e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2011
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission File Number 000-28275
PFSweb, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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75-2837058 |
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(State of Incorporation)
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(I.R.S. Employer I.D. No.) |
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500 North Central Expressway, Plano, Texas
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75074 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (972) 881-2900
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by checkmark whether the registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and
post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ |
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(Do not check if a smaller reporting company |
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Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
At November 10, 2011 there were 12,764,351 shares of registrants common stock outstanding.
PFSWEB, INC. AND SUBSIDIARIES
Form 10-Q
September 30, 2011
INDEX
2
PART I. FINANCIAL INFORMATION
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ITEM 1. Financial Statements |
PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
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September 30, |
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December 31, |
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2011 |
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2010 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
19,538 |
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$ |
18,430 |
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Restricted cash |
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468 |
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1,853 |
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Accounts receivable, net of allowance for doubtful accounts of $670
and $754 at September 30, 2011 and December 31, 2010, respectively |
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38,906 |
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41,438 |
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Inventories, net of reserves of $1,453 and $1,561 at September 30,
2011 and December 31, 2010, respectively |
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41,292 |
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35,161 |
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Assets of discontinued operations |
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2,776 |
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Other receivables |
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11,034 |
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14,539 |
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Prepaid expenses and other current assets |
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4,710 |
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3,580 |
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Total current assets |
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115,948 |
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117,777 |
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PROPERTY AND EQUIPMENT, net |
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13,059 |
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9,124 |
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ASSETS OF DISCONTINUED OPERATIONS |
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1,126 |
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OTHER ASSETS |
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2,200 |
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2,203 |
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Total assets |
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$ |
131,207 |
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$ |
130,230 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Current portion of long-term debt and capital lease obligations |
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$ |
18,259 |
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$ |
18,320 |
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Trade accounts payable |
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55,007 |
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55,692 |
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Deferred revenue |
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6,481 |
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5,254 |
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Accrued expenses |
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17,987 |
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15,870 |
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Total current liabilities |
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97,734 |
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95,136 |
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LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current
portion |
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1,806 |
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2,136 |
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OTHER LIABILITIES |
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4,410 |
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3,608 |
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Total liabilities |
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103,950 |
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100,880 |
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COMMITMENTS AND CONTINGENCIES |
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SHAREHOLDERS EQUITY: |
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Preferred stock, $1.00 par value; 1,000,000 shares authorized;
none issued and outstanding |
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Common stock, $0.001 par value; 35,000,000 shares authorized;
12,782,712 and 12,255,064 shares issued at September 30,
2011 and December 31, 2010, respectively; and 12,764,351 and
12,236,703 outstanding at September 30, 2011 and December
31, 2010, respectively |
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13 |
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12 |
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Additional paid-in capital |
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104,298 |
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101,229 |
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Accumulated deficit |
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(78,658 |
) |
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(73,332 |
) |
Accumulated other comprehensive income |
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1,689 |
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1,526 |
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Treasury stock at cost, 18,361 shares |
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(85 |
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(85 |
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Total shareholders equity |
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27,257 |
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29,350 |
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Total liabilities and shareholders equity |
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$ |
131,207 |
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$ |
130,230 |
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The accompanying notes are an integral part of these consolidated financial statements.
3
PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED INTERIM
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2011 |
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2010 |
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2011 |
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2010 |
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REVENUES: |
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Product revenue, net |
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$ |
37,923 |
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$ |
39,316 |
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$ |
122,005 |
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$ |
128,592 |
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Service fee revenue |
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22,949 |
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16,402 |
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62,819 |
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48,948 |
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Pass-through revenue |
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9,999 |
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7,842 |
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26,444 |
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20,662 |
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Total revenues |
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70,871 |
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63,560 |
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211,268 |
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198,202 |
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COSTS OF REVENUES: |
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Cost of product revenue |
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35,304 |
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36,392 |
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113,181 |
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119,377 |
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Cost of service fee revenue |
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17,663 |
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11,981 |
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47,241 |
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35,422 |
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Cost of pass-through revenue |
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9,999 |
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7,842 |
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26,444 |
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20,662 |
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Total costs of revenues |
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62,966 |
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56,215 |
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186,866 |
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175,461 |
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Gross profit |
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7,905 |
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7,345 |
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24,402 |
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22,741 |
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SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES,
including stock based
compensation expense of $346
and $225 in the three months
ended September 30, 2011 and
2010, respectively and $1,055
and $583 in the nine months
ended September 30, 2011 and
2010, respectively |
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9,385 |
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8,605 |
