as of December 31, 2007 and December 31, 2006, which are primarily
related to our net operating loss carryforwards, and certain foreign deferred tax assets. We expect
that we will continue to record an income tax provision associated with Supplies Distributors’
Canadian and European results of operations.
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Product Revenue, net. Product revenue was $333.3 million for the year ended December 31, 2006,
as compared to $252.9 million for the year ended December 31, 2005, an increase of $80.4 million,
or 31.8%. Excluding the $88.3 million of product revenue of eCOST following its acquisition in
February 2006, product revenue decreased $7.9 million, or 3.1%, primarily due to lower volumes and
reduced vendor promotional activity.
Service Fee Revenue. Service fee revenue was $67.1 million for the year ended December 31,
2006 as compared to $60.8 million for the year ended December 31, 2005, an increase of $6.3 million
or 10.3%. Service fee revenue includes increased service fees generated from incremental projects
with certain client relationships. The change in service fee revenue is shown below ($ millions):
| |
|
|
|
|
Year ended December 31, 2005 |
|
$ |
60.8 |
|
New service contract relationships, including certain
incremental projects under new contracts |
|
|
4.7 |
|
Change in existing client service fees from organic
growth and certain incremental projects with existing
clients |
|
|
6.7 |
|
Terminated clients not included in 2006 revenue |
|
|
(5.1 |
) |
|
|
|
|
Year ended December 31, 2006 |
|
$ |
67.1 |
|
|
|
|
|
Service fee revenue for the year ended December 31, 2006 included approximately $2.9 million
of fees earned from client contracts terminated during 2006.
Cost of Product Revenue. Cost of product revenue was $311.4 million for the year ended
December 31, 2006, as compared to $235.6 million for the year ended December 31, 2005, an increase
of $75.8 million or 32.2%. Excluding the $84.1 million of cost of product revenue of eCOST
following its acquisition in February 2006, cost of product revenue decreased $8.2 million or 3.5%.
Cost of product revenue, excluding eCOST, decreased primarily as the result of decreased sales
volumes of certain products. Cost of product revenue, as a percent of product revenue, excluding
the impact of eCOST, was 92.8% during the year ended December 31, 2006 and 93.2% during the year
ended December 31, 2005. The resulting gross profit margin was 7.2% for the year ended December 31,
2006 and 6.8% for the year ended December 31, 2005. The gross profit margin for the 2006 and 2005
periods include certain incremental inventory cost reductions. eCOST’s cost of product revenue, as
a percentage of product revenue was 95.2% during the year ended December 31, 2006, following its
acquisition in February 2006. The resulting gross
45
margin for eCOST was 4.8% during the same
period, which is lower than expected primarily due to unusually high levels of credit card
chargeback activity that resulted in approximately $1.7 million of higher than normal credit card
chargebacks, an increased provision for excess and obsolete inventory, and the impact of a
$0.4 million loss applicable to a sales transaction to a former eCOST customer.
Cost of Service Fee Revenue. Cost of service fee revenue was $49.3 million for the year ended
December 31, 2006, as compared to $45.6 million during the year ended December 31, 2005, an
increase of $3.7 million or 8.1%. The resulting service fee gross profit was $17.8 million, or
26.5% of service fee revenue, during the year ended December 31, 2006 as compared to $15.2 million,
or 25.0% of service fee revenue, for the year ended December 31, 2005. Our gross profit as a
percent of service fees increased in the year ended December 31, 2006 primarily due to higher gross
margins on certain client project revenue as well as the prior year having lower gross margins on
certain new contracts, including certain start up costs.
Operating Expenses. Operating expenses were $50.9 million for the year ended December 31,
2006, or 12.0% of total net revenues, as compared to $30.5 million, or 9.2% of total net revenues,
for the year ended December 31, 2005. Excluding the $20.4 million of operating expenses of eCOST
following its acquisition in February 2006, operating expenses were $30.6 million, or 9.1% of total
net revenues, during the current period. Operating expenses in the year ended December 31, 2006
included $0.9 million of costs applicable to stock-based compensation, which were zero in the prior
year. In addition, the 2005 period included certain personnel related costs and certain
incremental costs incurred to relocate certain of our operations from Memphis, TN to a new facility
in Southaven, MS, which did not recur in 2006.
Operating expenses also include a goodwill impairment resulting from our annual analysis
pursuant to Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible
Assets. Under this analysis, we determined that the carrying value of goodwill exceeded the fair
value, which resulted in a $3.5 million non-cash write-off of goodwill during the fourth quarter of
2006.
Interest Expense, net. Net interest expense was $2.1 million and $1.7 million for the years
ended December 31, 2006 and 2005, respectively. The increase was primarily related to the increase
in interest rates.
Income Taxes. For the year ended December 31, 2006 and 2005, we recorded a tax provision of
$1.2 million and $1.0 million, respectively, primarily associated with our subsidiary Supplies
Distributors’ Canadian and European operations. We did not record an income tax benefit associated
with our consolidated net loss in our U.S. operations. A valuation allowance has been provided for
our net U.S. deferred tax assets as of December 31, 2006 and 2005, which are primarily related to
our net operating loss carryforwards, and certain foreign deferred tax assets. We did not record an
income tax benefit for our PFSweb Canadian pre-tax losses in the current or prior periods.
Supplies Distributors and its Subsidiaries
Supplies Distributors and its subsidiaries act as master distributors of various IPS and other
products and, pursuant to a transaction management services agreement between us and Supplies
Distributors, we provide transaction management and fulfillment services to Supplies Distributors
and its subsidiaries. In addition to our equity investment in Supplies Distributors, we have also
provided Supplies Distributors with a subordinated loan that, as of December 31, 2007, had an
outstanding balance of $6.0 million.
Supplies Distributors has paid us dividends of $2.4 million, $3.9 million and $1.0 million in
2007, 2006 and 2005, respectively. Supplies Distributors has received lender approval to pay us
dividends of $2.8 million in 2008, and to reduce its subordinated debt to us by $0.5 million, but
pursuant to the terms of its amended credit agreements, is restricted from paying further cash
dividends without the prior approval of its lenders. In addition, no distribution may be made if,
after giving effect thereto, the net worth of Supplies Distributors, as defined, would be less than
$1.0 million.
eCOST and its Subsidiaries
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. As of
December 31, 2007, we have advanced $12.6
46
million to eCOST to support its operations.
Liquidity and Capital Resources
Net cash provided by operating activities was $5.4 million for the year ended December 31,
2007 and primarily resulted from cash income before working capital changes of $8.6 million and
working capital changes consisting of a decrease in inventories of $2.3 million, a decrease in
prepaid expenses, other receivables and other assets of $2.1 million and a decrease in accounts
receivable of $2.1 million, partially offset by a decrease in accounts payable, accrued expenses
and other liabilities of $9.4 million primarily related to the change in vendor financing payables
and an increase in restricted cash of $0.3 million.
Net cash provided by operating activities was $2.5 million for the year ended December 31,
2006 and primarily consisted of a decrease in inventories of $2.9 million, a decrease in accounts
receivable of $1.7 million and a decrease in restricted cash of $0.8 million. These sources of
cash were offset by a $2.6 million decrease in accounts payable, accrued expenses and other
liabilities and an increase in net loss, as adjusted for non-cash items of $0.2 million.
Net cash used in investing activities for the year ended December 31, 2007 totaled $3.7
million primarily resulting from capital expenditures.
Net cash used in investing activities was $4.4 million for the year ended December 31, 2006
and consisted primarily of capital expenditures of $4.0 million and cash paid to acquire eCOST, net
of cash acquired, of $1.3 million, partially offset by a decrease in restricted cash of $0.9
million.
Capital expenditures have historically consisted primarily of additions to upgrade our
management information systems and general expansion of our facilities, both domestic and foreign.
We expect to incur capital expenditures to support new contracts and anticipated future growth
opportunities. Based on our current client business activity and our targeted growth plans, we
anticipate that our total investment in upgrades and additions to facilities and information
technology services for the upcoming twelve months will be approximately $5 million to $8 million,
although additional capital expenditures may be necessary to support the infrastructure
requirements of new clients as well as the eCOST infrastructure. To maintain our current operating
cash position, a portion of these expenditures may be financed through debt, operating or capital
leases or additional equity. We may elect to modify or defer a portion of such anticipated
investments in the event that we do not achieve the revenue necessary to support such investments.
Net cash used in financing activities was approximately $3.1 million for the year ended
December 31, 2007, primarily representing $2.2 million of payments on capital leases and $1.7
million of payments on debt partially offset by a decrease in restricted cash of $0.8 million.
Net cash provided by financing activities was $3.3 million for the year ended December 31,
2006 primarily representing $4.9 million of net proceeds on issuance of common stock pursuant to a
private placement transaction and $1.0 million of net proceeds on debt partially offset by payments
on capital leases of $1.5 million and an increase in restricted cash of $1.1 million.
Our liquidity has been negatively impacted as a result of the merger with eCOST. eCOST has
experienced a net usage of cash primarily due to losses incurred. As a result, during the process
of transitioning and integrating the eCOST operations, we have had to support eCOST’s cash needs
with the goal of achieving a stabilized operational position. The amount of further cash needed to
support eCOST operations will depend upon the financing available as well as eCOST’s ability to
improve its financial results.
We initially targeted that eCOST, as part of a combined Company, would achieve annual
recurring cost savings of approximately $4 million to $5 million, as compared to pre-merger levels.
As we have now completed the integration of eCOST into our infrastructure, we have begun to
realize the expected benefits of these cost savings initiatives, which resulted from, among other
things, the reduction of advertising expense and certain overhead expenses, changes in corporate
infrastructure and reduced freight costs. eCOST’s results have improved during 2007 and we expect
continued improvement as a result of efforts to increase sales, improve product mix, gross
47
margin
and further improve operational efficiencies.
During the year ended December 31, 2007, our working capital increased to $22.5 million from
$21.2 million at December 31, 2006 primarily as a result of improved cash flows from operations.
To obtain additional financing in the future, in addition to our current cash position, we plan to
evaluate various financing alternatives including the sale of equity, utilizing capital or
operating leases, borrowing under our own 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 letters of credit to secure these arrangements. No
assurances can be given that we will be successful in obtaining any additional financing or the
terms thereof. We currently believe that our cash position, financing available under our credit
facilities and funds generated from operations (including our anticipated revenue growth and/or
cost reductions to offset lower than anticipated revenue growth) will satisfy our presently known
operating cash needs, our working capital and capital expenditure requirements, our lease
obligations, and additional loans to our subsidiaries Supplies Distributors and eCOST, if
necessary, for at least the next twelve months.
The following is a schedule of our total contractual cash obligations, which is comprised of
operating leases, debt, vendor financing and capital leases (including interest), as of December
31, 2007 (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Contractual Obligations |
|
Payments Due By Period |
|
| |
|
|
|
|
|
Less than |
|
|
1 - 3 |
|
|
3 - 5 |
|
|
More than |
|
| |
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
Debt and vendor financing |
|
$ |
61,471 |
|
|
$ |
57,584 |
|
|
$ |
2,071 |
|
|
$ |
1,816 |
|
|
$ |
— |
|
Capital lease obligations |
|
|
5,071 |
|
|
|
2,087 |
|
|
|
2,602 |
|
|
|
382 |
|
|
|
— |
|
Operating leases |
|
|
24,256 |
|
|
|
8,458 |
|
|
|
12,683 |
|
|
|
3,115 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
90,798 |
|
|
$ |
68,129 |
|
|
$ |
17,356 |
|
|
$ |
5,313 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In support of certain debt instruments and leases, as of December 31, 2007, we had $2.0
million of cash restricted for payment of capital expenditures or 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 it may fail to comply with one or more of the financial covenants required
under its working capital line of credit. In such event, absent a waiver, the working capital
lender would be entitled to accelerate all amounts outstanding thereunder and exercise all other
rights and remedies, including sale of collateral and payment under our parent guaranty. A
requirement to accelerate the repayment of the credit facility obligations would have a material
adverse impact on our financial condition and results of operations. We can provide no assurance
that we will have the financial ability to repay all of such obligations. As of December 31, 2007,
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
48
have provided a collateralized guaranty to secure the repayment of these
credit facilities. These asset-based credit facilities provide financing for up to $30.5 million
and up to 12.5 million Euros (approximately $18.4 million at
December 31, 2007) with IBM Credit and IBM Belgium, respectively. These agreements expire in
March 2009.
Supplies Distributors also has a loan and security agreement with Wachovia Bank, N.A.
(“Wachovia”) to provide financing for up to $25 million of eligible accounts receivables in the
United States and Canada. The Wachovia facility expires on the earlier of March 29, 2009 or the
date on which the parties to the IPS master distributor agreement no longer operate under the terms
of such agreement and/or IPS no longer supplies products pursuant to such agreement.
Supplies Distributors’ European subsidiary has a factoring agreement with Fortis Commercial
Finance N.V. (“Fortis”) to provide factoring for up to 7.5 million Euros (approximately $11.0
million at December 31, 2007) of eligible accounts receivables through March 2009.
These credit facilities contain cross default provisions, various restrictions upon the
ability of Supplies Distributors and its subsidiaries to, among other things, merge, consolidate,
sell assets, incur indebtedness, make loans, 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 $5.5 million, maintain restricted cash of less than $5.0 million and
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 PFS subsidiary has entered into a Loan and Security Agreement with Comerica Bank
(“Comerica”), which provides for up to $10.0 million of eligible accounts receivable financing
through March 2009, provided a $1.5 million term loan due in equal monthly installments through
December 2007, and provided for up to $2.5 million of eligible equipment purchases. 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 investments and loans, pledge assets,
make changes to capital stock ownership structure, as well as financial covenants of a minimum
tangible net worth of $20 million, as defined, and a minimum liquidity ratio, as defined. The
agreement also limits PFS’ ability to increase the subordinated loan to Supplies Distributors to no
more than $6.5 million and limits PFS’ ability to advance
more than $3.3 million, with certain
restrictions, to certain of its subsidiaries, including eCOST, without Comerica’s approval. 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 eCOST’s assets and expires in May 2009.
Borrowings under the facility are limited to a percentage of eligible accounts receivable and
letter of credit availability is limited to a percentage of accounts receivable and inventory. As
of December 31, 2007, eCOST had $2.1 million of letters of credit outstanding and $1.1 million of
available credit under this facility. The credit facility restricts eCOST’s ability to, among other
things, merge, consolidate, sell assets, incur indebtedness, make loans, investments and payments
to subsidiaries, affiliates and related parties, make investments and loans, pledge assets, make
changes to capital stock ownership structure, as well as a minimum tangible net worth of $0, as
defined. PFSweb has guaranteed all current and future obligations of eCOST under this line of
credit.
In 2004, we incurred more than $5 million in capital expenditures to support incremental
business from a distribution facility in Southaven, MS. We 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
49
Fulfillment Services, Inc. Project) (the “Bonds”).
The MBFC loaned us the proceeds of the Bonds for the purpose of financing the acquisition and
installation of equipment, machinery and related assets located in our Southaven,
Mississippi distribution facility. The primary source of repayment of the Bonds is a letter
of credit (the “Letter of Credit”) in the initial face amount of $5.1 million issued by Comerica
pursuant to a Reimbursement Agreement between us and Comerica under which we are obligated to pay
to Comerica all amounts drawn under the Letter of Credit. The Letter of Credit has a maturity date
of April 2009 at which time, if not renewed or replaced, will result in a draw on the undrawn face
amount thereof. The amount outstanding on the Bonds as of December 31, 2007 is $4.0 million. Our
obligations under the Reimbursement Agreement are secured by substantially all of the assets of our
PFS subsidiary, including restricted cash of $1.5 million and a
Company parent guarantee.
In June 2006, we entered into a Securities Purchase Agreement with certain institutional
investors in a private placement transaction pursuant to which we issued and sold an aggregate of
5.0 million shares of our common stock, par value $.001 per share, at $1.00 per share, resulting in
gross proceeds of $5.0 million. After deducting expenses, the net proceeds were approximately $4.8
million. We advanced the net proceeds to eCOST to support its operating requirements.
To the extent we fail to comply with the various debt covenants described above, and the
lenders accelerate the repayment of the credit facility obligations, we would be required to repay
all amounts 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 December 31, 2007, we were in compliance with all debt covenants.
Through our merger with eCOST, we have aligned the core strengths of each company, to leverage
our operational infrastructure and technology expertise with eCOST’s customer base and supplier
relationships. We initially targeted to achieve $4 to $5 million in annual cost savings as compared
to pre-merger levels. These targeted savings were expected to result from, among other things,
reductions in the following costs:
| |
• |
|
Certain redundant administrative and public company activities; |
| |
| |
• |
|
Advertising expense; |
| |
| |
• |
|
Excess capacity and other related facility expenses; |
| |
| |
• |
|
Technology, telecommunications and operational costs; and |
| |
| |
• |
|
Overall outbound freight costs due to additional freight options. |
As we have completed the integration of eCOST into our infrastructure, we are realizing a
substantial amount of expected benefits of many of these cost saving initiatives.
Additionally, we believe the combined companies can pursue a variety of incremental revenue
and gross profit-related opportunities, such as:
| |
• |
|
Increase the number of “virtual warehouse” partnerships for both electronics and
non-electronic goods; |
| |
| |
• |
|
Develop higher margin non-product and service categories; |
| |
| |
• |
|
Expand international sales, particularly in Europe and Canada, where we maintain a
presence; and |
| |
| |
• |
|
Utilize our stronger financial platform to enhance eCOST’s working capital resources to
expand access to exclusive products and deals. |
We can provide no assurance that such plans or the underlying financial benefits will be
achieved. Additionally, even with such plans, we expect that eCOST will operate at a loss during
2008 and may require funding to support its operations.
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 eCOST’s 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 eCOST’s ability to improve its financial results.
Through March 28, 2008, we have advanced
$13.1 million to eCOST to fund eCOST’s cash flow requirements and have lender approval to advance
an additional $3.3 million, with certain restrictions, to
certain of its subsidiaries, including eCOST. In the event we need to advance 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
50
will receive such approval from our lenders or any terms or conditions required
by our lenders to obtain such
approval. In addition, PFSweb has provided a guaranty of eCOST’s bank line of credit and
certain of eCOST’s vendor trade payables.