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28,103 |
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25,591 |
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Loss from operations |
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(1,480 |
) |
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(1,260 |
) |
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(3,701 |
) |
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(2,850 |
) |
INTEREST EXPENSE, net |
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308 |
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250 |
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769 |
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738 |
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Loss from continuing
operations
before income taxes |
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(1,788 |
) |
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(1,510 |
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(4,470 |
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(3,588 |
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INCOME TAX EXPENSE |
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57 |
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73 |
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287 |
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253 |
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LOSS FROM CONTINUING OPERATIONS |
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(1,845 |
) |
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(1,583 |
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(4,757 |
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(3,841 |
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INCOME (LOSS) FROM DISCONTINUED
OPERATIONS, NET OF TAX |
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20 |
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(337 |
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(569 |
) |
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(783 |
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NET LOSS |
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$ |
(1,825 |
) |
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$ |
(1,920 |
) |
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$ |
(5,326 |
) |
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$ |
(4,624 |
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LOSS PER SHARE FROM CONTINUING
OPERATIONS: |
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Basic |
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$ |
(0.15 |
) |
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$ |
(0.13 |
) |
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$ |
(0.38 |
) |
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$ |
(0.35 |
) |
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Diluted |
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$ |
(0.15 |
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$ |
(0.13 |
) |
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$ |
(0.38 |
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$ |
(0.35 |
) |
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LOSS PER SHARE INCLUDING
DISCONTINUED OPERATIONS: |
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Basic |
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$ |
(0.14 |
) |
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$ |
(0.16 |
) |
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$ |
(0.43 |
) |
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$ |
(0.42 |
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Diluted |
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$ |
(0.14 |
) |
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$ |
(0.16 |
) |
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$ |
(0.43 |
) |
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$ |
(0.42 |
) |
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WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING: |
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Basic |
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12,688 |
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12,237 |
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12,509 |
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10,998 |
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Diluted |
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12,688 |
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12,237 |
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12,509 |
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10,998 |
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The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
4
PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
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Nine Months Ended |
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September 30, |
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2011 |
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2010 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net loss |
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$ |
(5,326 |
) |
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$ |
(4,624 |
) |
Loss from discontinued operations |
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(569 |
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(783 |
) |
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Loss from continuing operations |
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(4,757 |
) |
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(3,841 |
) |
Adjustments to reconcile net loss to net cash provided by
operating activities: |
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Depreciation and amortization |
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4,575 |
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4,593 |
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Provision for doubtful accounts |
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(8 |
) |
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110 |
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Provision for excess and obsolete inventory |
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61 |
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185 |
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Deferred income taxes |
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92 |
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(16 |
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Stock-based compensation expense |
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1,055 |
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583 |
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Changes in operating assets and liabilities: |
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Restricted cash |
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87 |
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14 |
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Accounts receivable |
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2,628 |
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|
4,690 |
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Inventories, net |
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(7,054 |
) |
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(641 |
) |
Prepaid expenses, other receivables and other assets |
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2,396 |
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(311 |
) |
Accounts payable, deferred revenue, accrued expenses
and other liabilities |
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3,103 |
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(1,909 |
) |
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Net cash provided by continuing operating activities |
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2,178 |
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|
3,457 |
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Net cash provided by (used in) discontinued operating activities |
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2,152 |
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(408 |
) |
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Net cash provided by operating activities |
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4,330 |
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3,049 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchases of property and equipment |
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(7,014 |
) |
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(3,081 |
) |
Proceeds from sale of eCOST subsidiary |
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2,327 |
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Net cash used in investing activities |
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(4,687 |
) |
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(3,081 |
) |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Net proceeds from issuance of common stock |
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|
2,015 |
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|
7,271 |
|
Decrease in restricted cash |
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|
1,298 |
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|
426 |
|
Payments on capital lease obligations |
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|
(793 |
) |
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|
(968 |
) |
Payments on debt, net |
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(1,202 |
) |
|
|
(2,449 |
) |
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|
Net cash provided by financing activities |
|
|
1,318 |
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|
|
4,280 |
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|
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS |
|
|
147 |
|
|
|
(276 |
) |
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NET INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
1,108 |
|
|
|
3,972 |
|
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|
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|
CASH AND CASH EQUIVALENTS, beginning of period |
|
|
18,430 |
|
|
|
14,812 |
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CASH AND CASH EQUIVALENTS, end of period |
|
$ |
19,538 |
|
|
$ |
18,784 |
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SUPPLEMENTAL CASH FLOW INFORMATION |
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Non-cash investing and financing activities: |
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|
Property and equipment acquired under debt and capital leases |
|
$ |
1,609 |
|
|
$ |
635 |
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|
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
5
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Consolidated Financial Statements
1. OVERVIEW AND BASIS OF PRESENTATION
PFSweb, Inc. and its subsidiaries are collectively referred to as the Company; Supplies
Distributors refers to Supplies Distributors, Inc. and its subsidiaries; Retail Connect refers
to PFSweb Retail Connect, Inc.; and PFS refers to Priority Fulfillment Services, Inc. and its
subsidiaries and affiliates, excluding Supplies Distributors and Retail Connect. In connection with
the sale of certain of the assets of eCOST.com, Inc. (eCOST) described below, the name of eCOST
was changed to PFSweb Retail Connect, Inc. in March 2011.
PFS Overview
PFS is an international business process outsourcing provider of end-to-end eCommerce
solutions to major brand name companies seeking to optimize their supply chain and to enhance their
traditional and online business channels and initiatives in the United States, Canada, and Europe.
PFS offers a broad range of service offerings that include digital marketing, eCommerce
technologies, order management, customer care, logistics and fulfillment, financial management and
professional consulting.
Supplies Distributors Overview
Supplies Distributors, PFS and InfoPrint Solutions Company (IPS), a wholly-owned subsidiary
of RICOH Company Limited (RICOH), have entered into master distributor agreements under which
Supplies Distributors acts as a master distributor of various products, primarily IPS product.
Supplies Distributors has obtained certain financing that allows it to fund the working
capital requirements for the sale of primarily IPS products. Pursuant to the transaction management
services agreements between PFS and Supplies Distributors, PFS provides to Supplies Distributors
transaction management and fulfillment services such as managed web hosting and maintenance,
procurement support, web-enabled customer contact center services, customer relationship
management, financial services including billing and collection services, information management,
and international distribution services. Supplies Distributors does not have its own sales force
and relies upon IPS sales force and product demand generation activities for its sale of IPS
products. Supplies Distributors sells its products in the United States, Canada and Europe.
All of the agreements between PFS and Supplies Distributors were made in the context of a
related party relationship and were negotiated in the overall context of PFS and Supplies
Distributors arrangement with IPS. Although management believes that the terms of these agreements
are generally consistent with fair market values, there can be no assurance that the prices charged
to or by each company under these arrangements are not higher or lower than the prices that may be
charged by, or to, unaffiliated third parties for similar services.
eCOST Overview
Until February 2011 the Company operated eCOST primarily as a multi-category online discount
retailer of new, close-out and recertified brand-name merchandise, which sold products primarily
to customers in the United States. In February 2011 the Company sold substantially all of the
inventory and certain intangible assets of the eCOST discount retailer business unit for a cash
purchase price of $2.3 million (before expenses of approximately $0.2 million) and the assumption by the purchaser of
certain limited liabilities of eCOST. The purchase price represented approximately $1 million for
inventory and the balance for the intangible assets. In connection with the closing of this
business unit, the Company incurred exit costs of approximately $0.3 million related to employee
termination costs, excess property
6
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Consolidated Financial Statements
and equipment and certain contract termination costs and may incur additional costs, including
excess facility costs. In December 2010, the Company recorded a non-cash goodwill impairment charge
of approximately $2.8 million as a result of this sale. For all periods presented, the Company has
reported the operating results of the eCOST discount retailer business unit, excluding costs
expected to continue to occur in the future, as discontinued operations. The remaining assets and
business operations of eCOST will be conducted under the name PFSweb Retail Connect and will
continue to provide certain services, primarily under a product ownership based model, to certain
of the Companys client relationships on an ongoing basis.
Basis of Presentation
The unaudited interim condensed consolidated financial statements as of September 30, 2011,
and for the three and nine months ended September 30, 2011 and 2010, have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission (SEC) and are unaudited.
Certain information and note disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of America have been
condensed or omitted pursuant to the rules and regulations promulgated by the SEC. In the opinion
of management and subject to the foregoing, the unaudited interim consolidated financial statements
of the Company include all adjustments necessary for a fair presentation of the Companys financial
position as of September 30, 2011, its results of operations for the three and nine months ended
September 30, 2011 and 2010 and its cash flows for the nine months ended September 30, 2011 and
2010. Results of the Companys operations for interim periods may not be indicative of results for
the full fiscal year.
Certain prior period data has been reclassified to conform to the current period presentation.
These reclassifications had no effect on previously reported net income (loss) or total
shareholders equity.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements and related disclosures in conformity
with generally accepted accounting principles requires management to make judgments, estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and
disclosure of contingent assets and liabilities. The recognition and allocation of certain revenues
and selling, general and administrative expenses in these consolidated financial statements also
require management estimates and assumptions.