If eCOST is unable to meet its requirements under its debt obligations and bank facility, the
guarantees referred to above could be called upon.
We receive municipal tax abatements in certain locations. During 2004 we received notice from
a municipality that we did not satisfy certain criteria necessary to maintain the abatements. In
December 2006 we received notice that the municipal authority planned to make an adjustment to our
tax abatement. We have disputed the adjustment, but if the dispute is not resolved favorably,
additional taxes of approximately $1.7 million could be assessed against us.
On May 9, 2005, a lawsuit was filed in the District Court of Collin County, Texas, by J. Gregg
Pritchard, as Trustee of the D.I.C. Creditors Trust, naming the former directors of Daisytek
International Corporation and the Company as defendants. Daisytek filed for bankruptcy in May 2003
and the Trust was created pursuant to Daisytek’s Plan of Liquidation. The complaint alleged, among
other things, that the spin-off of the Company from Daisytek in December 1999 was a fraudulent
conveyance and that Daisytek was damaged thereby in the amount of at least $38 million. On May 3,
2007, the Court granted the Company’s motions for summary judgment and all of the claims against
the Company have been dismissed. In December 2007, the remaining parties to the litigation agreed
to a settlement pursuant to which all of the remaining claims have been dismissed.
On July 25, 2007 a purported class action lawsuit entitled Darral Frank and Joseph F. Keeley,
Jr. v. PC Mall, Inc. dba eCOST.com and eCOST.com, Inc. was filed in the Superior Court of
California, Los Angeles County. The purported class consists of all of current and former sales
representatives who worked for the defendants in California from July 24, 2003 through July 24,
2007. The lawsuit alleges that the defendants failed to pay overtime compensation and interest
thereon, failed to timely pay compensation to terminated employees and failed to provide meal and
rest periods, all in violation of the California Labor Code and Business and Professions Code. The
complaint seeks unpaid overtime, statutory penalties, interest, attorneys’ fees, punitive damages,
restitution and injunctive relief. We intend to vigorously contest this action and do not believe
the claims have any merit. The matter has been submitted to arbitration.
In February 2008, eCOST and the Company were served with a Complaint For Civil Penalties and
Injunctive Relief filed by Jamie Te’o in the Superior Court of California, Alameda County, alleging
violation of California Proposition 65 arising from the sale by eCOST of certain computer
components. We intend to vigorously contest this action and do not believe the claims have any
merit. We may also seek indemnification for these claims from the manufacturers of these products.
Inventory Management
We manage our inventories held for sale by maintaining sufficient quantities of product to
achieve high order fill rates while at the same time maximizing inventory turnover rates. Inventory
balances will fluctuate as we add new product lines. To reduce the risk of loss due to supplier
price reductions, our master distributor agreement, as well as certain vendor agreements in our
eCOST business, provide for price protection under which we receive credits if the supplier lowers
prices on previously purchased inventory.
Seasonality
The seasonality of our service fee business is dependent upon the seasonality of our clients’
business and sales of their products. Accordingly, our management must rely upon the projections of
our clients in assessing quarterly variability. We believe that with our current client mix and
their current business volumes, our service fee business activity will be at its lowest in the
quarter ended March 31. We anticipate that our Supplies Distributors product revenue will be
highest during the quarter ended December 31. Our eCOST business is moderately seasonal, reflecting
the general pattern of peak sales for the retail industry during the holiday shopping season.
Typically, a larger portion of our eCOST revenues occur during the first and fourth fiscal
quarters. We believe that our historical revenue growth makes it difficult to predict the effect of
seasonality on our future revenues and results of operations
51
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.
Impact of Recently Issued Accounting Standards
In 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation 48,
Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN
48”), which prescribes accounting for and disclosure of uncertainty in tax positions. This
interpretation defines the criteria that must be met for the benefits of a tax position to be
recognized in the financial statements and the measure of tax benefits recognized. There was no
impact of our January 1, 2007 adoption of the provisions of FIN 48. We recognize interest and
penalties related to uncertain tax positions in income tax expense.
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 will be required to apply the provisions
of the new standards in the first quarter of 2009. The impact of this statement on our financial
statements is expected to be insignificant.
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This new
standard defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements. We will adopt this
new standard in the first quarter of 2008 and expect the impact on our financial statements to be
insignificant.
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. This new standard will allow companies to elect to measure
specified financial instruments and warranty and insurance contracts at fair value on a
contract-by-contract basis, with changes in fair value recognized in earnings in each reporting
period. We will adopt this new standard in the first quarter of 2008 and expect the impact on our
financial statements to be insignificant.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in conformity with accounting
principles generally accepted in the U.S. These accounting principles require us to make estimates
and assumptions that affect the reported amounts of assets and liabilities at the date of our
financial statements and the reported amounts of revenues and expenses during the reporting period.
While we do not believe the reported amounts would be materially different, application of these
policies involves the exercise of judgment and the use of assumptions as to future uncertainties
and, as a result, actual results could differ from these estimates. If there is a significant
unfavorable change to current conditions, it would likely result in a material adverse impact to
our business, operating results and financial condition. We evaluate our estimates and assumptions
on an ongoing basis. We base our estimates on experience and on various other assumptions that we
believe to be reasonable under the circumstances. All of our significant accounting policies are
disclosed in the notes to our consolidated financial statements.
We have defined a critical accounting estimate as one that is both important to the portrayal
of our financial condition and results of operations and requires us to make difficult, subjective
or complex judgments or estimates about matters that are uncertain. During the past three fiscal
years, we have not made any material changes in accounting methodology used to establish the
critical accounting estimates discussed below. The following represent certain critical accounting
policies that require us to exercise our business judgment or make significant estimates. In
addition, there are other items within our consolidated financial statements that require
estimation but are not
52
deemed critical as defined above.
Product Revenue Recognition
We adhere to the revised guidelines and principles of sales recognition described in Staff
Accounting Bulletin No. 104, Revenue Recognition. Under SAB 104, sales are recognized when the
title and risk of loss are passed to the customer, there is persuasive evidence of an arrangement
for the sale, delivery has occurred and/or services have been rendered, the sales price is fixed or
determinable and collectability is reasonably assured. Under these guidelines, we recognize a
majority of our sales, including revenue from product sales and gross outbound shipping and
handling charges, upon receipt of the product by the customer. For all product sales shipped
directly from suppliers to customers, we are the primary obligor in the transaction, and we take
title to the products sold upon shipment, bear credit risk, and bear inventory risk for returned
products that are not successfully returned to suppliers; therefore, we recognize these revenues at
gross sales amounts.
Sales are reported net of estimated returns and allowances, credit card fraud and chargebacks,
all of which are estimated based upon historical information such as return and redemption rates,
and fraud and chargeback experience. Management also considers any other current information and
trends in making estimates. If actual sales returns, allowances, discounts and credit card fraud
and chargebacks are greater than estimated by management, additional expense may be incurred.
Cost of Service Fee Revenue
Our service fee revenue primarily relates to our distribution services and order
management/customer care services. Distribution services relate primarily to inventory management,
product receiving, warehousing and fulfillment (i.e., picking, packing and shipping). Order
management/customer care services relate primarily to taking customer orders for our clients’
products via various channels such as telephone call-center, electronic or facsimile. These
services also entail addressing customer questions related to orders, as well as
cross-selling/up-selling activities.
Our cost of service fee revenue represents the cost to provide the services described above,
primarily compensation and related expenses and other fixed and variable expenses directly related
to providing the services. These include certain occupancy and information technology costs and
depreciation and amortization expenses. Certain of these costs are allocated from general and
administrative expenses. For these allocations, we estimate the amount of direct expenses based on
a client-specific number of transactions processed. We believe our allocation methodology is
reasonable, however a change in assumptions would result in a different gross profit in our
statement of operations, yet no change to the resulting net income or loss.
Allowance for Doubtful Accounts
The determination of the collectability of amounts due from our customers requires us to use
estimates and make judgments regarding future events and trends, including monitoring our
customers’ payment history and current credit worthiness to determine that collectability is
reasonably assured, as well as consideration of the overall business climate in which our clients
and customers operate. Inherently, these uncertainties require us to make frequent judgments and
estimates regarding our clients and customers’ ability to pay amounts due us to determine the
appropriate amount of valuation allowances required for doubtful accounts. Provisions for doubtful
accounts are recorded when it becomes evident that the client or customer will not make the
required payments at either contractual due dates or in the future.
With our online discount retail business, we also maintain an allowance for uncollectible
vendor receivables, which arise from vendor rebate programs, price protections and other
promotions. We determine the sufficiency of the vendor receivable allowance based upon various
factors, including payment history. Amounts received from vendors may vary from amounts recorded
because of potential non-compliance with certain elements of vendor programs. If our estimated
allowances for uncollectible accounts or vendor receivables subsequently prove insufficient,
additional allowance maybe required.
Allowances for doubtful accounts totaled $1.5 million and $2.3 million at December 31, 2007
and 2006,
53
respectively. We believe that our allowances for doubtful accounts are adequate to cover
anticipated losses under
current conditions; however, uncertainties regarding changes in the financial condition of our
clients and customers, either adverse or positive, could impact the amount and timing of any
additional provisions for doubtful accounts that may be required.
Inventory Reserves
Inventories (merchandise, held for resale, all of which are finished goods) are stated at the
lower of weighted average cost or market. Supplies Distributors and its subsidiaries assume
responsibility for slow-moving inventory under certain master distributor agreements, subject to
certain termination rights, but have the right to return product rendered obsolete by engineering
changes, as defined. eCOST assumes responsibility for slow-moving inventory but has limited rights
to return product based on specific inventory agreements. We review inventory for impairment on a
periodic basis, but at a minimum, annually. Recoverability of the inventory on hand is measured by
comparison of the carrying value of the inventory to the fair value of the inventory. This requires
us to record provisions and maintain reserves for excess or obsolete inventory. To determine these
reserve amounts, we regularly review inventory quantities on hand and compare them to estimates of
future product demand and market conditions. These estimates and forecasts inherently include
uncertainties and require us to make judgments regarding potential outcomes. At December 31, 2007
and 2006, our allowance for slow moving inventory totaled $2.1 million and $3.0 million,
respectively. We believe that our reserves are adequate to cover anticipated losses under current
conditions. Significant or unanticipated changes to our estimates and forecasts, either adverse or
positive, could impact the amount and timing of any additional provisions for excess or obsolete
inventory that may be required.
Income Taxes
The liability method is used for determining our income taxes, under which current and
deferred tax liabilities and assets are recorded in accordance with enacted tax laws and rates.
Under this method, the amounts of deferred tax liabilities and assets at the end of each period are
determined using the tax rate expected to be in effect when taxes are actually paid or recovered.
Valuation allowances are established to reduce deferred tax assets when it is more likely than not
that some portion or all of the deferred tax assets will not be realized. In determining the need
for valuation allowances, we have considered and made judgments and estimates regarding estimated
future taxable income. These estimates and judgments include some degree of uncertainty and changes
in these estimates and assumptions could require us to adjust the valuation allowances for our
deferred tax assets. The ultimate realization of our deferred tax assets depends on the generation
of sufficient taxable income in the applicable taxing jurisdictions. Although we believe our
estimates and judgments are reasonable, actual results may differ, which could be material.
As we operate in multiple countries, we are subject to the jurisdiction of multiple
domestic and foreign tax authorities. Determination of taxable income in any jurisdiction requires
the interpretation of the related tax laws and regulations and the use of estimates and assumptions
regarding significant future events such as the amount, timing and character of deductions,
permissible revenue recognition methods under the tax law and the sources and character of income
and tax credits. Changes in tax laws, regulations, foreign currency exchange restrictions or our
level of operations or profitability in each taxing jurisdiction could have an impact on the amount
of income taxes that we provide during any given year.
Long-Lived Assets
Long-lived assets include property, intangible assets, goodwill and certain other assets. We
make judgments and estimates in conjunction with the carrying value of these assets, including
amounts to be capitalized, depreciation and amortization methods and useful lives. Additionally, we
review long-lived assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. We review goodwill for impairment at least
annually. We record impairment losses in the period in which we determine that the carrying amount
is not recoverable. Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be generated by the asset. This
may require us to make judgments regarding long-term forecasts of our future revenues and costs
related to the assets subject to review. During the fourth quarter of 2006, we determined that the
carrying value of the goodwill resulting from our acquisition of eCOST was impaired, which resulted
in a $3.5 million non-cash write-off of goodwill.
54
Item 7a. Quantitative and Qualitative Disclosure about Market Risk
We are exposed to various market risks including interest rates on our financial instruments
and foreign exchange rates.
Interest Rate Risk
Our interest rate risk relates to the outstanding balances on our inventory and working
capital financing agreements, taxable revenue bonds, loan and security agreements, and factoring
agreement for the financing of inventory, accounts receivable and certain other receivables and
certain equipment, which amounted to $65.6 million at December 31, 2007. A 100 basis point movement
in interest rates would result in approximately $0.2 million annualized increase or decrease in
interest expense based on the outstanding balance of these agreements at December 31, 2007.
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.
55
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
| |
|
|
|
|
| |
|
Page |
PFSweb, Inc. and Subsidiaries |
|
|
|
|
|
|
|
57 |
|
|
|
|
58 |
|
|
|
|
59 |
|
|
|
|
60 |
|
|
|
|
61 |
|
|
|
|
62 |
|
Supplementary Data |
|
|
|
|
|
|
|
93 |
|
|
|
|
96 |
|
56
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
PFSweb, Inc.:
We have audited the accompanying consolidated balance sheets of PFSweb, Inc. and subsidiaries as of
December 31, 2007 and 2006, and the related consolidated statements of operations, shareholders’
equity and comprehensive income (loss), and cash flows for each of the years in the three-year
period ended December 31, 2007. In connection with our audits of the consolidated financial
statements, we have also audited financial statement schedules I and II as of December 31, 2007 and
2006, and for each of the years in the three-year period ended December 31, 2007. These
consolidated financial statements and financial statement schedules are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of PFSweb, Inc. and subsidiaries as of December 31, 2007
and 2006, and the results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2007, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules as of December 31,
2007 and 2006, and for each of the years in the three-year period ended December 31, 2007, when
considered in relation to the basic financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, during 2006, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment.