Estimates and assumptions about future events and their effects cannot be determined with
certainty. The Company bases its estimates on historical experience and on various other
assumptions believed to be applicable and reasonable under the circumstances. These estimates may
change as new events occur, as additional information is obtained and as the operating environment
changes. These changes have been included in the consolidated financial statements as soon as they became known. In addition,
management is periodically faced with uncertainties, the outcomes of which are not within its
control and will not be known for prolonged periods of time. These uncertainties are discussed in
this report and in the Companys Annual Report on Form 10-K for the year ended December 31, 2010 in
the section entitled Risk Factors. Based on a critical assessment of accounting policies and the
underlying judgments and uncertainties affecting the application of those policies, management
believes the Companys consolidated financial statements are fairly stated in accordance with
generally accepted accounting principles in the United States of America, and provide a fair
presentation of the Companys financial position and results of operations.
7
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Consolidated Financial Statements
Investment in Affiliates
PFS has made advances to Supplies Distributors that are evidenced by a Subordinated Demand
Note (the Subordinated Note). Under the terms of certain of the Companys debt facilities, the
outstanding balance of the Subordinated Note cannot be increased to more than $5.0 million or
decreased to less than $3.5 million without prior approval of the Companys lenders. At September
30, 2011 and December 31, 2010, the outstanding balance of the Subordinated Note was $3.5 million
in both periods. The Subordinated Note is eliminated in the Companys consolidated financial
statements.
PFS has also made advances to Retail Connect, which aggregated $11.1 million as of both
September 30, 2011 and December 31, 2010. Certain terms of the Companys debt facilities provide
that the total advances to Retail Connect may not be less than $2.0 million without prior approval
of Retail Connects lender, if needed. PFSweb, Inc. has also advanced to Retail Connect an
additional $7.7 million and $7.4 million as of September 30, 2011 and December 31, 2010,
respectively. The PFS and PFSweb advances are eliminated in the Companys consolidated financial
statements.
Concentration of Business and Credit Risk
The Companys service fee revenue is generated under contractual service fee relationships
with multiple client relationships. No service fee client or product revenue customer exceeded 10%
of the Companys consolidated total net revenue or accounts receivable during the nine months ended
September 30, 2011. A summary of the nonaffiliated customer and client concentrations is as
follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
September 30, |
|
|
2011 |
|
2010 |
Product Revenue (as a percentage of
Product Revenue): |
|
|
|
|
|
|
|
|
Customer 1 |
|
|
16 |
% |
|
|
17 |
% |
Customer 2 |
|
|
9 |
% |
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
Service Fee Revenue (as a percentage of
Service Fee Revenue): |
|
|
|
|
|
|
|
|
Client 1 |
|
|
15 |
% |
|
|
6 |
% |
Client 2 |
|
|
15 |
% |
|
|
7 |
% |
Client 3 |
|
|
1 |
% |
|
|
10 |
% |
PFS previously operated three distinct geographical contract arrangements with Client 3, which
are aggregated in the service fee revenue percentages reflected above. As of September 30, 2010,
substantially all of Client 3s contracts with PFS had expired in accordance with their terms and
were not renewed.
The Company 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.
Supplies Distributors has multiple arrangements with International Business Machines Corporation (IBM)
and IPS and is dependent upon the continuation of such arrangements. These arrangements, which are
critical to Supplies Distributors ongoing operations, include master distributor
agreements and certain working capital financing agreements.
Substantially all of Supplies Distributors revenue is generated by its sale of product
purchased from IPS. Supplies Distributors also relies upon IPS sales force and product demand
generation activities and the discontinuance of such services would have a material impact upon
Supplies Distributors business. In addition, Supplies Distributors has product sales to IBM and
IPS business affiliates.
8
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Consolidated Financial Statements
RICOH
has advised Supplies Distributors that it is restructuring its IPS business which will include certain
realignment and operational changes in the sale and distribution of
IPS products. The Company is currently evaluating the impact of these changes to its business, though it believes the changes will result in reduced
revenues and profitability for
Supplies Distributors beginning in 2012.
Inventories
Inventories (all of which are finished goods) are stated at the lower of weighted average cost
or market. The Company establishes inventory reserves based upon estimates of declines in values
due to inventories that are slow moving or obsolete, excess levels of inventory or values assessed
at lower than cost.
Supplies Distributors assumes responsibility for slow-moving inventory under its IPS master
distributor agreements, subject to certain termination rights, but has the right to return product
rendered obsolete by engineering changes, as defined. In the event PFS, Supplies Distributors and
IPS terminate the master distributor agreements, the agreements provide for the parties to mutually
agree on a plan of disposition of Supplies Distributors then existing inventory.
Property and Equipment
The Companys property held under capital leases amounted to approximately $2.4 million and
$1.5 million, net of accumulated amortization of approximately $2.1 million and $2.8 million, at
September 30, 2011 and December 31, 2010, respectively.
Income Taxes
The Company records a tax provision primarily associated with state income taxes and its Supplies Distributors subsidiarys international operations. The Company has recorded a valuation allowance for the majority of its net deferred tax assets.