KPMG LLP
Dallas, Texas
March 31, 2008
57
PFSWEB, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
ASSETS |
|
|
|
|
|
|
|
|
CURRENT ASSETS: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
14,272 |
|
|
$ |
15,066 |
|
Restricted cash |
|
|
2,021 |
|
|
|
2,653 |
|
Accounts receivable, net of allowance for doubtful accounts of $1,483
and $2,352 at December 31, 2007 and 2006, respectively |
|
|
48,493 |
|
|
|
49,186 |
|
Inventories, net of reserves of $2,080 and $2,987 at December 31,
2007 and 2006, respectively |
|
|
46,392 |
|
|
|
47,670 |
|
Other receivables |
|
|
10,372 |
|
|
|
10,774 |
|
Prepaid expenses and other current assets |
|
|
2,608 |
|
|
|
3,531 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
124,158 |
|
|
|
128,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, net |
|
|
11,918 |
|
|
|
12,884 |
|
IDENTIFIABLE INTANGIBLES, net |
|
|
5,824 |
|
|
|
6,631 |
|
GOODWILL |
|
|
15,362 |
|
|
|
15,362 |
|
OTHER ASSETS |
|
|
911 |
|
|
|
864 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
158,173 |
|
|
$ |
164,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
Current portion of long-term debt and capital lease obligations |
|
$ |
22,238 |
|
|
$ |
23,802 |
|
Trade accounts payable |
|
|
56,975 |
|
|
|
62,441 |
|
Accrued expenses |
|
|
22,438 |
|
|
|
21,485 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
101,651 |
|
|
|
107,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current
portion |
|
|
6,378 |
|
|
|
6,076 |
|
OTHER LIABILITIES |
|
|
1,302 |
|
|
|
1,977 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
109,331 |
|
|
|
115,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY: |
|
|
|
|
|
|
|
|
Preferred stock, $1.00 par value; 1,000,000 shares authorized; none
issued and outstanding |
|
|
¾ |
|
|
|
¾ |
|
Common stock, $0.001 par value; 75,000,000 shares authorized;
46,574,189 and 46,553,752 shares issued at December 31, 2007 and
2006, respectively; and 46,487,889 and 46,467,452 outstanding at
December 31, 2007 and 2006, respectively |
|
|
47 |
|
|
|
47 |
|
Additional paid-in capital |
|
|
92,084 |
|
|
|
91,302 |
|
Accumulated deficit |
|
|
(45,738 |
) |
|
|
(44,354 |
) |
Accumulated other comprehensive income |
|
|
2,534 |
|
|
|
1,930 |
|
Treasury stock at cost, 86,300 shares |
|
|
(85 |
) |
|
|
(85 |
) |
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
48,842 |
|
|
|
48,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
158,173 |
|
|
$ |
164,621 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
58
PFSWEB, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31
(In thousands, except per share data)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue, net |
|
$ |
339,500 |
|
|
$ |
333,311 |
|
|
$ |
252,902 |
|
Service fee revenue |
|
|
74,480 |
|
|
|
67,056 |
|
|
|
60,783 |
|
Pass-through revenue |
|
|
32,822 |
|
|
|
22,886 |
|
|
|
17,972 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
446,802 |
|
|
|
423,253 |
|
|
|
331,657 |
|
|
|
|
|
|
|
|
|
|
|
COSTS OF REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue |
|
|
313,835 |
|
|
|
311,417 |
|
|
|
235,584 |
|
Cost of service fee revenue |
|
|
53,375 |
|
|
|
49,274 |
|
|
|
45,597 |
|
Cost of pass-through revenue |
|
|
32,822 |
|
|
|
22,886 |
|
|
|
17,972 |
|
|
|
|
|
|
|
|
|
|
|
Total costs of revenues |
|
|
400,032 |
|
|
|
383,577 |
|
|
|
299,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
46,770 |
|
|
|
39,676 |
|
|
|
32,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES, including stock based
compensation expense of $764, $899 and
$16 in the years ended December 31,
2007, 2006 and 2005, respectively |
|
|
44,057 |
|
|
|
45,189 |
|
|
|
30,521 |
|
MERGER INTEGRATION EXPENSES |
|
|
150 |
|
|
|
1,495 |
|
|
|
— |
|
AMORTIZATION OF IDENTIFIABLE INTANGIBLES |
|
|
806 |
|
|
|
749 |
|
|
|
— |
|
GOODWILL IMPAIRMENT |
|
|
— |
|
|
|
3,507 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
45,013 |
|
|
|
50,940 |
|
|
|
30,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
1,757 |
|
|
|
(11,264 |
) |
|
|
1,983 |
|
| |
INTEREST EXPENSE |
|
|
2,505 |
|
|
|
2,171 |
|
|
|
1,824 |
|
INTEREST INCOME |
|
|
(163 |
) |
|
|
(59 |
) |
|
|
(95 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(585 |
) |
|
|
(13,376 |
) |
|
|
254 |
|
INCOME TAX EXPENSE |
|
|
799 |
|
|
|
1,154 |
|
|
|
1,001 |
|
|
|
|
|
|
|
|
|
|
|
NET LOSS |
|
$ |
(1,384 |
) |
|
$ |
(14,530 |
) |
|
$ |
(747 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS PER SHARE: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted |
|
$ |
(0.03 |
) |
|
$ |
(0.34 |
) |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted |
|
|
46,480 |
|
|
|
42,762 |
|
|
|
22,394 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
59
PFSWEB, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME (LOSS)
(In thousands, except share data)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Comprehensive |
|
| |
|
Common Stock |
|
|
Paid-In |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Treasury Stock |
|
|
Shareholders’ |
|
|
Income |
|
| |
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Income (Loss) |
|
|
Shares |
|
|
Amount |
|
|
Equity |
|
|
(Loss) |
|
Balance, December 31, 2004 |
|
|
21,665,585 |
|
|
$ |
22 |
|
|
$ |
56,645 |
|
|
$ |
(29,077 |
) |
|
$ |
2,421 |
|
|
|
86,300 |
|
|
$ |
(85 |
) |
|
$ |
29,926 |
|
|
|
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(747 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(747 |
) |
|
$ |
(747 |
) |
Stock-based compensation
expense |
|
|
— |
|
|
|
— |
|
|
|
16 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
16 |
|
|
|
|
|
Employee stock purchase plan |
|
|
401,270 |
|
|
|
— |
|
|
|
613 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
613 |
|
|
|
|
|
Proceeds from exercised options |
|
|
151,774 |
|
|
|
— |
|
|
|
181 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
181 |
|
|
|
|
|
Warrants exercised |
|
|
394,685 |
|
|
|
1 |
|
|
|
1,281 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,282 |
|
|
|
|
|
Other comprehensive loss—
foreign currency translation
adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,337 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1,337 |
) |
|
|
(1,337 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(2,084 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005 |
|
|
22,613,314 |
|
|
$ |
23 |
|
|
$ |
58,736 |
|
|
$ |
(29,824 |
) |
|
$ |
1,084 |
|
|
|
86,300 |
|
|
$ |
(85 |
) |
|
$ |
29,934 |
|
|
|
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(14,530 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(14,530 |
) |
|
$ |
(14,530 |
) |
Stock-based compensation
expense |
|
|
— |
|
|
|
— |
|
|
|
899 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
899 |
|
|
|
|
|
Employee stock purchase plan |
|
|
54,431 |
|
|
|
— |
|
|
|
52 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
52 |
|
|
|
|
|
Proceeds from exercised options |
|
|
27,875 |
|
|
|
— |
|
|
|
16 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
16 |
|
|
|
|
|
Issuance of common stock |
|
|
5,000,000 |
|
|
|
5 |
|
|
|
4,839 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,844 |
|
|
|
|
|
Shares issued for eCOST
acquisition |
|
|
18,858,132 |
|
|
|
19 |
|
|
|
26,760 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
26,779 |
|
|
|
|
|
Other comprehensive income—
foreign currency translation
adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
846 |
|
|
|
— |
|
|
|
— |
|
|
|
846 |
|
|
|
846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(13,684 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006 |
|
|
46,553,752 |
|
|
$ |
47 |
|
|
$ |
91,302 |
|
|
$ |
(44,354 |
) |
|
$ |
1,930 |
|
|
|
86,300 |
|
|
$ |
(85 |
) |
|
$ |
48,840 |
|
|
|
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,384 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,384 |
) |
|
$ |
(1,384 |
) |
Stock-based compensation
expense |
|
|
— |
|
|
|
— |
|
|
|
764 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
764 |
|
|
|
|
|
Employee stock purchase plan |
|
|
18,105 |
|
|
|
— |
|
|
|
18 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
18 |
|
|
|
|
|
Proceeds from exercised options |
|
|
2,332 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Other comprehensive income—
foreign currency translation
adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
604 |
|
|
|
— |
|
|
|
— |
|
|
|
604 |
|
|
|
604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(780 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007 |
|
|
46,574,189 |
|
|
$ |
47 |
|
|
$ |
92,084 |
|
|
$ |
(45,738 |
) |
|
$ |
2,534 |
|
|
|
86,300 |
|
|
$ |
(85 |
) |
|
$ |
48,842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
60
PFSWEB, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,384 |
) |
|
$ |
(14,530 |
) |
|
$ |
(747 |
) |
Adjustments to reconcile net loss to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
8,180 |
|
|
|
7,476 |
|
|
|
6,112 |
|
Goodwill impairment |
|
|
— |
|
|
|
3,507 |
|
|
|
— |
|
Loss on disposition of assets |
|
|
— |
|
|
|
144 |
|
|
|
— |
|
Provision for doubtful accounts |
|
|
254 |
|
|
|
960 |
|
|
|
25 |
|
Provision for excess and obsolete inventory |
|
|
665 |
|
|
|
1,495 |
|
|
|
— |
|
Deferred income taxes |
|
|
84 |
|
|
|
(148 |
) |
|
|
(8 |
) |
Stock-based compensation expense |
|
|
764 |
|
|
|
899 |
|
|
|
16 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash |
|
|
(299 |
) |
|
|
845 |
|
|
|
— |
|
Accounts receivables |
|
|
2,104 |
|
|
|
1,673 |
|
|
|
(4,490 |
) |
Inventories, net |
|
|
2,261 |
|
|
|
2,856 |
|
|
|
(825 |
) |
Prepaid expenses, other receivables and other assets |
|
|
2,137 |
|
|
|
(66 |
) |
|
|
(1,837 |
) |
Accounts payable, accrued expenses and other liabilities |
|
|
(9,367 |
) |
|
|
(2,627 |
) |
|
|
2,510 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
5,399 |
|
|
|
2,484 |
|
|
|
756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(3,862 |
) |
|
|
(3,978 |
) |
|
|
(3,918 |
) |
Payment for purchase of eCOST, net of cash acquired |
|
|
— |
|
|
|
(1,299 |
) |
|
|
— |
|
Decrease in restricted cash |
|
|
145 |
|
|
|
893 |
|
|
|
1,143 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(3,717 |
) |
|
|
(4,384 |
) |
|
|
(2,775 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of common stock |
|
|
19 |
|
|
|
4,912 |
|
|
|
2,076 |
|
Decrease (increase) in restricted cash |
|
|
785 |
|
|
|
(1,109 |
) |
|
|
50 |
|
Payments on capital lease obligations |
|
|
(2,225 |
) |
|
|
(1,504 |
) |
|
|
(1,199 |
) |
Proceeds from (payments on) from debt, net |
|
|
(1,669 |
) |
|
|
1,028 |
|
|
|
1,188 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(3,090 |
) |
|
|
3,328 |
|
|
|
2,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS |
|
|
614 |
|
|
|
(45 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
(794 |
) |
|
|
1,383 |
|
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, beginning of period |
|
|
15,066 |
|
|
|
13,683 |
|
|
|
13,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period |
|
$ |
14,272 |
|
|
$ |
15,066 |
|
|
$ |
13,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment acquired under capital leases |
|
$ |
3,016 |
|
|
$ |
2,304 |
|
|
$ |
1,125 |
|
|
|
|
|
|
|
|
|
|
|
Shares issued to acquire eCOST |
|
$ |
— |
|
|
$ |
26,778 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
61
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Overview
PFSweb, Inc. and its subsidiaries, including Supplies Distributors, Inc, and eCOST.com, Inc.
are collectively referred to as the “Company;” “Supplies Distributors” refers to Supplies
Distributors, Inc. and its subsidiaries; “eCOST” refers to eCOST.com, Inc. and its subsidiaries 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 such
services as professional consulting, technology collaboration, managed web hosting and internet
application development, order management, web-enabled customer contact centers, customer
relationship management, financial services including billing and collection services and working
capital solutions, information management, facilities and operations management, kitting and
assembly services, and international fulfillment and distribution services.
Supplies Distributors Overview
Supplies Distributors, PFSweb and International Business Machines Corporation (“IBM”) had
master distributor agreements pursuant to which Supplies Distributors served as a master
distributor of various products, primarily IBM product. In June 2007, IBM and Ricoh created a joint
venture company, InfoPrint Solutions (“IPS”), which succeeded the business of IBM’s Printing
Systems Division. Ricoh owns 51% of IPS and has stated its intentions to progressively acquire the
remaining 49% over the next 3 years. As the result of the formation of IPS, IBM assigned the
Supplies Distributors master distributor agreements to IPS.
Supplies Distributors has obtained certain financing (see Notes 3 and 4) that allows it to
fund the working capital requirements for the sale of primarily IPS products. Pursuant to
transaction management services agreements between PFSweb and Supplies Distributors, PFSweb
provides various services to Supplies Distributors, 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 a third party for sales force and product demand generation services. Supplies
Distributors sells its products in the United States, Canada and Europe.
All of the agreements between PFSweb and Supplies Distributors were made in the context of a
related party relationship and were negotiated in the overall context of PFSweb’s and Supplies
Distributors’ arrangements with IBM and IPS. Although management generally believes that the terms
of these agreements are consistent with market values, there can be no assurance that the prices
charged to or by each company under these arrangements are not higher or lower than the prices that
may be charged by, or to, unaffiliated third parties for similar services.
eCOST Overview
eCOST is a multi-category online discount retailer of new, “close-out” and recertified
brand-name merchandise, selling products primarily to customers in the United States. eCOST offers
products in several merchandise categories, including computer hardware and software, home
electronics, digital imaging, watches and jewelry, housewares, DVD movies, video games and
cellular/wireless. eCOST carries products from leading manufacturers such as Sony, JVC, Canon,
Hewlett-Packard, Denon, Onkyo, Garmin, Panasonic, Toshiba and Microsoft.
The Company’s liquidity has been negatively impacted as a result of the merger with eCOST.
During 2007 and 2006 eCOST experienced a net usage of cash primarily due to losses incurred. As a
result, the Company has had to support eCOST’s cash needs with the goal of achieving a stabilized
operational position and profitable performance. The amount of further cash needed to support
eCOST operations will depend upon the working capital requirements,
62
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
bank financing available as well as eCOST’s ability to improve its financial results. Further
advances to eCOST may be limited by the Company’s current cash and future cash flow and may be
restricted by the Company’s 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 Company’s financial condition and results of operations and no assurance can be given that the
Company would have the financial ability to repay all of such obligations.
Management currently believes eCOST will meet the Company’s expectations related to improved
overall profitability. The Company has reported improvement in eCOST’s financial results during
2007 and expects continued improvement as a result of efforts to increase sales, improve product
mix and control operating costs, although there can be no assurances that these future improvements
will be achieved. If eCOST does not meet these expectations, the Company anticipates that it would
be able to terminate or sublease eCOST’s facility leases, liquidate remaining inventory through the
eCOST website and reduce certain personnel related costs as needed so as to minimize any material
impact upon the Company’s other segments.
Acquisition of eCOST
Effective February 1, 2006, a wholly-owned subsidiary of PFSweb merged with and into eCOST,
with eCOST surviving the merger as a wholly-owned subsidiary of PFSweb. Each of the 18,858,132
issued and outstanding shares of common stock of eCOST were converted into one share of common
stock of the Company. In conjunction with the merger, the Company assumed 36,210 warrants
previously issued to a former eCOST warrant-holder with an exercise price of $2.00 per share,
subject to the terms set forth therein. As a result of the merger, effective February 1, 2006, the
Company began consolidating 100% of eCOST’s financial position and results of operations into the
Company’s consolidated financial statements. The following table presents selected pro forma
information, for comparative purposes, assuming the acquisition had occurred on January 1 for the
periods presented (unaudited) (in thousands, except per share data):
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended |
| |
|
2006 |
|
2005 |
Net revenues |
|
$ |
436,187 |
|
|
$ |
506,448 |
|
Net loss |
|
|
(16,120 |
) |
|
|
(14,452 |
) |
Basic and diluted loss per share |
|
|
(0.38 |
) |
|
|
(0.35 |
) |
Pro forma adjustments have been made to reflect the amortization expense relating to acquired
intangibles, such as trademark name and customer relationships and the reversal of the income tax
expense recognized by eCOST in the year ended December 31, 2005.
The unaudited pro forma information does not reflect operational and administrative cost
savings, which are referred to as synergies, that management estimates may be achieved as a result
of the merger transaction, or other incremental costs that may be incurred as a direct result of
the merger transaction. The unaudited pro forma net revenue and pro forma net loss are not
necessarily indicative of the consolidated results of operations for future periods or the results
of operations that would have been realized had the Company consolidated eCOST during the periods
noted.
The transaction was accounted for using the purchase method of accounting for business
combinations and, accordingly, the results of operations of eCOST have been included in the
Company’s consolidated financial statements since the date of acquisition. For purposes of
computing the purchase price, the value of the 18.9 million shares of the Company’s common stock
issued was $1.42 per common share, based on the average closing price of the Company’s common stock
on NASDAQ for the period beginning two days prior to the consummation of the merger and ending on
the consummation of the merger. The following table summarizes the estimated fair value of the
assets acquired and liabilities assumed as of February 1, 2006 (in thousands):
63
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
| |
|
|
|
|
Cash and restricted cash |
|
$ |
1,053 |
|
Accounts receivable, net |
|
|
5,723 |
|
Inventories |
|
|
6,893 |
|
Identifiable intangibles |
|
|
7,380 |
|
Property and equipment |
|
|
479 |
|
Other assets |
|
|
323 |
|
|
|
|
|
Total identifiable assets acquired |
|
|
21,851 |
|
|
|
|
|
Trade accounts payable |
|
|
8,248 |
|
Accrued expenses |
|
|
3,560 |
|
Other liabilities |
|
|
834 |
|
|
|
|
|
Total liabilities assumed |
|
|
12,642 |
|
|
|
|
|
Net identifiable assets acquired |
|
|
9,209 |
|
Estimated purchase price |
|
|
28,078 |
|
|
|
|
|
Goodwill acquired |
|
$ |
18,869 |
|
|
|
|
|
Purchase price for eCOST is as follows (in thousands):
| |
|
|
|
|
Number of shares of common stock issued |
|
|
18,858 |
|
Multiplied by the Company’s stock price |
|
$ |
1.42 |
|
|
|
|
|
Share consideration |
|
$ |
26,778 |
|
Transaction costs |
|
|
1,300 |
|
|
|
|
|
Purchase price |
|
$ |
28,078 |
|
|
|
|
|
The above purchase price has been allocated based on estimates of the fair values of assets
acquired and liabilities assumed.
The Company acquired eCOST because of the strategic benefits expected to result from combining
eCOST’s e-commerce platform with PFSweb’s advanced technology and operational infrastructure
thereby providing the combined company with the enhanced ability to expand its market share in the
fast growing web commerce market. Such benefits are the primary factors that contributed to a
purchase price that resulted in the recognition of goodwill.
The excess of the purchase price over the fair value of the net identifiable assets
acquired and liabilities assumed was allocated to goodwill and is included in the eCOST reportable
segment. Total goodwill of $18.9 million, none of which is deductible for tax purposes, is not
being amortized but is subject to an impairment test each year, using a fair-value-based approach
pursuant to SFAS No. 142. The Company is amortizing the identifiable intangible assets acquired on
a straight-line basis over their estimated remaining useful lives.
There are no residual values for any of the intangible assets subject to amortization acquired
during the eCOST acquisition. Definite lived intangible assets acquired in the eCOST acquisition
consist of (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
December 31, 2007 |
|
|
December 31, 2006 |
|
|
Estimated |
|
| |
|
Fair Value at |
|
|
Accumulated |
|
|
Net Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
Useful Life |
|
| |
|
Acquisition |
|
|
Amortization |
|
|
Value |
|
|
Amortization |
|
|
Value |
|
|
from Acquisition |
|
Trademark name |
|
$ |
4,635 |
|
|
$ |
(888 |
) |
|
$ |
3,747 |
|
|
$ |
(425 |
) |
|
$ |
4,210 |
|
|
10 years |
Customer relationships |
|
|
2,745 |
|
|
|
(668 |
) |
|
|
2,077 |
|
|
|
(324 |
) |
|
|
2,421 |
|
|
8 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total definite lived intangible assets |
|
$ |
7,380 |
|
|
$ |
(1,556 |
) |
|
$ |
5,824 |
|
|
$ |
(749 |
) |
|
$ |
6,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for intangible assets is estimated to be approximately $0.8 million
annually for each year through the period ending December 31, 2012.
During the Company’s 2006 annual analysis of the carrying value of goodwill, pursuant to
Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets, the
Company determined that the
64
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
carrying value of goodwill exceeded the fair value, which resulted in a $3.5 million non-cash
write-off of goodwill during 2006.
The Company determined fair value using a combination of the discounted cash flow, market
multiple and market capitalization valuation methods.
The Company incurred costs for operational integration and IT systems conversion activities
related to the acquisition of $0.2 million and $1.5 million in the years ended December 31, 2007
and 2006, respectively. The Company incurred no such expenses prior to the acquisition.
2. Significant Accounting Policies
Principles of Consolidation
All intercompany accounts and transactions have been eliminated in consolidation.
Investment in Affiliates
Priority Fulfillment Services, Inc. (“PFS”), a wholly-owned subsidiary of PFSweb, has loaned
Supplies Distributors monies in the form of a Subordinated Demand Note (the “Subordinated Note”).
Under the terms of certain of the Company’s debt facilities, the outstanding balance of the
Subordinated Note cannot be increased to more than $6.5 million or decreased to lower than $5.5
million without prior approval of the Company’s lenders (see Notes 3 and 4). As of December 31,
2007 and 2006, the outstanding balance of the Subordinated Note, which is eliminated upon the
consolidation of Supplies Distributors’ financial position, was $6.0 million and $6.5 million,
respectively.
PFS has also loaned eCOST monies under certain terms of the Company’s debt facilities, which
requires outstanding balances of the eCOST loan not to be less than $2.0 million without prior
approval of eCOST’s lender.
The outstanding loan balance owed to PFS is $7.9 million as of
December 31, 2007. The Company has lender approval to advance an
additional $3.3 million, with certain restrictions, to certain
of its subsidiaries, including eCOST. PFSweb has also
loaned eCOST $4.7 million as of December 31, 2007.
Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets
and liabilities. The recognition and allocation of certain operating expenses in these consolidated
financial statements also require management estimates and assumptions. The Company’s estimates
and assumptions are continually evaluated based on available information and experience. Because
the use of estimates is inherent in the financial reporting process, actual results could differ
from estimates.
Revenue and Cost Recognition
Depending on the terms of the customer arrangement, Supplies Distributors recognizes product
revenue and product cost either upon the shipment of product to customers or when the customer
receives the product. Supplies Distributors permits its customers to return product for credit
against other purchases, which include returns for defective products (that Supplies Distributors
then returns to the manufacturer) and incorrect shipments. Supplies Distributors provides a reserve
for estimated returns and allowances and offers terms to its customers that it believes are
standard for its industry.
Freight costs billed to customers are reflected as components of product revenue. Freight
costs incurred are recorded as a component of cost of goods sold.
Under the master distributor agreements (see Note 6), Supplies Distributors bills IPS for
reimbursements of certain expenses, including: pass through customer marketing programs, including
rebates and coop funds; certain
65
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
freight costs; direct costs incurred in passing on any price
decreases offered by IPS to Supplies Distributors or its
customers to cover price protection and certain special bids; the cost of products provided to
replace defective product returned by customers; and certain other expenses as defined. Supplies
Distributors records a receivable for these reimbursable amounts as they are incurred with a
corresponding reduction in either inventory or cost of product revenue. Supplies Distributors also
reflects pass through customer marketing programs as a reduction of product revenue and cost of
product revenue.
eCOST recognizes product revenue, net of estimated returns, promotional discounts, credit card
fraud and chargebacks, when both title and risk of loss to the products has transferred to the
customer, which eCOST has determined to occur upon receipt of products by the customer. eCOST
generally requires payment by credit card upon placing an order, and to a lesser extent, grants
credit to business customers on normal credit terms. eCOST permits its customers to return
defective product for credit against other purchases.
For product sales shipped directly from eCOST’s vendors to end customers, eCOST records
revenue and related costs at the gross amounts charged to the customer and paid to the vendor based
on an evaluation of the criteria outlined in EITF No. 99-19, Reporting Revenue Gross as a Principal
Versus Net as an Agent. eCOST’s evaluation is performed based on a number factors, including
whether eCOST is the primary obligor in the transaction, has latitude in establishing prices and
selecting suppliers, takes title to the products sold upon shipment, bears credit risk, and bears
inventory risk for returned products that are not successfully returned to third-party suppliers.
eCOST recognizes revenue on extended warranties and other services for which it is not the primary
obligor on a net basis.
The Company’s service fee revenue primarily relates to its (1) distribution services, (2)
order management/customer care services and (3) the reimbursement of out-of-pocket and third-party
expenses. The Company typically charges its service fee revenue on a cost-plus basis, a percent of
shipped revenue basis or a per transaction basis, such as a per item basis for fulfillment services
or a per minute basis for web-enabled customer contact center services. Additional fees are billed
for other services.
Distribution services relate primarily to inventory management, product receiving, warehousing
and fulfillment (i.e., picking, packing and shipping) and facilities and operations management.
Service fee revenue for these activities is recognized as earned, which is either (i) on a per
transaction basis or (ii) at the time of product fulfillment, which occurs at the completion of the
distribution services.
Order management/customer care services relate primarily to taking customer orders for the
Company’s clients’ products via various channels such as telephone call-center, electronic or
facsimile. These services also entail addressing customer questions related to orders, as well as
cross-selling/up-selling activities. Service fee revenue for this activity is recognized as the
services are rendered. Fees charged to the client are on a per transaction basis based on either
(i) a pre-determined fee per order or fee per telephone minutes incurred, (ii) a per dedicated
agent fee, or (iii) are included in the product fulfillment service fees that are recognized on
product shipment.
The Company’s billings for reimbursement of out-of-pocket expenses, including travel and
certain third-party vendor expenses such as shipping and handling costs and telecommunication
charges are included in pass-through revenue. The related reimbursable costs are reflected as cost
of pass-through revenue.
The Company’s cost of service fee revenue, representing the cost to provide the services
described above, is recognized as incurred. Cost of service fee revenue also includes certain costs
associated with technology collaboration and ongoing technology support that include maintenance,
web hosting and other ongoing programming activities. These activities are primarily performed to
support the distribution and order management/customer care services and are recognized as
incurred.
The Company recognizes revenue and records trade accounts receivables, pursuant to the methods
described above, when collectability is reasonably assured. Collectability is evaluated in the
aggregate and on an individual customer basis taking into consideration payment due date,
historical payment trends, current financial position, results of independent credit evaluations
and payment terms.
66
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
The Company primarily performs its services under one to three-year contracts that can
generally be terminated by either party. In conjunction with these long-term contracts, the Company
sometimes receives start-up fees to
cover its implementation costs, including certain technology infrastructure and development
costs. The Company defers the fees received, and the related costs, and amortizes them over the
life of the contract. The amortization of deferred revenue is included as a component of service
fee revenue. The amortization of deferred implementation costs is included as a cost of service fee
revenue. To the extent implementation costs for non-technology infrastructure and development
exceed the fees received, the excess costs are expensed as incurred. The following summarizes the
deferred implementation revenues and costs, excluding technology and development costs that are
included in property and equipment (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
Deferred implementation revenues |
|
|
|
|
|
|
|
|
Current |
|
$ |
772 |
|
|
$ |
2,046 |
|
Non-current |
|
|
516 |
|
|
|
832 |
|
|
|
|
|
|
|
|
|
|
$ |
1,288 |
|
|
$ |
2,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred implementation costs |
|
|
|
|
|
|
|
|
Current |
|
$ |
388 |
|
|
$ |
1,077 |
|
Non-current |
|
|
298 |
|
|
|
271 |
|
|
|
|
|
|
|
|
|
|
$ |
686 |
|
|
$ |
1,348 |
|
|
|
|
|
|
|
|
Current and non-current deferred implementation costs, excluding technology and development
costs, are a component of prepaid expenses and other assets, respectively. Current and non-current
deferred implementation revenues, which may precede the timing of when the related implementation
costs are incurred and thus deferred, are a component of accrued expenses and other liabilities,
respectively.
Concentration of Business and Credit Risk
The Company’s service fee revenue is generated under contractual service fee relationships
with multiple client relationships. A summary of the customer and client concentrations is as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
December 31, |
|
December 31, |
| |
|
2007 |
|
2006 |
|
2005 |
Product Revenue (as a
percentage of Product
Revenue): |
|
|
|
|
|
|
|
|
|
|
|
|
Customer 1 |
|
|
10 |
% |
|
|
11 |
% |
|
|
14 |
% |
Customer 2 |
|
|
9 |
% |
|
|
9 |
% |
|
|
12 |
% |
Customer 3 |
|
|
6 |
% |
|
|
8 |
% |
|
|
11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Service Fee Revenue (as a
percentage of Service Fee
Revenue): |
|
|
|
|
|
|
|
|
|
|
|
|
Client 1 |
|
|
27 |
% |
|
|
23 |
% |
|
|
27 |
% |
Client 2 |
|
|
11 |
% |
|
|
12 |
% |
|
|
12 |
% |
Client 3 |
|
|
12 |
% |
|
|
19 |
% |
|
|
16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Customer/Client 1 |
|
|
8 |
% |
|
|
9 |
% |
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable: |
|
|
|
|
|
|
|
|
|
|
|
|
Customer/Client 1 |
|
|
10 |
% |
|
|
13 |
% |
|
|
12 |
% |
PFSweb has provided certain collateralized guarantees of its subsidiaries’ financings and
credit arrangements. These subsidiaries’ ability to obtain financing on similar terms would be
significantly impacted without these guarantees.
The Company has multiple arrangements with IBM and IPS and is dependent upon the continuation
of such arrangements. Substantially all of the Supplies Distributors’ revenue is generated by its
sale of product purchased
67
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
from IPS. These arrangements, which are critical to the Company’s
ongoing operations, include Supplies Distributors’ master distributor agreements, certain of
Supplies Distributors’ working capital financing agreements, product sales to IPS business units,
and a term master lease agreement. Supplies Distributors also relies upon
outsourced sales force and product demand generation services and the termination of such
services would have a material impact upon Supplies Distributors’ business.
eCOST’s arrangements with its vendors are terminable by either party at will. Loss of any
vendors could have a material adverse effect on its financial position, results of operations and
cash flows. Sales of HP and HP-related products represented 49% of eCOST’s net revenues in 2007
(11% of consolidated net revenues). Sales of these products were 33% of eCOST’s net revenues in
2006 (7% of consolidated net revenues).
Cash and Cash Equivalents
Cash equivalents are defined as short-term highly liquid investments with original maturities,
when acquired, of three months or less.
Restricted Cash
Restricted cash includes the following items (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
Letters of credit security |
|
$ |
— |
|
|
$ |
150 |
|
Customer remittances |
|
|
1,971 |
|
|
|
2,457 |
|
Bond financing |
|
|
50 |
|
|
|
46 |
|
|
|
|
|
|
|
|
Total restricted cash |
|
$ |
2,021 |
|
|
$ |
2,653 |
|
|
|
|
|
|
|
|
In conjunction with certain of its financing agreements, Supplies Distributors has granted to
its lenders a security interest in certain customer remittances received in specified bank accounts
(see Note 4). At December 31, 2007 and 2006, these bank accounts held $1.5 million and $2.2
million, respectively, which was restricted and can only be used to reduce the outstanding debt.
In conjunction with certain of its financing agreements, eCOST has granted to its lender a
security interest in certain customer remittances received in specified bank accounts (see Note 4).
At December 31, 2007 and 2006 these bank accounts held $0.5 million and $0.2 million,
respectively, which was restricted and can only be used to reduce the outstanding debt.
Other Receivables and Liabilities
Other receivables include $10.0 million and $10.6 million as of December 31, 2007 and 2006,
respectively, primarily for amounts due from IBM and IPS for costs incurred by the Company under
the master distributor agreements (see Note 6).
Inventories
Inventories (all of which are finished goods) are stated at the lower of weighted average cost
or market. The Company establishes inventory reserves based upon estimates of declines in values
due to inventories that are slow moving or obsolete, excess levels of inventory or values assessed
at lower than cost.
Supplies Distributors assumes responsibility for slow-moving inventory under certain master
distributor agreements, subject to certain termination rights, but has the right to return product
rendered obsolete by engineering changes, as defined (see Note 6). In the event PFSweb, Supplies
Distributors and IPS terminate the master distributor agreements, the agreements provide for the
parties to mutually agree on a plan of disposition of Supplies Distributors’ then existing
inventory.
Supplies Distributors’ inventories include merchandise in-transit that has not been received
by the Company but
68
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
that has been shipped and invoiced by Supplies Distributors’ vendors. The
corresponding payable for inventories in-transit is included in accounts payable in the
accompanying consolidated financial statements.
eCOST inventories include goods in-transit to customers.
The Company reviews inventory for impairment on a periodic basis, but at a minimum, annually.
Recoverability of the inventory on hand is measured by comparison of the carrying value of the
inventory to the fair value of the inventory.
Property and Equipment
The components of property and equipment as of December 31, 2007 and 2006 are as follows (in
thousands):
| |
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
December 31, |
|
|
|
| |
|
2007 |
|
|
2006 |
|
|
Depreciable Life |
Furniture and fixtures |
|
$ |
22,510 |
|
|
$ |
19,668 |
|
|
2-10 years |
Purchased and capitalized software costs |
|
|
14,595 |
|
|
|
12,276 |
|
|
3-7 years |
Computer equipment |
|
|
10,442 |
|
|
|
10,050 |
|
|
3 years |
Leasehold improvements |
|
|
7,779 |
|
|
|
6,501 |
|
|
3-5 years |
Other |
|
|
101 |
|
|
|
354 |
|
|
3-5 years |
|
|
|
|
|
|
|
|
|
|
|
|
55,427 |
|
|
|
48,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less-accumulated depreciation and
Amortization |
|
|
(43,509 |
) |
|
|
(35,965 |
) |
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
11,918 |
|
|
$ |
12,884 |
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment are stated at cost and are depreciated using the straight-line method
over the estimated useful lives of the respective assets. Leasehold improvements are amortized over
the shorter of the useful life of the related asset or the remaining lease term.
The Company’s property held under capital leases amount to approximately $4.6 million and $3.7
million, net of accumulated amortization of approximately $10.5 million and $10.0 million, at
December 31, 2007 and 2006, respectively.
Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. The Company
reviews goodwill for an impairment at least annually. 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 is determined using appraisals, discounted cash flow analysis or similar
valuation techniques. We make judgments and estimates in conjunction with the carrying value of
these assets, including amounts to be capitalized, depreciation and amortization methods and useful
lives. We record impairment losses in the period in which we determine that the carrying amount is
not recoverable. This may require us to make judgments regarding long-term forecasts of our future
revenues and costs related to the assets subject to review.
Foreign Currency Translation and Transactions
For the Company’s Canadian and European operations, the local currency is the functional
currency. All assets and liabilities are translated at exchange rates in effect at the end of the
period, and income and expense items are translated at the average exchange rates for the period.
The Company includes currency gains and losses on short-term intercompany advances in the
determination of net income and loss. Currency gains and losses, including transaction gains and
losses and those on short-term intercompany advances, included in net loss were a net gain of
approximately $1.0 million, net gain of
69
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
approximately $0.3 million and a net loss of $0.3 million
for the years ended December 31, 2007, 2006 and 2005, respectively. The Company reports gains and
losses on intercompany foreign currency transactions that are of a long-term investment nature as a
separate component of shareholders’ equity.
Stock-Based Compensation
On January 1, 2006, the Company adopted the fair value recognition provisions of Financial
Accounting Standards Board (“FASB”) Statement No. 123(R), Share-Based Payment, (“FAS 123R”). Prior
to January 1, 2006, the Company accounted for share-based employee compensation plans using the
recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees (“APB 25”), and related Interpretations. In accordance with APB 25 no compensation was
required to be recognized for options granted to employees that had an exercise price equal to or
greater than the market value of the underlying common stock on the date of grant.
The following table shows the pro forma effect on the Company’s net loss and loss per share as
if compensation cost had been recognized for stock-based employee compensation plans based on their
fair value at the date of the grant. The pro forma effect of stock-based employee compensation
plans on the Company’s net loss for the year prior to the Company’s adoption of FAS 123R may not be
representative of the pro forma effect for future years due to the impact of vesting and potential
future awards.
| |
|
|
|
|
| |
|
Year Ended |
|
| |
|
December 31, |
|
| |
|
2005 |
|
| |
|
(In thousands, except |
|
| |
|
per share amounts) |
|
Net loss as reported |
|
$ |
(747 |
) |
Deduct: Stock-based non-employee
compensation expense included in reported
net loss |
|
|
16 |
|
Add: total stock-based employee and
non-employee compensation expense
determined under fair value based method |
|
|
(1,002 |
) |
|
|
|
|
Pro forma net loss, applicable to common
stock for basic and diluted computations |
|
$ |
(1,733 |
) |
|
|
|
|
Loss per common share – as reported |
|
|
|
|
Basic and diluted |
|
$ |
(0.03 |
) |
|
|
|
|
Loss per common share – pro forma |
|
|
|
|
Basic and diluted |
|
$ |
(0.08 |
) |
|
|
|
|
Impact of Recently Issued Accounting Standards
In 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation 48,
Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN
48”), which prescribes accounting for and disclosure of uncertainty in tax positions. This
interpretation defines the criteria that must be met for the benefits of a tax position to be
recognized in the financial statements and the measure of tax benefits recognized. There was no
impact of the Company’s January 1, 2007 adoption of the provisions of FIN 48. The Company
recognizes interest and penalties related to uncertain tax positions in income tax expense.
For federal income tax purposes, tax years that remain subject to examination include years
2003 through 2007. However, the utilization of net operating loss (“NOL”) carryforwards that arose
prior to 2003 remain subject to examination through the years such carryforwards are utilized. For
Europe, tax years that remain subject to examination include years 2004 to 2007. However, the
utilization of NOL carryforwards that arose prior to 2004 remain subject to examination through the
years such carryforwards are utilized. For Canada, tax years that remain subject to examination
include years 1999 to 2007, depending on the subsidiary. For state income tax purposes, the tax
years that remain subject to examination include years 2002 to 2007, depending upon the
jurisdiction in which the Company files tax returns.
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
70
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
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. The Company will be required to apply the
provisions of the new standards in the first quarter of 2009. The impact of this statement on our
financial statements is expected to be insignificant.
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. This new standard will allow companies to elect to measure
specified financial instruments and warranty and insurance contracts at fair value on a
contract-by-contract basis, with changes in fair value recognized in earnings in each reporting
period. The Company will adopt this new standard in the first quarter of 2008 and expects the
impact on its financial statements to be insignificant.
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This new
standard defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements. The Company will
adopt this new standard in the first quarter of 2008 and expects the impact on its financial
statements to be insignificant.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date. Valuation allowances are established when necessary to reduce deferred tax assets
to the amount more likely than not to be realized.
Self Insurance
The Company is self-insured for medical insurance benefits up to certain stop-loss limits.
Such costs are accrued based on known claims and an estimate of incurred, but not reported (“IBNR”)
claims. IBNR claims are estimated using historical lag information and other data provided by
claims administrators.
Fair Value of Financial Instruments
The carrying value of the Company’s financial instruments, which include cash and cash
equivalents, accounts receivable, accounts payable and debt and capital lease obligations,
approximate their fair values based on short terms to maturity or current market prices and
interest rates.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity (net assets) of a business
enterprise during a period from transactions and other events and circumstances from non-owner
sources. Comprehensive income (loss) consists of net income (loss) and foreign currency translation
adjustments.