Cash Paid for Interest and Taxes
The Company made payments for interest of approximately $0.8 million and $0.7 million in the
nine months ended September 30, 2011 and 2010, respectively.
Income taxes of approximately $0.4 million were paid by the
Company during each of the nine month periods ended September 30,
2011 and 2010.
Impact of Recently Issued Accounting Standards
In June 2011, the Financial Accounting Standards Board issued new accounting guidance
regarding the presentation of comprehensive income. The new guidance requires the presentation of
items of net income and comprehensive income in either a single continuous financial statement or
in two separate but consecutive financial statements. This account guidance is effective for
fiscal years, and interim periods within those years, beginning after December 15, 2011. The impact of adoption will not have a
material effect on the Companys consolidated financial statements as it only requires a change in
the format of the Companys current presentation.
3. COMPREHENSIVE LOSS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net loss |
|
$ |
(1,825 |
) |
|
$ |
(1,920 |
) |
|
$ |
(5,326 |
) |
|
$ |
(4,624 |
) |
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment |
|
|
(622 |
) |
|
|
871 |
|
|
|
163 |
|
|
|
(569 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(2,447 |
) |
|
$ |
(1,049 |
) |
|
$ |
(5,163 |
) |
|
$ |
(5,193 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
4. 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. For the three and nine months ended
September
9
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Consolidated Financial Statements
30, 2011 and 2010, outstanding options to purchase common shares of 2.3 million in each period
were anti-dilutive and have been excluded from the diluted weighted average share computation.
5. STOCK AND STOCK OPTIONS
In May 2010, the Company completed a public offering pursuant to which the Company issued and
sold an aggregate of 2.3 million shares of common stock, par value $.001 per share, at $3.50 per
share, resulting in net proceeds after deducting offering expenses of $7.3 million.
During the nine months ended September 30, 2011 and 2010, the Company issued an aggregate of
660,000 and 654,000 options, respectively, to purchase shares of common stock to officers,
directors, employees and consultants of the Company.
6. VENDOR FINANCING:
Outstanding obligations under vendor financing arrangements consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Inventory and working capital financing agreements: |
|
|
|
|
|
|
|
|
United States |
|
$ |
17,847 |
|
|
$ |
16,472 |
|
Europe |
|
|
16,052 |
|
|
|
11,318 |
|
|
|
|
|
|
|
|
Total |
|
$ |
33,899 |
|
|
$ |
27,790 |
|
|
|
|
|
|
|
|
Inventory and Working Capital Financing Agreement, United States
Supplies Distributors has a short-term credit facility with IBM Credit LLC to finance its
distribution of IPS products in the United States, providing financing for eligible IPS inventory
and certain receivables up to $25.0 million through its expiration in March 2012. As of September
30, 2011, Supplies Distributors had $4.1 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 other direct
or indirect Company subsidiaries), 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 guarantee of PFS and a Company parent guarantee.
Additionally, PFS is required to maintain a minimum Subordinated Note receivable balance from
Supplies Distributors of $3.5 million and the Company is required to maintain a minimum
shareholders equity of $18.0 million. Borrowings under the credit facility accrue interest, after
a defined free financing period, at prime rate plus 0.5% (3.75% as of September 30, 2011). The
facility also includes a monthly service fee. Given the structure of this facility and as
outstanding balances, which represent inventory purchases, are repaid within twelve months, the
Company has classified the outstanding amounts under this facility as accounts payable in the
consolidated balance sheets.
Inventory and Working Capital Financing Agreement, Europe
Supplies Distributors European subsidiary has a short-term credit facility with IBM Belgium
Financial Services S.A. (IBM Belgium) to finance its distribution of IPS products in Europe. The
asset based credit facility with IBM Belgium provides up to 16.0 million euros (approximately $21.6
million as of September 30, 2011) in inventory financing and cash advances based on eligible
inventory and accounts receivable through its expiration in March 2012. As of September 30, 2011,
Supplies Distributors European subsidiaries had 1.6 million euros (approximately $2.2 million) of
available credit under this facility. The credit facility contains cross default provisions,
various restrictions upon the ability of Supplies Distributors and its European subsidiary to,
among others, merge, consolidate, sell assets, incur
10
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Consolidated Financial Statements
indebtedness, make loans and payments to related parties (including other direct or indirect
Company subsidiaries), provide guarantees, make investments and loans, pledge assets, make changes
to capital stock ownership structure and pay dividends, as well as financial covenants, such as
annualized revenue to working capital, net profit after tax to revenue, and total liabilities to
tangible net worth, as defined, and are secured by certain of the assets of Supplies Distributors
European subsidiary, as well as collateralized guaranties of Supplies Distributors and PFS and a
Company parent guarantee. Additionally, PFS is required to maintain a minimum Subordinated Note
receivable balance from Supplies Distributors of $3.5 million and the Company is required to
maintain a minimum shareholders equity of $18.0 million. Borrowings under the credit facility
accrue interest at Euribor plus 1.82% for cash advances, and, after a defined free financing
period, at Euribor plus 4.1% for inventory financings. As of September 30, 2011, the interest rate
was 5.5% on $7.5 million of outstanding inventory financings. Supplies Distributors European
subsidiary pays a monthly service fee on the commitment. Given the structure of this facility and
as outstanding inventory financing balances are repaid within twelve months, the Company has
classified the outstanding inventory financing amounts under this facility as accounts payable in
the consolidated balance sheets.