Net Loss Per Common Share
Basic and diluted net loss per share is computed by dividing net loss by the weighted-average
number of common shares outstanding for the reporting period. Stock options not included in the
calculation of diluted net loss per share for the years ended December 31, 2007, 2006 and 2005,
were 6.1 million, 5.9 million, and 5.4 million, respectively, as the effect would be anti-dilutive.
Warrants not included in the calculation of diluted net loss per share for the years ended December
31, 2007, 2006 and 2005, were 0.6 million, 0.6 million and 0.4 million, respectively, as the effect
would be anti-dilutive.
71
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Cash Paid During Year
The Company made payments for interest of approximately $2.6 million, $2.8 million and $2.4
million and income taxes of approximately $1.5 million, $0.5 million and $0.7 million during the
years ended December 31, 2007, 2006, and 2005, respectively (see Notes 3, 4 and 8).
Advertising Costs
Advertising expenses for eCOST, including those for catalog, internet and other methods, were
$1.1 million and $2.7 million for the years end December 31, 2007 and 2006, respectively and are
included in selling, general and administrative expenses. There were no such expenses to the
Company prior to the acquisition of eCOST.
Reclassifications
Certain prior year data have been reclassified to conform to the current period presentation.
These reclassifications had no effect on previously reported net income (loss) or shareholders’
equity.
3. Vendor Financing
Outstanding obligations under vendor financing arrangements consist of the following (in
thousands):
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
Inventory and working capital financing agreements: |
|
|
|
|
|
|
|
|
United States |
|
$ |
23,667 |
|
|
$ |
28,037 |
|
Europe |
|
|
13,340 |
|
|
|
12,713 |
|
|
|
|
|
|
|
|
Total |
|
$ |
37,007 |
|
|
$ |
40,750 |
|
|
|
|
|
|
|
|
Inventory and Working Capital Financing Agreement, United States
Supplies Distributors has a short-term credit facility with IBM Credit LLC to finance its
distribution of IPS products in the United States, providing financing for eligible IPS inventory
and for certain other receivables up to $30.5 million through its expiration in March 2008. As of
December 31, 2007, Supplies Distributors had $1.6 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, PFSweb is required to maintain a minimum
Subordinated Note receivable balance from Supplies Distributors of $6.0 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% (7.75% and 8.75% as of December 31, 2007
and 2006, respectively). The facility also includes a monthly service fee.
On March 27, 2008, Supplies Distributors entered into an amended credit facility with IBM
Credit LLC, which extends the termination date through March 2009 and reduces the minimum
Subordinated Note balance to $5.5 million. Given the structure of this facility and as outstanding
balances, which represent inventory purchases, are repaid within twelve months, the Company has
classified the outstanding amounts under this facility as accounts payable in the consolidated
balance sheets.
Inventory and Working Capital Financing Agreement, Europe
Supplies Distributors’ European subsidiaries have a short-term credit facility with IBM
Belgium Financial Services S.A. (“IBM Belgium”) to finance their distribution of IPS products in
Europe. The asset based credit facility with IBM Belgium provides up to 12.5 million Euros
(approximately $18.4 million at December 31, 2007) in financing for purchasing IPS inventory and
for certain other receivables through its expiration in March 2008. As
72
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
of December 31, 2007,
Supplies Distributors’ European subsidiaries had 2.1 million Euros (approximately $3.1 million at
December 31, 2007) 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
subsidiaries, as well as collateralized guaranties of Supplies Distributors and PFSweb.
Additionally, PFSweb is required to maintain a minimum Subordinated Note receivable balance from
Supplies Distributors of $6.0 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 1.5% as of December 31, 2007 and 2006 (5.8% and 5.1% as of December 31, 2007 and 2006,
respectively). Supplies Distributors’ European subsidiaries pay a monthly service fee on the
commitment.
On March 27, 2008, Supplies Distributors’ European subsidiaries entered into an amended credit
facility with IBM Belgium, which increases the facility from 12.5 million Euros to 16.0 million
Euros (approximately $23.6 million at December 31, 2007), extends the termination date through
March 2009 and reduces the minimum Subordinated Note balance to $5.5 million. 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.
4. Debt and Capital Lease Obligations:
Outstanding obligations under debt and capital lease obligations consist of the following (in
thousands):
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
Loan and security agreements, United States: |
|
|
|
|
|
|
|
|
Supplies Distributors |
|
$ |
10,353 |
|
|
$ |
12,102 |
|
PFSweb |
|
|
7,225 |
|
|
|
6,985 |
|
Credit facility — eCOST |
|
|
— |
|
|
|
— |
|
Factoring agreement, Europe |
|
|
1,212 |
|
|
|
1,039 |
|
Taxable revenue bonds |
|
|
4,000 |
|
|
|
4,500 |
|
Master lease agreements |
|
|
5,033 |
|
|
|
4,742 |
|
Other |
|
|
793 |
|
|
|
510 |
|
|
|
|
|
|
|
|
Total |
|
|
28,616 |
|
|
|
29,878 |
|
Less current portion of long-term debt |
|
|
22,238 |
|
|
|
23,802 |
|
|
|
|
|
|
|
|
Long-term debt, less current portion |
|
$ |
6,378 |
|
|
$ |
6,076 |
|
|
|
|
|
|
|
|
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 December 31, 2007, Supplies Distributors had $2.0 million of available credit under
this agreement. The Wachovia facility expires on the earlier of March 29, 2009 or the date on which
the parties to the IPS master distributor agreement (see Note 6) no longer operate under the terms
of such agreement and/or IPS no longer supplies products pursuant to such agreement. Borrowings
under the Wachovia facility accrue interest at prime rate or Eurodollar rate plus 1.75% to 2.25%,
dependent on excess availability, as defined. The interest rate as of December 31, 2007 was 7.25%
for $6.4 million of outstanding borrowings and 7.2% for $4.0 million of outstanding borrowings.
This agreement contains cross default provisions, various restrictions upon the ability of Supplies
Distributors to, among other things, merge, consolidate, sell assets, incur indebtedness, make
loans and payments to related parties (including entities directly or indirectly owned by PFSweb,
Inc.), provide guarantees, make investments and loans, pledge assets, make changes to capital stock
ownership structure and pay dividends, as well as financial covenants, such as minimum net worth,
as defined, and is secured by all of the assets of Supplies Distributors, as well as a
collateralized guaranty of PFSweb. Additionally, PFSweb is required to maintain a Subordinated Note
receivable balance from Supplies Distributors of no less than $5.5 million and restricted cash of
less than $5.0 million, and is restricted with regard to transactions
73
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
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 December 31, 2007 and December 31, 2006, these bank accounts held $1.4 million and
$2.2 million, respectively, which was restricted for payment to Wachovia.
Loan and Security Agreement – PFSweb
PFS has a Loan and Security Agreement (“Comerica Agreement”) with Comerica Bank (“Comerica”).
The Comerica Agreement provides for up to $10.0 million of eligible accounts receivable financing
(“Working Capital Advances”) through April 2008 and $2.5 million of equipment financing (“Equipment
Advances”) through June 15, 2008. Outstanding Working Capital Advances, $7.2 million as of
December 31, 2007, accrue interest at prime rate plus 1% (8.25% as of December 31, 2007).
Outstanding Equipment Advances, ($0 million as of December 31, 2007) accrue interest at prime rate
plus 1.5% (8.75% as of December 31, 2007). As of December 31, 2007, PFS had $2.6 million of
available credit under the Working Capital Advance portion of this facility and no funds available
under the Equipment Advance portion of this facility. In January 2008, the Company repaid the $7.2
million of Working Capital Advances outstanding as of December 31, 2007. The Comerica Agreement
contains cross default provisions, various restrictions upon PFS’ ability to, among other things,
merge, consolidate, sell assets, incur indebtedness, make loans and payments to related parties
(including entities directly or indirectly owned by PFSweb, Inc.), make 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 $8 million. Comerica has
provided approval for PFS to advance $8.5 million in cash to fund the cash flow requirements of
eCOST. As of December 31, 2007, PFS has advanced $7.9 million to eCOST. The Comerica Agreement is
secured by all of the assets of PFS, as well as a guarantee of PFSweb, Inc.
On
March 28, 2008, PFS entered into an amended agreement with Comerica, which extends the
termination date through March 2009, reduces the maximum amount of the subordinated note receivable
from Supplies Distributors to $6.5 million and provides the approval for PFS to advance an
additional $3.3 million to certain of its subsidiaries, including eCOST, with certain restrictions,
if needed.
Credit Facility – eCOST
eCOST has an asset-based line of credit facility that provides for borrowings of up to $7.5
million from Wachovia, through May 2009, which is collateralized by substantially all of eCOST’s
assets. Borrowings under the facility are limited to a percentage of eligible accounts receivable
and inventory. Outstanding amounts under the facility bear interest at rates ranging from the prime
rate to the prime rate plus 0.5% (7.75% as of December 31, 2007), depending on eCOST’s financial
results. As of December 31, 2007, eCOST had $2.1 million of letters of credit outstanding and $1.1
million of available credit under this facility. In connection with the line of credit, eCOST
entered into a cash management arrangement whereby eCOST’s operating amounts are swept and used to
repay outstanding amounts under the line of credit. The credit facility restricts eCOST’s ability
to, among other things, merge, consolidate, sell assets, incur indebtedness, make loans,
investments and payments to subsidiaries, affiliates and related parties (including entities
directly or indirectly owned by PFSweb, Inc.), make investments and loans, pledge assets, make
changes to capital stock ownership structure, and requires a minimum tangible net worth of $0, as
defined. PFSweb has guaranteed all current and future obligations of eCOST under this line of
credit.
Factoring Agreement
Supplies Distributors’ European subsidiary has a factoring agreement with Fortis Commercial
Finance N.V. (“Fortis”) to provide factoring for up to 7.5 million Euros (approximately $11.0
million at December 31, 2007) of eligible accounts receivables through March 2009. As of December
31, 2007, Supplies Distributors’ European subsidiary had approximately 2.1 million Euros ($3.1
million) of available credit under this agreement. Borrowings accrue interest at Euribor plus 0.6%
(4.9% at December 31, 2007). This agreement contains various restrictions
74
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
upon the ability of
Supplies Distributors’ European subsidiary to, among other things, merge, consolidate and incur
indebtedness, as well as financial covenants, such as minimum net worth. This agreement is secured
by a guarantee of Supplies Distributors, up to a maximum of 200,000 Euros.
Taxable Revenue Bonds
PFSweb has a Loan Agreement with the Mississippi Business Finance Corporation (the “MBFC”) in
connection with the issuance by the MBFC of $5 million MBFC Taxable Variable Rate Demand Limited
Obligation Revenue Bonds, Series 2004 (Priority Fulfillment Services, Inc. Project) (the “Bonds”).
The MBFC loaned the proceeds of
the Bonds to PFSweb for the purpose of financing the acquisition and installation of
equipment, machinery and related assets located in the Company’s Southaven, Mississippi
distribution facility. The Bonds bear interest at a variable rate (5.1% as of December 31, 2007),
as determined by Comerica Securities, as Remarketing Agent. PFSweb, at its option, may convert the
Bonds to a fixed rate, to be determined by the Remarketing Agent at the time of conversion.
The primary source of repayment of the Bonds is a letter of credit (the “Letter of Credit”) in
the initial face amount of $5.1 million issued by Comerica pursuant to a Reimbursement Agreement
between PFSweb and Comerica under which PFSweb is obligated to pay to Comerica all amounts drawn
under the Letter of Credit. The Letter of Credit has a maturity date of April 2009 at which time,
if not renewed or replaced, will result in a draw on the undrawn face amount thereof. If the
Letter of Credit is renewed or replaced, the Bonds require future principal repayments of $800,000
in each of January 2009 through 2012. The amount outstanding on the Bonds as of December 31, 2007
is $4.0 million. Our obligations under the Reimbursement Agreement are secured by substantially
all of the assets of our PFS subsidiary and a Company parent guarantee.
Debt Covenants
To the extent the Company or any of its subsidiaries fail to comply with its covenants
applicable to its debt or vendor financing obligations, including the monthly financial covenant
requirements and required level of shareholders’ equity or net worth, and one or all of the lenders
accelerate the repayment of the credit facility obligations, the Company would be required to repay
all amounts outstanding thereunder. In particular, in the event eCOST is unable to increase its
revenue and/or gross profit from its present levels, it may fail to comply with one or more of the
financial covenants required under its working capital line of credit. In such event, absent a
waiver, the working capital lender would be entitled to accelerate all amounts outstanding
thereunder and exercise all other rights and remedies, including sale of collateral and demand for
payment under the Company parent guaranty. Any acceleration of the repayment of the credit
facilities would have a material adverse impact on the Company’s financial condition and results of
operations and no assurance can be given that the Company would have the financial ability to repay
all of such obligations.
PFSweb has also provided a guarantee of the obligations of Supplies Distributors to IBM,
excluding the trade payables that are financed by IBM Credit.
Master Lease Agreements
The Company has a Term Lease Master Agreement with IBM Credit (“Master Lease Agreement”) that
provides for leasing or financing transactions of equipment and other assets, which generally have
terms of three years. The outstanding leasing transactions ($0.9 million and $1.0 million as of
December 31, 2007 and 2006, respectively) are secured by the related equipment (see Note 2).
The Company has two master agreements with financing companies that provide for leasing or
financing transactions of certain equipment. The amounts outstanding under these agreements as of
December 31, 2007 and 2006 were $1.8 million and $2.1 million, 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.
75
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Debt and Capital Lease Maturities
The Company’s aggregate maturities of debt subsequent to December 31, 2007 are as follows (in
thousands):
| |
|
|
|
|
Fiscal year ended December 31, |
|
|
|
|
2008 |
|
$ |
20,480 |
|
2009 |
|
|
1,027 |
|
2010 |
|
|
914 |
|
2011 |
|
|
893 |
|
2012 |
|
|
828 |
|
Thereafter |
|
|
— |
|
|
|
|
|
Total |
|
$ |
24,142 |
|
|
|
|
|
The following is a schedule of the Company’s future minimum lease payments under the capital
leases together with the present value of the net minimum lease payments as of December 31, 2007
(in thousands):
| |
|
|
|
|
Fiscal year ended December 31, |
|
|
|
|
2008 |
|
$ |
2,087 |
|
2009 |
|
|
1,751 |
|
2010 |
|
|
851 |
|
2011 |
|
|
290 |
|
Thereafter |
|
|
92 |
|
|
|
|
|
Total minimum lease payments |
|
$ |
5,071 |
|
Less amount representing interest at rates ranging from 7.25%
to 12.4% |
|
|
(597 |
) |
|
|
|
|
Present value of net minimum lease payments |
|
|
4,474 |
|
Less: Current portion |
|
|
(1,758 |
) |
|
|
|
|
Long-term capital lease obligations |
|
$ |
2,716 |
|
|
|
|
|
5. Stock and Stock Options
Preferred Stock Purchase Rights
On June 8, 2000, the Company’s Board of Directors declared a dividend distribution of one
preferred stock purchase right (a “Right”) for each share of the Company’s common stock outstanding
on July 6, 2000 and each share of common stock issued thereafter. Each Right entitles the
registered shareholders to purchase from the Company one one-thousandth of a share of preferred
stock at an exercise price of $67, subject to adjustment. The Rights are not currently exercisable,
but would become exercisable if certain events occurred relating to a person or group acquiring or
attempting to acquire 15 percent or more of the Company’s outstanding shares of common stock. The
Rights expire on July 6, 2010, unless redeemed or exchanged by the Company earlier.
Employee Stock Purchase Plan
The Company offers the PFSweb Employee Stock Purchase Plan (the “Stock Purchase Plan”) that is
qualified under Section 423 of the Internal Revenue Code of 1986, to provide employees of the
Company an opportunity to acquire a proprietary interest in the Company. The Stock Purchase Plan
permits each U.S. employee who has completed 90 days of service to elect to participate in the
plan. Eligible employees may elect to contribute with after-tax dollars up to a maximum annual
contribution of $25,000. The Stock Purchase Plan originally provided for acquisition of the
Company’s common stock at a 15% discount to the lower of the beginning or end of a calendar
quarter’s market value. In 2005, the Company’s shareholders approved amendments to the Purchase
Plan and effective January 1, 2006, reduced the acquisition price discount to 5% of the market
value on the date of purchase. The Company has reserved 4 million shares of its common stock under
the Stock Purchase Plan. During the years ended December 31, 2007, 2006 and 2005, the Company
issued 18,105, 54,431 and 401,270 shares under the Stock Purchase Plan, respectively. As of
December 31, 2007, there were 2,153,384 shares available for further issuance under the Stock
Purchase Plan.
76
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Private Placement Transactions
In 2003, the Company entered into a Securities Purchase Agreement with certain institutional
investors in a private placement transaction pursuant to which the Company issued and sold its
common stock, par value $.001 per share (the “Common Stock”). In addition to the Common Stock, the
investors received one-year warrants to purchase an aggregate 525,692 shares of Common Stock at an
exercise price of $3.25 per share and four-year warrants to purchase an aggregate of 395,486 shares
of Common Stock at an exercise price of $3.30 per share. In January 2005, 394,685 of the one-year
warrants were exercised prior to their expiration, generating net proceeds to
the Company of $1.3 million, and 131,277 of the one-year warrants expired unexercised. As a
result of the merger with eCOST and the private placement transaction in June 2006, the four-year
warrants were adjusted such that there were 564,980 warrants outstanding with an exercise price of
$2.31 per share as of December 31, 2007. These four-year warrants expired, unexercised in January
2008.
In June 2006, the Company entered into a Purchase Agreement and Registration Rights Agreement
with certain institutional investors in a private placement transaction pursuant to which the
Company issued and sold an aggregate of 5,000,000 shares of its common stock, par value $.001 per
share, at $1.00 per share, resulting in gross proceeds of $5.0 million. After deducting expenses,
the net proceeds were approximately $4.8 million. The Company has advanced $4.7 million of these
proceeds to eCOST as of December 31, 2007.
Stock Options and Stock Option Plans
On January 1, 2006, the Company adopted the fair value recognition provisions of Financial
Accounting Standards Board (“FASB”) Statement No. 123(R), Share-Based Payment, (“FAS 123R”). Prior
to January 1, 2006, the Company accounted for share-based employee compensation plans using the
recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees (“APB 25”), and related Interpretations. In accordance with APB 25 no compensation was
required to be recognized for options granted that had an exercise price equal to or greater than
the market value of the underlying common stock on the date of grant.
The Company adopted FAS 123R using the modified prospective transition method. Under that
transition method, compensation cost recognized during the years ended December 31, 2007 and 2006
includes: a) compensation cost for all share-based payments granted prior to, but not yet vested as
of January 1, 2006, based on the grant date fair value estimated in accordance with the original
provisions of FAS 123, and b) compensation cost for all share-based payments granted subsequent to
January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of
FAS 123R. Compensation cost is recognized on a straight-line basis, net of estimated forfeitures,
over the requisite service period of each award. Results for prior periods have not been restated.
As a result of adoption FAS 123R, stock-based compensation charged against income was $0.8
million and $0.9 million for the years ended December 31, 2007 and 2006. As of December 31, 2007,
there was $0.6 million of total unrecognized compensation costs related to unvested stock options,
which is expected to be recognized over a weighted average period of approximately 1.2 years.
Prior to the adoption of FAS 123R, the Company recorded stock-based compensation expense of $16,000
in the year ended December 31, 2005, in connection with stock options to purchase an aggregate of
11,000 shares issued to non-employees.
As of December 31, 2007, the Company had the following share-based compensation plans:
PFSweb Plan Options
The Company has an Employee Stock and Incentive Plan and an Outside Director Stock Option and
Retainer Plan under which an aggregate of 8,500,000 shares of common stock were originally
authorized for issuance (the “Stock Options Plans”) and an outstanding stock option agreement under
which 35,000 shares were originally authorized for issuance. The Stock Option Plans provide for the
granting of incentive awards in the form of stock options to directors, executive management, key
employees, and outside consultants of the Company. The rights to
77
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
purchase shares under the employee
stock option agreements typically vest over a three-year period, one-twelfth each quarter. Stock
options must be exercised within 10 years from the date of grant. Stock options are generally
issued such that the exercise price is equal to the market value of the Company’s common stock at
the date of grant.
As of December 31, 2007, there were 2,484,947 shares available for future grants under the
Stock Option Plans.
The following table summarizes stock option activity under the Stock Option Plans:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted |
|
Average |
|
|
| |
|
|
|
|
|
|
|
|
|
Average |
|
Remaining |
|
Aggregate |
| |
|
|
|
|
|
|
|
|
|
Exercise |
|
Contractual |
|
Intrinsic |
| |
|
Shares |
|
Price Per Share_ |
|
Price |
|
Life |
|
Value |
Outstanding, December 31, 2006 |
|
|
5,467,448 |
|
|
$ |
0.39—$16.00 |
|
|
$ |
1.30 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
612,000 |
|
|
$ |
0.94—$1.04 |
|
|
$ |
0.94 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Canceled |
|
|
(398,750 |
) |
|
$ |
0.80—$5.78 |
|
|
$ |
1.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2007 |
|
|
5,680,698 |
|
|
$ |
0.39—$16.00 |
|
|
$ |
1.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2007 |
|
|
4,943,609 |
|
|
$ |
0.39—$16.00 |
|
|
$ |
1.25 |
|
|
|
4.9 |
|
|
$ |
1,396,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable and expected to
vest, December 31, 2007 |
|
|
5,560,475 |
|
|
$ |
0.39—$16.00 |
|
|
$ |
1.41 |
|
|
|
4.7 |
|
|
$ |
1,518,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average fair value per share of options granted during the years ended December
31, 2007, 2006 and 2005 was $0.71, $1.13 and $2.07, respectively. The total intrinsic value of
options exercised under the Stock Option Plans was $0.02 million and $0.2 million during the years
ended December 31, 2006 and 2005, respectively.
PFSweb Non-plan Options
Prior to the Company’s initial public offering, certain of the Company’s employees were
holders of stock options of the Company’s former parent company, Daisytek International Corporation
(“Daisytek”), issued under Daisytek’s stock option plans.
In connection with the completion of the Company’s spin-off from Daisytek on July 6, 2000 (the
“Spin-off”), all outstanding Daisytek stock options were replaced with substitute stock options.
Daisytek options held by PFSweb employees were replaced (at the option holder’s election made prior
to the Spin-off) with either options to acquire shares of PFSweb common stock or options to acquire
shares of both Daisytek common stock and PFSweb common stock (which may be exercised separately)
(the “Unstapled Options”). Options held by Daisytek employees were replaced (at the option holder’s
election made prior to the Spin-off) with either options to acquire shares of Daisytek common stock
or Unstapled Options.
As a result of the stock option replacement process described above, in conjunction with the
Spin-off, PFSweb stock options (the “Non-plan Options”) were issued to PFSweb and Daisytek
officers, directors and employees. These options were issued as one-time grants and were not issued
under the Stock Option Plans. The terms and provisions of the Non-plan Options are substantially
the same as options issued under the Stock Option Plans.
The following table summarizes stock option activity under the Non-plan Options:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted |
|
Average |
|
|
| |
|
|
|
|
|
|
|
|
|
Average |
|
Remaining |
|
Aggregate |
| |
|
|
|
|
|
|
|
|
|
Exercise |
|
Contractual |
|
Intrinsic |
| |
|
Shares |
|
Price Per Share |
|
Price |
|
Life |
|
Value |
Outstanding, December 31, 2006 |
|
|
433,030 |
|
|
$ |
0.91—$10.58 |
|
|
$ |
0.95 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
Canceled |
|
|
(3,811 |
) |
|
$ |
0.91—$5.78 |
|
|
$ |
1.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2007 |
|
|
429,019 |
|
|
$ |
0.91—$10.58 |
|
|
$ |
0.94 |
|
|
|
3.9 |
|
|
$ |
145,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
December 31, 2007 |
|
|
429,219 |
|
|
$ |
0.91—$10.58 |
|
|
$ |
0.94 |
|
|
|
3.9 |
|
|
$ |
145,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Fair Value
The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions used for grants of options under the Stock
Option Plans:
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended |
|
Year Ended |
|
Year Ended |
| |
|
December 31, 2007 |
|
December 31, 2006 |
|
December 31, 2005 |
Expected dividend yield
|
|
|
— |
|
|
—
|
|
— |
Expected stock price volatility
|
|
87% — 90% |
|
91% — 103% |
|
104% — 105% |
Risk-free interest rate
|
|
4.4% — 5.0% |
|
4.5% — 5.2%
|
|
3.6% — 4.6% |
Expected life of options (years)
|
|
|
6 |
|
|
0.5-6
|
|
5-6 |
The fair value of each share of common stock granted under the Stock Purchase Plan is
estimated on the date of grant using the Black-Scholes option-pricing model with the following
assumptions:
| |
|
|
|
|
| |
|
Year Ended |
| |
|
December 31, 2005 |
Expected dividend yield
|
|
|
— |
|
Expected stock price volatility
|
|
|
102% — 107 |
% |
Risk-free interest rate
|
|
|
2.3% — 4.0 |
% |
Expected life of options (months)
|
|
|
3 |
|
The weighted average fair value per share of common stock granted under the Stock Purchase
Plan granted during the year ended December 31, 2005 was $0.98.
The Black-Scholes option valuation model requires the input of highly subjective assumptions,
including the expected life of the stock-based award and stock-price volatility. The assumptions
listed above represent management’s best estimates, but these estimates involve inherent
uncertainties and the application of management judgment. As a result, if other assumptions had
been used, the Company’s recorded and pro forma stock-based compensation expense could have been
different. In addition, the Company is required to estimate the expected forfeiture rate and only
recognize expense for those shares expected to vest. If the Company’s actual forfeiture rate is
materially different from its estimate, the share-based compensation expense could be materially
different. The expected life of options has been computed using the simplified method as
prescribed by Staff Accounting Bulletin No. 107.
6. Master Distributor Agreements
Supplies Distributors, PFSweb and IPS have entered into master distributor agreements whereby
Supplies Distributors acts as a master distributor of various IPS products and PFSweb provides
transaction management and fulfillment services to Supplies Distributors. Under the master
distributor agreements, IPS sells product to Supplies Distributors and reimburses Supplies
Distributors for certain freight costs, direct costs incurred in passing on any price decreases
offered by IPS to Supplies Distributors or its customers to cover price protection and certain
special bids, the cost of products provided to replace defective product returned by customers and
other certain expenses as defined. Supplies Distributors can return to IPS product rendered
obsolete by IPS engineering changes after customer demand ends. IPS determines when a product is
obsolete. IPS and Supplies Distributors also have agreements under which IPS reimburses or collects
from Supplies Distributors amounts calculated in certain inventory cost adjustments.
Supplies Distributors passes through to customers marketing programs specified by IPS and
administers, along with a party performing product demand generation for the IPS products, such
programs according to IPS guidelines.
7. Supplies Distributors
Pursuant to a credit agreement, Supplies Distributors is restricted from making any
distributions to PFSweb if,
79
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
after giving affect thereto, Supplies Distributors’ net worth would be
less than $1.0 million. At December 31, 2007, Supplies Distributors’ net worth was $10.6 million. Supplies Distributors has received lender
approval to pay $2.8 million of dividends in 2008 but, under the terms of its amended credit
agreements, is restricted from paying further annual cash dividends without the prior approval of
its lenders (see Notes 3 and 4). Supplies Distributors has paid dividends to PFSweb of $2.4
million, $3.9 million and $1.0 million in the years ended December 31, 2007, 2006 and 2005,
respectively.
8. Income Taxes
A reconciliation of the difference between the expected income tax expense at the U.S. federal
statutory corporate tax rate of 34%, and the Company’s effective tax rate is as follows (in
thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
| |
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
Income tax provision (benefit)
computed at statutory rate |
|
$ |
(199 |
) |
|
$ |
(4,548 |
) |
|
$ |
86 |
|
Impact of foreign taxation |
|
|
(3 |
) |
|
|
(17 |
) |
|
|
(16 |
) |
Foreign dividends received |
|
|
494 |
|
|
|
850 |
|
|
|
— |
|
Items not deductible for tax purposes |
|
|
230 |
|
|
|
1,704 |
|
|
|
337 |
|
Change in valuation reserve |
|
|
898 |
|
|
|
3,285 |
|
|
|
706 |
|
Other |
|
|
(621 |
) |
|
|
(120 |
) |
|
|
(112 |
) |
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
799 |
|
|
$ |
1,154 |
|
|
$ |
1,001 |
|
|
|
|
|
|
|
|
|
|
|
The consolidated income (loss) before income taxes, by domestic and foreign entities, is as
follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
| |
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
Domestic |
|
$ |
(3,389 |
) |
|
$ |
(15,035 |
) |
|
$ |
(1,211 |
) |
Foreign |
|
|
2,804 |
|
|
|
1,659 |
|
|
|
1,465 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(585 |
) |
|
$ |
(13,376 |
) |
|
$ |
254 |
|
|
|
|
|
|
|
|
|
|
|
Current and deferred income tax expense (benefit) is summarized as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
| |
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
57 |
|
|
$ |
105 |
|
|
$ |
151 |
|
State |
|
|
(70 |
) |
|
|
419 |
|
|
|
80 |
|
Foreign |
|
|
728 |
|
|
|
778 |
|
|
|
778 |
|
|
|
|
|
|
|
|
|
|
|
Total current |
|
|
715 |
|
|
|
1,302 |
|
|
|
1,009 |
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
|
— |
|
|
|
— |
|
|
|
— |
|
State |
|
|
21 |
|
|
|
(59 |
) |
|
|
— |
|
Foreign |
|
|
63 |
|
|
|
(89 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
Total deferred |
|
|
84 |
|
|
|
(148 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
799 |
|
|
$ |
1,154 |
|
|
$ |
1,001 |
|
|
|
|
|
|
|
|
|
|
|
The components of the deferred tax asset (liability) are as follows (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
551 |
|
|
$ |
826 |
|
Inventory reserve |
|
|
747 |
|
|
|
1,143 |
|
Property and equipment |
|
|
1,773 |
|
|
|
1,800 |
|
Net operating loss carryforwards |
|
|
21,220 |
|
|
|
19,704 |
|
80
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
Other |
|
|
1,123 |
|
|
|
1,282 |
|
|
|
|
|
|
|
|
|
|
|
25,414 |
|
|
|
24,755 |
|
Less — Valuation reserve |
|
|
22,848 |
|
|
|
21,950 |
|
|
|
|
|
|
|
|
Total deferred tax asset |
|
|
2,566 |
|
|
|
2,805 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Intangible assets |
|
|
(1,980 |
) |
|
|
(2,254 |
) |
Other |
|
|
(289 |
) |
|
|
(160 |
) |
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(2,269 |
) |
|
|
(2,414 |
) |
|
|
|
|
|
|
|
Deferred tax assets, net |
|
$ |
297 |
|
|
$ |
391 |
|
|
|
|
|
|
|
|
Management believes that PFSweb has not established a sufficient history of earnings, on a
stand-alone basis, to support the more likely than not realization of certain deferred tax assets
in excess of existing taxable temporary differences. A valuation allowance has been provided for
these net deferred income tax assets as of December 31, 2007 and 2006. At December 31, 2007, net
operating loss carryforwards relate to taxable losses of PFSweb’s European subsidiary totaling
approximately $11.2 million, PFSweb’s Canadian subsidiary totaling approximately $5.3 million and
PFSweb’s U.S. subsidiaries totaling approximately $45.7 million that expire at various dates
through 2023. The U.S. NOL carryforward includes $4.6 million relating to tax benefits of stock
option exercises and, if utilized, will be recorded against additional paid-in-capital upon
utilization rather than as an adjustment to income tax expense from continuing operations. The
U.S. NOL also includes approximately $21.0 million of NOL acquired through the acquisition of eCOST
in February 2006. This acquired NOL carryforward is subject to annual limits under IRS Section
382.
9. Commitments and Contingencies
The Company leases facilities, warehouse, office, transportation and other equipment under
operating leases expiring in various years through December 31, 2012. In most cases, management
expects that, in the normal course of business, leases will be renewed or replaced by other leases.
Minimum future annual rental payments under non-cancelable operating leases having original terms
in excess of one year are as follows (in thousands):
| |
|
|
|
|
| |
|
Operating |
|
| |
|
Lease |
|
| |
|
Payments |
|
Fiscal year ended December 31, |
|
|
|
|
2008 |
|
$ |
8,458 |
|
2009 |
|
|
7,045 |
|
2010 |
|
|
5,638 |
|
2011 |
|
|
2,440 |
|
2012 |
|
|
675 |
|
|
|
|
|
Total |
|
$ |
24,256 |
|
|
|
|
|
Minimum rental payments under operating leases are recognized on a straight-line basis over
the term of the lease including any periods of free rent. Total rental expense under operating
leases approximated $10.3 million, $8.7 million and $7.3 million for the years ended December 31,
2007, 2006 and 2005, respectively. Certain landlord required deposits are secured by letters of
credit.
The Company receives municipal tax abatements in certain locations. During 2004 the Company
received notice from a municipality that we did not satisfy certain criteria necessary to maintain
the abatements. In December 2006 the Company received notice that the municipal authority planned
to make an adjustment to the Company’s tax abatement. The Company has disputed the adjustment, but
if the dispute is not resolved favorably, additional taxes of approximately $1.7 million could be
assessed against the Company.
On May 9, 2005, a lawsuit was filed in the District Court of Collin County, Texas, by J. Gregg
Pritchard, as Trustee of the D.I.C. Creditors Trust, naming the former directors of Daisytek
International Corporation and the Company as defendants. Daisytek filed for bankruptcy in May 2003
and the Trust was created pursuant to Daisytek’s Plan of Liquidation. The complaint alleged, among
other things, that the spin-off of the Company from Daisytek in December 1999 was a fraudulent
conveyance and that Daisytek was damaged thereby in the amount of at least $38 million. On May 3,
2007, the Court granted the Company’s motions for summary judgment and all of
81
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
the claims against
the Company were dismissed. In December 2007, the remaining parties to the litigation agreed to a
settlement pursuant to which all of the remaining claims have been dismissed.
On July 25, 2007 a purported class action lawsuit entitled Darral Frank and Joseph F. Keeley,
Jr. v. PC Mall, Inc. dba eCOST.com and eCOST.com, Inc. was filed in the Superior Court of
California, Los Angeles County. The purported class consists of all of current and former sales
representatives who worked for the defendants in California from July 24, 2003 through July 24,
2007. The lawsuit alleges that the defendants failed to pay overtime compensation and interest
thereon, failed to timely pay compensation to terminated employees and failed to provide meal and
rest periods, all in violation of the California Labor Code and Business and Professions Code. The
complaint seeks unpaid overtime, statutory penalties, interest, attorneys’ fees, punitive damages,
restitution and injunctive relief. The Company intends to vigorously contest this action and does
not believe the claims have any merit. The matter has been submitted to arbitration.
In February 2008, eCOST and the Company were served with a Complaint For Civil Penalties and
Injunctive Relief filed by Jamie Te’o in the Superior Court of California, Alameda County, alleging
violation of California Proposition 65 arising from the sale by eCOST of certain computer
components. The Company intends to vigorously contest this action and does not believe the claims
have any merit. The Company may also seek indemnification for these claims from the manufacturers
of these products.
The Company is subject to claims in the ordinary course of business, including claims of
alleged infringement by the Company or its subsidiaries of the patents, trademarks and other
intellectual property rights of third parties. If the party asserting such claims commences
litigation, the Company could be required to defend itself or its customers. Except as
disclosed herein, the Company is not aware of any such litigation.
.