7. DEBT AND CAPITAL LEASE OBLIGATIONS;
Outstanding obligations under debt and capital lease obligations consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Loan and security agreements, United States |
|
|
|
|
|
|
|
|
Supplies Distributors |
|
$ |
7,032 |
|
|
$ |
7,220 |
|
PFS |
|
|
6,350 |
|
|
|
6,000 |
|
Credit facility Retail Connect |
|
|
|
|
|
|
|
|
Factoring agreement, Europe |
|
|
1,702 |
|
|
|
2,302 |
|
Taxable revenue bonds |
|
|
800 |
|
|
|
1,600 |
|
Master lease agreements |
|
|
2,946 |
|
|
|
2,660 |
|
Other |
|
|
1,235 |
|
|
|
674 |
|
|
|
|
|
|
|
|
Total |
|
|
20,065 |
|
|
|
20,456 |
|
Less current portion of long-term debt |
|
|
18,259 |
|
|
|
18,320 |
|
|
|
|
|
|
|
|
Long-term debt, less current portion |
|
$ |
1,806 |
|
|
$ |
2,136 |
|
|
|
|
|
|
|
|
Loan and Security Agreement Supplies Distributors
Supplies Distributors has a loan and security agreement with Wells Fargo Bank, National
Association (Wells Fargo) to provide financing for up to $25 million of eligible accounts
receivable in the United States and Canada. As of September 30, 2011, based on the available
borrowing collateral balances, Supplies Distributors had $1.2 million of available credit under
this agreement. The Wells Fargo facility expires on the earlier of March 2014 or the date on which
the parties to the IPS master distributor agreement no longer operate under the terms of such
agreement and/or IPS no longer supplies products pursuant to such agreement. Borrowings under the
Wells Fargo facility accrue interest at prime rate plus 0.25% to 0.75% (3.75% as of September 30,
2011) or Eurodollar rate plus 2.5% to 3.0%, dependent on excess availability and subject to a
minimum of 3.0%, as defined. The interest rate as of September 30, 2011 was 3.75% for $5.0 million
of outstanding borrowings and 3.0% for $2.0 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 other direct or indirect Company subsidiaries), 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 guarantee
of PFS and a Company parent guarantee. Additionally, PFS is required to maintain a Subordinated
Note receivable balance from Supplies Distributors of no less than $3.5 million and may not
maintain restricted cash of more than $5.0 million, and is restricted with regard to transactions
with related parties, indebtedness and changes to
11
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Consolidated Financial Statements
capital stock ownership structure. Supplies Distributors has entered into blocked account
agreements with its banks and Wells Fargo pursuant to which a security interest was granted to
Wells Fargo for all U.S. and Canadian customer remittances received in specified bank accounts. At
September 30, 2011 and December 31, 2010, these bank accounts held $0.2 million and $0.8 million,
respectively, which was restricted for payment to Wells Fargo.
Loan and Security Agreement PFS
PFS has a Loan and Security Agreement (Comerica Agreement) with Comerica Bank (Comerica).
The Comerica Agreement provides for up to $10.0 million of eligible accounts receivable financing
through September 2012. The Comerica Agreement also allows for up to $12.5 million of eligible
accounts receivable financing during certain seasonal peak months. As of September 30, 2011, PFS
had $3.6 million of available credit under this facility. Borrowings under the Comerica Agreement
accrue interest at a defined rate, which will generally be prime rate plus 2%, with a minimum of
4.5% (5.25% at September 30, 2011). 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 other direct or indirect
Company subsidiaries), make capital expenditures, make investments and loans, pledge assets, make
changes to capital stock ownership structure, as well as financial covenants of a minimum tangible
net worth of $20 million, as defined, a minimum earnings before interest and taxes, plus
depreciation, amortization and non-cash compensation accruals, if any, as defined, and a
minimum liquidity ratio, as defined. The Comerica Agreement restricts the amount of the
Subordinated Note receivable from Supplies Distributors to a maximum of $5.0 million. Comerica has
provided approval for PFS to advance incremental amounts subject to certain cash inflows to PFS, as
defined, to certain of its subsidiaries and/or affiliates, if needed. The Comerica Agreement is
secured by all of the assets of PFS, as well as a Company parent guarantee.
On November 10, 2011, PFS entered into an amended agreement
with Comerica to also provide for up to $2.5 million of eligible equipment purchases (Equipment Advances). Outstanding Equipment Advances under the amended Comerica Agreement accrue interest at prime rate plus 2.25% and have a final maturity date of April 15, 2015.
Credit Facility Retail Connect
Retail Connect has an asset-based line of credit facility of up to $7.5 million from Wells
Fargo Bank, National Association (Wells Fargo), through May 2012, which is collateralized by
substantially all of Retail Connects assets. Borrowings under the facility are limited to a
percentage of eligible accounts receivable and inventory up to a specified amount. Outstanding
borrowings under the facility bear interest at prime rate plus 1% or Eurodollar rate plus 3.5%.
There were no outstanding borrowings as of September 30, 2011. As of September 30, 2011, Retail
Connect had $0.1 million of letters of credit outstanding and $0.1 million of available credit
under this facility. Subsequent to the sale of certain assets in February 2011, amounts available
under the outstanding letter of credit are secured by restricted cash in equivalent amounts until
expiration. In connection with the line of credit, Retail Connect entered into a cash management
arrangement whereby Retail Connects operating accounts are considered restricted and swept and used
to repay outstanding amounts under the line of credit, if any. As of September 30, 2011 and
December 31, 2010, the restricted cash amount was $0.1 million and $0.2 million, respectively. The
credit facility restricts Retail Connects ability to, among other things, merge, consolidate, sell
assets, incur indebtedness, make loans, investments and payments to subsidiaries, affiliates and
related parties (including other direct or indirect Company subsidiaries), make investments and
loans, pledge assets, make changes to capital stock ownership structure, and requires a minimum
tangible net worth for Retail Connect of $0 million, as defined. The Company has guaranteed all
current and future obligations of Retail Connect under this line of credit.
Factoring Agreement
Supplies Distributors European subsidiary has a factoring agreement with BNP Paribas Fortis
that provides factoring for up to 7.5 million euros (approximately $10.1 million as of September
30, 2011) of eligible accounts receivables through March 2014. This factoring agreement is
accounted for as a secured borrowing. Borrowings accrue interest at Euribor plus 0.7% (2.0% at
September 30, 2011). This agreement contains certain financial covenants, including minimum
tangible net worth.
12
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Consolidated Financial Statements
Taxable Revenue Bonds
PFS has a Loan Agreement with the Mississippi Business Finance Corporation (the MBFC) in
connection with the issuance by the MBFC of MBFC Taxable Variable Rate Demand Limited Obligation
Revenue Bonds, Series 2004 (Priority Fulfillment Services, Inc. Project) (the Bonds). The MBFC
loaned the proceeds of the Bonds to PFS for the purpose of financing the acquisition and
installation of equipment, machinery and related assets located in one of the Companys Southaven,
Mississippi distribution facilities. The Bonds bear interest at a variable rate (0.3% as of
September 30, 2011), as determined by Comerica Securities, as Remarketing Agent. PFS, at its
option, may convert the Bonds to a fixed rate, to be determined by the Remarketing Agent at the
time of conversion.
The primary source of repayment of the Bonds is a letter of credit (the Letter of Credit)
issued by Comerica pursuant to a Reimbursement Agreement between PFS and Comerica under which PFS
is obligated to pay to Comerica all amounts drawn under the Letter of Credit. The Letter of Credit
has a maturity date of April 2012. The Bonds require a final principal repayment of $800,000 in
January of 2012. PFS obligations under the Reimbursement Agreement are secured by substantially all of
the assets of PFS and a Company parent guarantee.
Debt Covenants
To the extent the Company or any of its subsidiaries fail to comply with covenants applicable
to its debt or vendor financing obligations, including the monthly financial covenant requirements
and required level of shareholders equity or net worth, and one or all of the lenders accelerate
the repayment of the credit facility obligations, the Company would be required to repay all
amounts outstanding thereunder. In particular, if PFS service fee revenue declines from expected
levels and it is unable to reduce costs to correspond to such reduced revenue levels or if Supplies
Distributors revenue or gross profit declines from expected levels, such events may result in a
breach of one or more of the financial covenants required under its working capital line of credit.
In such event, absent a waiver, the working capital lender would be entitled to accelerate all
amounts outstanding thereunder and exercise all other rights and remedies, including sale of
collateral and demand for payment under the Company parent guarantee. Any acceleration of the
repayment of the credit facilities would have a material adverse impact on the Companys financial
condition and results of operations and no assurance can be given that the Company would have the
financial ability to repay all of such obligations. As of September 30, 2011, the Company was in
compliance with all debt covenants.