10. Segment and Geographic Information
The Company is organized into three operating segments: PFSweb is an international provider of
integrated business process outsourcing solutions and operates as a service fee business; Supplies
Distributors is a master distributor of primarily IPS products; and eCOST is a multi-category
online discount retailer of new, “close-out” and recertified brand-name merchandise.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
| |
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
Revenues (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
PFSweb |
|
$ |
115,878 |
|
|
$ |
98,946 |
|
|
$ |
87,883 |
|
Supplies Distributors |
|
|
235,357 |
|
|
|
244,979 |
|
|
|
252,902 |
|
eCOST |
|
|
104,143 |
|
|
|
88,332 |
|
|
|
— |
|
Eliminations |
|
|
(8,576 |
) |
|
|
(9,004 |
) |
|
|
(9,128 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
446,802 |
|
|
$ |
423,253 |
|
|
$ |
331,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
PFSweb |
|
$ |
(1,421 |
) |
|
$ |
(2,730 |
) |
|
$ |
(5,292 |
) |
Supplies Distributors |
|
|
6,577 |
|
|
|
7,614 |
|
|
|
7,275 |
|
eCOST |
|
|
(3,399 |
) |
|
|
(16,148 |
) |
|
|
— |
|
Eliminations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,757 |
|
|
$ |
(11,264 |
) |
|
$ |
1,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
PFSweb |
|
$ |
7,149 |
|
|
$ |
6,420 |
|
|
$ |
6,112 |
|
Supplies Distributors |
|
|
19 |
|
|
|
11 |
|
|
|
— |
|
eCOST |
|
|
1,012 |
|
|
|
1,045 |
|
|
|
— |
|
Eliminations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,180 |
|
|
$ |
7,476 |
|
|
$ |
6,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
PFSweb |
|
$ |
3,529 |
|
|
$ |
3,900 |
|
|
$ |
3,918 |
|
Supplies Distributors |
|
|
— |
|
|
|
49 |
|
|
|
— |
|
eCOST |
|
|
333 |
|
|
|
29 |
|
|
|
— |
|
Eliminations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,862 |
|
|
$ |
3,978 |
|
|
$ |
3,918 |
|
|
|
|
|
|
|
|
|
|
|
82
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2007 __ |
|
|
2006 _ _ |
|
Assets (in thousands): |
|
|
|
|
|
|
|
|
PFSweb |
|
$ |
102,950 |
|
|
$ |
100,229 |
|
Supplies Distributors |
|
|
79,446 |
|
|
|
85,249 |
|
eCOST |
|
|
33,615 |
|
|
|
33,616 |
|
Eliminations |
|
|
(57,838 |
) |
|
|
(54,473 |
) |
|
|
|
|
|
|
|
|
|
$ |
158,173 |
|
|
$ |
164,621 |
|
|
|
|
|
|
|
|
Geographic areas in which the Company operates include the United States, Europe (primarily
Belgium), and Canada. The following is geographic information by area. Revenues are attributed
based on the Company’s domicile.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
| |
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
Revenues (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
351,317 |
|
|
$ |
334,118 |
|
|
$ |
249,461 |
|
Europe |
|
|
91,927 |
|
|
|
88,656 |
|
|
|
89,603 |
|
Canada |
|
|
6,054 |
|
|
|
6,937 |
|
|
|
8,090 |
|
Inter-segment eliminations |
|
|
(2,496 |
) |
|
|
(6,458 |
) |
|
|
(15,497 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
446,802 |
|
|
$ |
423,253 |
|
|
$ |
331,657 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2007_ |
|
|
2006 |
|
Long-lived assets (in thousands): |
|
|
|
|
|
|
|
|
United States |
|
$ |
32,800 |
|
|
$ |
34,041 |
|
Europe |
|
|
1,160 |
|
|
|
1,643 |
|
Canada |
|
|
55 |
|
|
|
57 |
|
|
|
|
|
|
|
|
|
|
$ |
34,015 |
|
|
$ |
35,741 |
|
|
|
|
|
|
|
|
11. Employee Savings Plan
The Company has a defined contribution employee savings plan under Section 401(k) of the
Internal Revenue Code. Substantially all full-time and part-time U.S. employees are eligible to
participate in the plan. The Company, at its discretion, may match employee contributions to the
plan and also make an additional matching contribution in the form of profit sharing in recognition
of the Company’s performance. During the years ended December 31, 2007, 2006 and 2005, the Company
contributed approximately $0.1 million during each period to match 20% of employee contributions.
12. Quarterly Results of Operations (Unaudited)
Unaudited quarterly results of operations for years ended December 31, 2007 and 2006 were as
follows (amounts in thousands, except per share data):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, 2007 |
| |
|
1st Qtr. |
|
2nd Qtr. |
|
3rd Qtr. |
|
4th Qtr. |
Total revenues |
|
$ |
104,407 |
|
|
$ |
108,400 |
|
|
$ |
111,995 |
|
|
$ |
122,000 |
|
Total cost of revenues |
|
|
94,423 |
|
|
|
96,509 |
|
|
|
100,120 |
|
|
|
108,980 |
|
Gross profit |
|
|
9,984 |
|
|
|
11,891 |
|
|
|
11,875 |
|
|
|
13,020 |
|
Operating expenses |
|
|
11,555 |
|
|
|
10,819 |
|
|
|
10,882 |
|
|
|
11,757 |
|
Income (loss) from operations |
|
|
(1,571 |
) |
|
|
1,072 |
|
|
|
993 |
|
|
|
1,263 |
|
Net income (loss) |
|
|
(2,361 |
) |
|
|
154 |
|
|
|
162 |
|
|
|
661 |
|
Basic and diluted net income (loss) per share |
|
|
(0.05 |
) |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.01 |
|
83
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, 2006 |
| |
|
1st Qtr. |
|
2nd Qtr. |
|
3rd Qtr. |
|
4th Qtr. |
Total revenues |
|
$ |
110,668 |
|
|
$ |
109,304 |
|
|
$ |
94,284 |
|
|
$ |
108,997 |
|
Total cost of revenues |
|
|
100,247 |
|
|
|
99,297 |
|
|
|
84,871 |
|
|
|
99,162 |
|
Gross profit |
|
|
10,421 |
|
|
|
10,007 |
|
|
|
9,413 |
|
|
|
9,835 |
|
Operating expenses |
|
|
11,361 |
|
|
|
12,531 |
|
|
|
11,944 |
|
|
|
15,104 |
|
Loss from operations |
|
|
(940 |
) |
|
|
(2,524 |
) |
|
|
(2,531 |
) |
|
|
(5,269 |
) |
Net loss |
|
|
(1,587 |
) |
|
|
(3,184 |
) |
|
|
(3,309 |
) |
|
|
(6,450 |
) |
Basic and diluted net loss per share |
|
|
(0.05 |
) |
|
|
(0.07 |
) |
|
|
(0.07 |
) |
|
|
(0.14 |
) |
The seasonality of the Company’s business is dependent upon the seasonality of its clients’
business and their sale of products. Management believes that with the Company’s current client mix
and their clients’ business volumes, the Company’s service fee revenue business activity is
generally expected to be at its lowest in the quarter ended March 31 subject to transactional
volumes of our clients. Supplies Distributors’ product revenue business activity is expected to be
at its highest in the quarter ended December 31. eCOST’s 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 eCOST’s revenues occur during the first and fourth quarters.
13. Subsequent Events
On February 5, 2008, one of the Company’s distribution centers in Memphis, TN was partially
damaged as a result of a tornado. The Company is in the process of assessing the extent of the
damage, but the distribution center was operational within a few days. Based upon the terms of the
Company’s merchandise, property and business interruption insurance and related deductibles,
management does not believe that the ultimate resolution of this event will be material to the
Company’s financial position.
84
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9a. (T) CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and our Chief Financial Officer, after evaluating the
effectiveness of our disclosure controls and procedures (as defined in Securities Exchange Act of
1934 (the “Exchange Act”) Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by
this report (the “Evaluation Date”), have concluded that as of the Evaluation Date, our disclosure
controls and procedures are effective, in all material respects, to ensure that information
required to be disclosed in the reports that we file and submit under the Exchange Act (i) is
recorded, processed, summarized and reported as and when required and (ii) is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There have been no significant changes in our internal control over financial reporting that
occurred during the quarter ended December 31, 2007 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) under the Exchange Act. Our internal control over
financial reporting is designed, under the supervision of our chief executive and chief financial
officers, and effected by our board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting principles generally
accepted in the United States of America (GAAP). Our internal control over financial reporting
includes those policies and procedures that: (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with GAAP, and that our receipts and expenditures are being
made only in accordance with authorizations of our management and
Board of Directors; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on the financial statements.
We conducted an evaluation of the effectiveness of our internal control over financial
reporting as of December 31, 2007. This evaluation was based on the framework in “Internal
Control—Integrated
85
Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). All internal control systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective can provide only reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with GAAP. Also, projections of any
evaluation of the effectiveness of internal control over financial
reporting to future periods are subject to the risk that the controls
may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Based on our evaluation under the framework in Internal Control—Integrated Framework, our
Chief Executive Officer and Chief Financial Officer concluded that internal control over financial
reporting was effective as of December 31, 2007.
This annual report does not include an attestation report of our registered public accounting
firm regarding internal control over financial reporting. Management’s report was not subject to
attestation by our registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only management’s report in this annual report.
Item 9b. Other Information
On March 28, 2008, the Company’s Compensation Committee adopted a 2008 management bonus plan
pursuant to our 2005 Employee Stock and Incentive Plan. Under the terms of the bonus plan, cash
bonuses, if any, will be awarded to the Chief Executive Officer and other executive officers,
officers and senior management based on, and subject to, the achievement of a specified performance
goal. The performance goal shall be for the Company to exceed, on a quarterly basis, the
corresponding projected quarterly earnings before interest, taxes, depreciation and amortization
(EBITDA) contained in the Company’s annual budget (or, in case of a budgeted operating loss, to
reduce the operating loss below the budgeted operating loss).
Subject to an aggregate annual maximum of $1,100,000, the maximum aggregate amount to be
awarded for any quarter shall be equal to the sum of the following: (i) the amount of Excess EBITDA
up to
86
$275,000, plus (ii) if the Excess EBITDA exceeds $275,000, the amount of such excess, up to
the Cumulative Recapture Pool, plus (iii) if the amount of Excess EBITDA exceeds the amounts
determined under the preceding clauses (i) and (ii), an amount equal to ten percent (10%) of such
excess. “Excess EBITDA” means, for any quarter, the amount by which the EBITDA for such quarter
exceeded the budgeted EBITDA for such quarter, and “Cumulative Recapture Pool” means, as of any
date, (i) $275,000 for each completed Eligible Quarter prior to such date, minus (ii)
the aggregate amount of awards issued under the 2008 Bonus Plan as of such date; and “Eligible Quarter” means a quarter in which the Company’s EBITDA was not less than 80% of the budgeted EBITDA.
Following the end of each quarter, the Committee will grant cash bonuses in an aggregate
amount to be determined by it, but not to exceed the above limitations, to the Chief Executive
Officer and other executive officers, officers and senior management based on the Committee’s
determination of the relative contribution of each such person.
The Company recently renewed and amended its primary credit agreements. A description of such
renewed and amended agreements is set forth in Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations.
PART III
Item 10. Directors and Executive Officers of the Registrant
Reference is made to the information to be set forth in the section entitled “Board of
Directors” and “Committees of the Board” in the definitive proxy statement in connection with our
Annual Meeting of Shareholders (the “Proxy Statement”), which section is incorporated herein by
reference. Our Proxy Statement will be filed with the Securities and Exchange Commission not later
than 120 days after the last day of our fiscal year ended December 31, 2007.
Item 11. Executive Compensation
Information required by Part III, Item 11, will be included in the section entitled “Executive
Compensation” of our Proxy Statement relating to our annual meeting of shareholders and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder
Matters
Information required by Part III, Item 12, will be included in the Sections entitled “Election
of Directors” and “Security Ownership of Certain Beneficial Owners and Management” of our Proxy
Statement relating to our annual meeting of shareholders and is incorporated herein by reference.
Item 13. Certain Relationship and Related Transactions
Information regarding certain of our relationships and related transactions will be included
in the section entitled “Certain Relationship and Related Transactions” of our Proxy Statement
relating to our annual meeting of shareholders and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
Information required by Part III, Item 14, will be included in the section entitled
“Ratification of Appointment of Independent Auditors” of our Proxy Statement relating to our annual
meeting of shareholders and is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this report:
87
1. Financial Statements
PFSweb, Inc. and Subsidiaries
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Financial Statement Schedules
Schedule I – Condensed Financial Information of Registrant
Schedule II – Valuation and Qualifying Accounts
All other schedules are omitted because the required information is not present in
amounts sufficient to require submission of the schedule or because the information required
is included in the financial statements or notes thereto.
2. Exhibits
| |
|
|
| Exhibit |
|
|
| Number |
|
Description of Exhibits |
2.1 (19)
|
|
Agreement and Plan of Merger, dated as of November 29, 2005, by and among PFSweb,
Inc., Red Dog Acquisition Corp and eCOST.com, Inc. |
|
|
|
3.1 (1)
|
|
Amended and Restated Certificate of Incorporation of PFSweb, Inc. |
|
|
|
3.1.1 (20)
|
|
Certificate of Amendment to Amended and Restated Certificate of Incorporation of
PFSweb, Inc. |
|
|
|
3.2 (1)
|
|
Amended and Restated Bylaws |
|
|
|
3.2.1 (27)
|
|
Amendment to the Amended and Restated By-Laws of PFSweb, Inc. |
|
|
|
4.1 (22)
|
|
Purchase Agreement dated as of June 1, 2006 between PFSweb, Inc. and the Purchasers
named therein. |
|
|
|
4.2 (22)
|
|
Registration Rights Agreement dated as of June 1, 2006 between PFSweb, Inc. and the
Investors named therein. |
|
|
|
10.1 (17)
|
|
PFSweb, Inc. 2005 Employee Stock and Incentive Plan. |
|
|
|
10.1.1 (25)
|
|
PFSweb, Inc. 2007 Management Bonus Plan. |
|
|
|
10.2 (17)
|
|
PFSweb, Inc. 2005 Employee Stock Purchase Plan. |
|
|
|
10.3 (18)
|
|
Amendment 3 to Loan and Security Agreement. |
|
|
|
10.4 (18)
|
|
Amendment 6 to Agreement for Inventory Financing. |
|
|
|
10.5 (18)
|
|
Amendment 1 to First Amended and Restated Loan and Security Agreement. |
|
|
|
10.6 (16)
|
|
Amendment 5 to Amended and Restated Platinum Plan Agreement. |
|
|
|
10.7 (16)
|
|
Agreement for IBM Global Financing Platinum Plan Invoice Discounting Schedule. |
|
|
|
10.8 (16)
|
|
Amendment No. 5 to Agreement for Inventory Financing. |
|
|
|
10.9 (1)
|
|
Industrial Lease Agreement between Shelby Drive Corporation and Priority Fulfillment
Services, Inc. |
|
|
|
10.10 (1)
|
|
Lease Contract between Transports Weerts and Priority Fulfillment Services Europe B.V. |
|
|
|
10.11 (2)
|
|
Form of Change of Control Agreement between the Company and each of its executive
officers |
|
|
|
10.12 (4)
|
|
Ninth Amendment to Lease Agreement by and between AGBRI ATRIUM. L.P., and Priority
Fulfillment Services, Inc. |
|
|
|
10.13 (5)
|
|
Agreement for Inventory Financing by and among Business Supplies Distributors
Holdings, LLC, Supplies Distributors, Inc., Priority Fulfillment Services, Inc.,
PFSweb, Inc., Inventory Financing Partners, LLC and IBM Credit Corporation |
88
| |
|
|
| Exhibit |
|
|
| Number |
|
Description of Exhibits |
10.14 (5)
|
|
Amended and Restated Collateralized Guaranty by and between Priority Fulfillment
Services, Inc. and IBM Credit Corporation |
|
|
|
10.15 (5)
|
|
Amended and Restated Guaranty to IBM Credit Corporation by PFSweb, Inc. |
|
|
|
10.16 (5)
|
|
Amended and Restated Notes Payable Subordination Agreement by and between Priority
Fulfillment Services, Inc., Supplies Distributors, Inc. and IBM Credit Corporation |
|
|
|
10.17 (5)
|
|
Amended and Restated Platinum Plan Agreement (with Invoice Discounting) by and among
Supplies Distributors, S.A., Business Supplies Distributors Europe B.V., PFSweb B.V.,
and IBM Belgium Financial Services S.A. |
|
|
|
10.18 (5)
|
|
Amended and Restated Collateralized Guaranty between Priority Fulfillment Services,
Inc. and IBM Belgium Financial Services S.A. |
|
|
|
10.19 (5)
|
|
Amended and Restated Guaranty to IBM Belgium Financial Services S.A. by PFSweb, Inc. |
|
|
|
10.20 (5)
|
|
Subordinated Demand Note by and between Supplies Distributors, Inc. and Priority
Fulfillment Services, Inc. |
|
|
|
10.21 (5)
|
|
Notes Payable Subordination Agreement between Congress Financial Corporation
(Southwest) and Priority Fulfillment Services, Inc. |
|
|
|
10.22 (5)
|
|
Guarantee in favor of Congress Financial Corporation (Southwest) by Business Supplies
Distributors Holdings, LLC, Priority Fulfillment Services, Inc. and PFSweb, Inc. |
|
|
|
10.23 (5)
|
|
General Security Agreement by Priority Fulfillment Services, Inc. in favor of
Congress Financial Corporation (Southwest). |
|
|
|
10.24 (5)
|
|
Inducement Letter by Priority Fulfillment Services, Inc. and PFSweb, Inc. in favor of
Congress Financial Corporation (Southwest). |
|
|
|
10.25 (6)
|
|
Form of Executive Severance Agreement between the Company and each of its executive
officers. |
|
|
|
10.26 (7)
|
|
Amendment to Agreement for Inventory Financing by and among Business Supplies
Distributors Holdings, LLC, Supplies Distributors, Inc., Priority Fulfillment
Services, Inc., PFSweb, Inc., Inventory Financing Partners, LLC and IBM Credit
Corporation |
|
|
|
10.27 (7)
|
|
Amendment to Amended and Restated Platinum Plan Agreement (with Invoice Discounting)
by and among Supplies Distributors, S.A., Business Supplies Distributors Europe B.V.,
PFSweb B.V., and IBM Belgium Financial Services S.A. |
|
|
|
10.28 (7)
|
|
Amended and Restated Notes Payable Subordination Agreement by and between Priority
Fulfillment Services, Inc., Supplies Distributors, Inc. and IBM Credit Corporation |
|
|
|
10.29 (7)
|
|
Amendment to Factoring agreement dated March 29, 2002 between Supplies Distributors
S.A. and Fortis Commercial Finance N.V. |
|
|
|
10.30 (8)
|
|
Loan and Security Agreement by and between Comerica Bank — California (“Bank”) and
Priority Fulfillment Services, Inc. (“Priority”) and Priority Fulfillment Services of
Canada, Inc. (“Priority Canada”) |
|
|
|
10.31 (8)
|
|
Unconditional Guaranty of PFSweb, Inc. to Comerica Bank — California |
|
|
|
10.32 (8)
|
|
Security Agreement of PFSweb, Inc. to Comerica Bank — California |
|
|
|
10.33 (8)
|
|
Intellectual Property Security Agreement between Priority Fulfillment Services, Inc.
and Comerica Bank — California |
|
|
|
10.34 (8)
|
|
Amendment 2 to Amended and Restated Platinum Plan Agreement (with Invoice
Discounting) by and among Supplies Distributors, S.A., Business Supplies Distributors
B.V., PFSweb B.V., and IBM Belgium Financial Services S.A. |
|
|
|
10.35 (8)
|
|
Amendment to Agreement for Inventory Financing by and among Business Supplies
Distributors Holdings, LLC, Supplies Distributors, Inc., Priority Fulfillment
Services, Inc., PFSweb, Inc., and IBM Credit LLC |
|
|
|
10.36 (9)
|
|
Amendment to factoring agreement dated April 30, 2003 between Supplies Distributors
S.A. and Fortis Commercial Finance N.V. |
89
| |
|
|
| Exhibit |
|
|
| Number |
|
Description of Exhibits |
10.37 (9)
|
|
Loan and Security Agreement by and between Congress Financial Corporation
(Southwest), as Lender and Supplies Distributors, Inc., as Borrower dated March 29,
2002. |
|
|
|
10.38 (9)
|
|
General Security Agreement — Business Supplies Distributors Holdings, LLC in favor of
Congress Financial Corporation (Southwest) |
|
|
|
10.39 (9)
|
|
Stock Pledge Agreement between Supplies Distributors, Inc. and Congress Financial
Corporation (Southwest) |
|
|
|
10.40 (9)
|
|
First Amendment to General Security Agreement by Priority Fulfillment Services, Inc.
in favor of Congress Financial Corporation (Southwest) |
|
|
|
10.41 (10)
|
|
First Amendment to Loan and Security Agreement made as of September 11, 2003 by and
between Priority Fulfillment Services, Inc., Priority Fulfillment Services of Canada,
Inc. and Comerica Bank. |
|
|
|
10.44 (12)
|
|
Industrial Lease Agreement between New York Life Insurance Company and Daisytek, Inc. |
|
|
|
10.45 (12)
|
|
First Amendment to Industrial Lease Agreement between New York Life Insurance
Company, Daisytek, Inc. and Priority Fulfillment Services, Inc. |
|
|
|
10.46 (12)
|
|
Second Amendment to Industrial Lease Agreement between ProLogis North Carolina
Limited Partnership and Priority Fulfillment Services, Inc. |
|
|
|
10.47 (12)
|
|
Modification, Ratification and Extension of Lease between Shelby Drive Corporation
and Priority Fulfillment Services, Inc. |
|
|
|
10.48 (13)
|
|
Amendment to Agreement for Inventory Financing by and among Business Supplies
Distributors Holdings, LLC, Supplies Distributors, Inc., Priority Fulfillment
Services, Inc., PFSweb, Inc., and IBM Credit LLC |
|
|
|
10.49 (13)
|
|
Amendment 4 to Amended and Restated Platinum Plan Agreement (with Invoice
Discounting) by and among Supplies Distributors, S.A., Business Supplies Distributors
B.V., PFSweb B.V., and IBM Belgium Financial Services S.A. |
|
|
|
10.50 (13)
|
|
Third Amended and Restated Notes Payable Subordination Agreement by and between
Priority Fulfillment Services, Inc., Supplies Distributors, Inc. and IBM Credit
Corporation. |
|
|
|
10.51 (13)
|
|
First Amendment to Loan and Security Agreement by and between Congress Financial
Corporation (Southwest), as Lender and Supplies Distributors, Inc., as Borrower. |
|
|
|
10.52 (13)
|
|
Form of Modification to Executive Severance Agreement. |
|
|
|
10.53 (14)
|
|
Industrial Lease Agreement by and between Industrial Developments International, Inc.
and Priority Fulfillment Services, Inc. |
|
|
|
10.54 (14)
|
|
Guaranty by PFSweb, Inc. in favor of Industrial Developments International, Inc. |
|
|
|
10.55 (14)
|
|
Lease between Fleet National Bank and Priority Fulfillment Services, Inc. |
|
|
|
10.56 (14)
|
|
Guaranty by PFSweb, Inc. in favor of Fleet National Bank |
|
|
|
10.57 (14)
|
|
Amendment No. 3 to Lease dated as of March 3, 1999 between Fleet National Bank and
Priority Fulfillment Services, Inc. |
|
|
|
10.58 (15)
|
|
Loan Agreement between Mississippi Business Finance Corporation and Priority
Fulfillment Services, Inc. dated as of November 1, 2004 |
|
|
|
10.59 (15)
|
|
Placement Agreement between Priority Fulfillment Services, Inc., Comerica Securities
and Mississippi Business Finance Corporation |
|
|
|
10.60 (15)
|
|
Reimbursement Agreement between Priority Fulfillment Services, Inc. and Comerica Bank |
|
|
|
10.61 (15)
|
|
First Amended and Restated Loan and Security Agreement by and between Comerica Bank
and Priority Fulfillment Services, Inc. |
|
|
|
10.62 (15)
|
|
Remarketing Agreement between Priority Fulfillment Services, Inc. and Comerica
Securities |
|
|
|
10.63 (20)
|
|
Amendment to factoring agreement dated December 12, 2005 between Supplies
Distributors S.A. and Fortis Commercial Finance N.V. |
|
|
|
10.64 (21)
|
|
Fourth Amended and Restated Notes Payable Subordination Agreement by and between
Priority Fulfillment Services, Inc., Supplies Distributors, Inc. and IBM Credit
Corporation. |
90
| |
|
|
| Exhibit |
|
|
| Number |
|
Description of Exhibits |
10.65 (21)
|
|
Amendment 7 to Agreement for Inventory Financing. |
|
|
|
10.66 (21)
|
|
Amendment 6 to Amended and Restated Platinum Plan Agreement. |
|
|
|
10.67 (21)
|
|
Agreement for IBM Global Financing Platinum Plan Invoice Discounting Schedule. |
|
|
|
10.68 (21)
|
|
Second Amendment to Loan and Security Agreement by and between eCOST.com, Inc. and
Wachovia Capital Finance Corporation (Western). |
|
|
|
10.69 (21)
|
|
Amendment 4 to Loan and Security Agreement. |
|
|
|
10.70 (21)
|
|
Guaranty by PFSweb, Inc., in favor of Wachovia Capital Finance Corporation (Western). |
|
|
|
10.71 (21)
|
|
Second Amendment to First Amended and Restated Loan and Security Agreement by and
between Comerica Bank and Priority Fulfillment Services, Inc. |
|
|
|
10.72 (23)
|
|
Tenth Amendment to Lease Agreement by and between Plano Atrium, LLC and Priority
Fulfillment Services, Inc. |
|
|
|
10.73 (24)
|
|
Third Amendment to the Loan and Security Agreement by and between eCOST.com, Inc. and
Wachovia Capital Finance Corporation (Western). |
|
|
|
10.74 (25)
|
|
Fifth Amended and Restated Notes Payable Subordination Agreement by and between
Priority Fulfillment Services, Inc., Supplies Distributors, Inc. and IBM Credit
Corporation. |
|
|
|
10.75 (25)
|
|
Amendment 8 to Agreement for Inventory Financing. |
|
|
|
10.76 (25)
|
|
Fourth Amendment to the Loan and Security Agreement by and between eCOST.com, Inc.
and Wachovia Capital Finance Corporation (Western). |
|
|
|
10.77 (25)
|
|
Amendment 5 to Loan and Security Agreement. |
|
|
|
10.78 (25)
|
|
Amendment 7 to Amended and Restated Platinum Plan Agreement. |
|
|
|
10.79 (25)
|
|
Agreement for IBM Global Financing Platinum Plan Invoice Discounting Schedule. |
|
|
|
10.80 (26)
|
|
Fifth Amendment to First Amended and Restated Loan and Security Agreement by and
between Comerica Bank and Priority Fulfillment Services, Inc. |
|
|
|
10.81 (28)
|
|
Second Amendment to Industrial Lease Agreement by and between Industrial Property
Fund VI, LLC and Priority Fulfillment Services, Inc. |
|
|
|
21 (28)
|
|
Subsidiary Listing |
|
|
|
23.1 (28)
|
|
Consent of KPMG LLP, Independent Registered Public Accounting Firm |
|
|
|
31.1 (28)
|
|
Certifications of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 |
|
|
|
31.2 (28)
|
|
Certifications of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 |
|
|
|
32.1 (28)
|
|
Certifications Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| (1) |
|
Incorporated by reference from PFSweb, Inc. Registration Statement on Form S-1 (Commission
File No. 333-87657). |
| |
| (2) |
|
Incorporated by reference from PFSweb, Inc. Form 10-K for the fiscal year ended March 31,
2001 |
| |
| (3) |
|
Incorporated by reference from PFSweb, Inc. Form 10-Q/A for the quarterly period ended
September 30, 2001 |
| |
| (4) |
|
Incorporated by reference from PFSweb, Inc. Form 10-K for the transition period ended
December 31, 2001 |
| |
| (5) |
|
Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended March
31, 2002 |
| |
| (6) |
|
Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended June 30,
2002 |
| |
| (7) |
|
Incorporated by reference from PFSweb, Inc. Form 10-K for the year ended December 31, 2002 |
| |
| (8) |
|
Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended March
31, 2003 |
| |
| (9) |
|
Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended June 30,
2003 |
| |
| (10) |
|
Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended
September 30, 2003 |
91
| (11) |
|
Incorporated by reference from PFSweb, Inc. Report on Form 8-K filed on November 10, 2003 |
| |
| (12) |
|
Incorporated by reference from PFSweb, Inc. Form 10-K for the year ended December 31, 2003 |
| |
| (13) |
|
Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended March
31, 2004 |
| |
| (14) |
|
Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended
September 30, 2004 |
| |
| (15) |
|
Incorporated by reference from PFSweb, Inc. Form 10-K for the year ended December 31, 2004. |
| |
| (16) |
|
Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended March
31, 2005. |
| |
| (17) |
|
Incorporated by reference from PFSweb, Inc. Report on Form 8-K filed on June 14, 2005. |
| |
| (18) |
|
Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended June 30,
2005. |
| |
| (19) |
|
Incorporated by reference from PFSweb, Inc. Current Report on Form 8-K filed on November 30,
2005. |
| |
| (20) |
|
Incorporated by reference from PFSweb, Inc. Form 10-K for the year ended December 31, 2005. |
| |
| (21) |
|
Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended March
31, 2006. |
| |
| (22) |
|
Incorporated by reference from PFSweb, Inc. Current Report on Form 8-K filed on June 2, 2006. |
| |
| (23) |
|
Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended
September 30, 2006. |
| |
| (24) |
|
Incorporated by reference from PFSweb, Inc. Current Report on Form 8-K filed on November 20,
2006. |
| |
| (25) |
|
Incorporated by reference from PFSweb, Inc. Form 10-K for the year ended December 31, 2006. |
| |
| (26) |
|
Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended March
31, 2007. |
| |
| (27) |
|
Incorporated by reference from PFSweb, Inc. Report on Form 8-K filed on November 13, 2007. |
| |
| (28) |
|
Filed herewith |
92
SCHEDULE I
PFSWEB, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS – PARENT COMPANY ONLY
(In thousands)
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
ASSETS: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
175 |
|
|
$ |
281 |
|
Receivable from Priority Fulfillment Services, Inc. |
|
|
5,602 |
|
|
|
5,478 |
|
Receivable from eCOST.com, Inc. |
|
|
4,700 |
|
|
|
4,700 |
|
Investment in subsidiaries |
|
|
38,365 |
|
|
|
38,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
48,842 |
|
|
$ |
48,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES: |
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY: |
|
|
|
|
|
|
|
|
Preferred stock |
|
|
— |
|
|
|
— |
|
Common stock |
|
|
47 |
|
|
|
47 |
|
Additional paid-in capital |
|
|
92,084 |
|
|
|
91,302 |
|
Accumulated deficit |
|
|
(45,738 |
) |
|
|
(44,354 |
) |
Accumulated other comprehensive income |
|
|
2,534 |
|
|
|
1,930 |
|
Treasury stock |
|
|
(85 |
) |
|
|
(85 |
) |
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
48,842 |
|
|
|
48,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
48,842 |
|
|
$ |
48,840 |
|
|
|
|
|
|
|
|
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes.
93
SCHEDULE I
PFSWEB, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS – PARENT COMPANY ONLY
FOR THE YEARS ENDED DECEMBER 31
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
EQUITY IN NET LOSS OF CONSOLIDATED SUBSIDIARIES |
|
$ |
(1,384 |
) |
|
$ |
(14,530 |
) |
|
$ |
(747 |
) |
|
|
|
|
|
|
|
|
|
|
NET LOSS |
|
$ |
(1,384 |
) |
|
$ |
(14,530 |
) |
|
$ |
(747 |
) |
|
|
|
|
|
|
|
|
|
|
The condensed financial statements should be read in conjunction with the consolidated financial
statements and notes.
94
SCHEDULE I
PFSWEB, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS – PARENT COMPANY ONLY
FOR THE YEARS ENDED DECEMBER 31
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,384 |
) |
|
$ |
(14,530 |
) |
|
$ |
(747 |
) |
Adjustments to reconcile net loss to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net loss of consolidated subsidiaries |
|
|
1,384 |
|
|
|
14,530 |
|
|
|
747 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Payment for purchase of eCOST.com, Inc., net of cash
acquired |
|
|
— |
|
|
|
(1,299 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
— |
|
|
|
(1,299 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock |
|
|
18 |
|
|
|
4,912 |
|
|
|
2,075 |
|
Increase in receivable from eCOST.com, Inc. |
|
|
— |
|
|
|
(4,700 |
) |
|
|
— |
|
Decrease (increase) in receivable from Priority
Fulfillment Services, Inc., net |
|
|
(124 |
) |
|
|
1,368 |
|
|
|
(2,075 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(106 |
) |
|
|
1,580 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH |
|
|
(106 |
) |
|
|
281 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, beginning of period |
|
|
281 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period |
|
$ |
175 |
|
|
$ |
281 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
The condensed financial statements should be read in conjunction with the consolidated financial
statements and notes.
95
SCHEDULE II
PFSWEB, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31
(Amounts in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Additions |
|
|
|
|
|
|
| |
|
|
|
|
|
Charges |
|
|
|
|
|
Balance |
|
|
|
|
|
Balance |
| |
|
Balance at |
|
to Cost |
|
Charges |
|
Acquired |
|
|
|
|
|
at End |
| |
|
Beginning |
|
and |
|
to Other |
|
via |
|
|
|
|
|
of |
| |
|
of Period |
|
Expenses |
|
Accounts |
|
Acquisition |
|
Deductions |
|
Period |
Year Ended December 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
504 |
|
|
|
40 |
|
|
|
— |
|
|
|
— |
|
|
|
(60 |
) |
|
$ |
484 |
|
Allowance for slow moving inventory |
|
$ |
2,473 |
|
|
|
(230 |
) |
|
|
— |
|
|
|
— |
|
|
|
(704 |
) |
|
$ |
1,539 |
|
Income tax valuation allowance |
|
$ |
12,225 |
|
|
|
107 |
|
|
|
90 |
|
|
|
— |
|
|
|
— |
|
|
$ |
12,422 |
|
Year Ended December 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
484 |
|
|
|
960 |
|
|
|
— |
|
|
|
1,072 |
|
|
|
(164 |
) |
|
$ |
2,352 |
|
Allowance for slow moving inventory |
|
$ |
1,539 |
|
|
|
1,495 |
|
|
|
— |
|
|
|
— |
|
|
|
(47 |
) |
|
$ |
2,987 |
|
Income tax valuation allowance |
|
$ |
12,422 |
|
|
|
3,285 |
|
|
|
— |
|
|
|
6,243 |
|
|
|
— |
|
|
$ |
21,950 |
|
Year Ended December 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
2,352 |
|
|
|
254 |
|
|
|
— |
|
|
|
— |
|
|
|
(1,123 |
) |
|
$ |
1,483 |
|
Allowance for slow moving inventory |
|
$ |
2,987 |
|
|
|
(440 |
) |
|
|
— |
|
|
|
— |
|
|
|
(467 |
) |
|
$ |
2,080 |
|
Income tax valuation allowance |
|
$ |
21,950 |
|
|
|
898 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
22,848 |
|
96
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
| |
|
|
|
|
|
|
|
|
By:
|
|
/s/ THOMAS J. MADDEN
|
|
|
| |
|
Thomas J. Madden, |
|
|
| |
|
Executive Vice President and |
|
|
| |
|
Chief Financial and Accounting Officer |
|
|
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated.
| |
|
|
|
|
| Signature |
|
Title |
|
Date |
/s/ MARK C. LAYTON
Mark C. Layton
|
|
Chairman of the Board, President and Chief
Executive Officer (Principal
Executive Officer)
|
|
March 31, 2008 |
|
|
|
|
|
/s/ THOMAS J. MADDEN
Thomas J. Madden
|
|
Executive Vice President and Chief Financial
and Accounting Officer
(Principal Financial and Accounting
Officer)
|
|
March 31, 2008 |
|
|
|
|
|
/s/ DR. NEIL JACOBS
Dr. Neil Jacobs
|
|
Director
|
|
March 31, 2008 |
|
|
|
|
|
/s/ TIMOTHY M. MURRAY
Timothy M. Murray
|
|
Director
|
|
March 31, 2008 |
|
|
|
|
|
/s/ JAMES F. REILLY
James F. Reilly
|
|
Director
|
|
March 31, 2008 |
|
|
|
|
|
/s/ DAVID I. BEATSON
David I. Beatson
|
|
Director
|
|
March 31, 2008 |
97