Master Lease Agreements
The Company has a Term Lease Master Agreement with IBM Credit Corporation (Master Lease
Agreement) that provides for leasing or financing transactions of equipment and other assets,
which generally have terms of three years. The amounts outstanding under this Master Lease
Agreement ($0.5 million as of September 30, 2011 and $1.0 million as of December 31, 2010) are
secured by the related equipment and a Company parent guarantee.
The Company has other leasing and financing agreements and will continue to enter into such
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, and in certain
cases, by a Company parent guarantee.
13
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Consolidated Financial Statements
8. SEGMENT INFORMATION
The Company is currently organized into two primary operating segments, which generally align
with the corporate organization structure. In the first segment, PFS is an international provider
of various business process outsourcing solutions and operates as a service fee business. In the
second operating segment (Business and Retail Connect), subsidiaries of the Company purchase
inventory from clients and resell the inventory to client customers. In this segment, the Company
generally recognizes product revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Revenues (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PFS |
|
$ |
34,466 |
|
|
$ |
25,729 |
|
|
$ |
94,034 |
|
|
$ |
74,551 |
|
Business and Retail Connect |
|
|
37,923 |
|
|
|
39,316 |
|
|
|
122,005 |
|
|
|
128,592 |
|
Eliminations |
|
|
(1,518 |
) |
|
|
(1,485 |
) |
|
|
(4,771 |
) |
|
|
(4,941 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
70,871 |
|
|
$ |
63,560 |
|
|
$ |
211,268 |
|
|
$ |
198,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PFS |
|
$ |
(2,031 |
) |
|
$ |
(2,015 |
) |
|
$ |
(5,794 |
) |
|
$ |
(5,027 |
) |
Business and Retail Connect |
|
|
186 |
|
|
|
432 |
|
|
|
1,037 |
|
|
|
1,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,845 |
) |
|
$ |
(1,583 |
) |
|
$ |
(4,757 |
) |
|
$ |
(3,841 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization (in
thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PFS |
|
$ |
1,529 |
|
|
$ |
1,452 |
|
|
$ |
4,553 |
|
|
$ |
4,572 |
|
Business and Retail Connect |
|
|
8 |
|
|
|
7 |
|
|
|
22 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,537 |
|
|
$ |
1,459 |
|
|
$ |
4,575 |
|
|
$ |
4,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PFS |
|
$ |
2,981 |
|
|
$ |
1,132 |
|
|
$ |
6,977 |
|
|
$ |
2,986 |
|
Business and Retail Connect |
|
|
17 |
|
|
|
73 |
|
|
|
37 |
|
|
|
95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,998 |
|
|
$ |
1,205 |
|
|
$ |
7,014 |
|
|
$ |
3,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Assets (in thousands): |
|
|
|
|
|
|
|
|
PFS |
|
$ |
70,905 |
|
|
$ |
62,617 |
|
Business and Retail Connect |
|
|
75,397 |
|
|
|
82,175 |
|
Eliminations |
|
|
(15,095 |
) |
|
|
(14,562 |
) |
|
|
|
|
|
|
|
|
|
$ |
131,207 |
|
|
$ |
130,230 |
|
|
|
|
|
|
|
|
9. COMMITMENTS AND CONTINGENCIES
The Company receives municipal tax abatements in certain locations. During 2004 the Company
received notice from a municipality that it did not satisfy certain criteria necessary to maintain
the abatements. In December 2006, the Company received notice that the municipal authority planned
to make an adjustment to the Companys tax abatement. The Company disputed the adjustment and such
dispute has been settled with the municipality. However, the amount of additional property taxes
to be assessed against the Company and the timing of the related payments has not been finalized.
As of September 30, 2011, the Company believes it has adequately accrued for the expected
assessment.
In April 2010, a sales employee of eCOST was charged with violating various federal criminal
statutes in connection with the sales of eCOST products to certain customers, and approximately
$620,000 held in an eCOST deposit account was seized and turned over to the Office of the U.S.
Attorney in connection
14
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Consolidated Financial Statements
with such activity. The Company received subpoenas from the Office of the U.S. Attorney
requesting information regarding the employee and other matters, and the Company has responded to
the subpoenas and is fully cooperating with the Office of the U.S. Attorney. The Company has
commenced its own investigation into the actions of the employee. Neither the Company nor eCOST
have been charged with any criminal activity, and the Company intends to seek the recovery or
reimbursement of the funds which are currently classified as other receivables in the September 30,
2011 financial statements. Based on the information available to date, the Company is unable to
determine the amount of the loss, if any, relating to the seizure of such funds. No assurance can
be given, however, that the seizure of such funds, or the inability of the Company to recover such
funds or any significant portion thereof, or any costs and expenses
incurred by the Company in connection with this matter will not have a material adverse effect
upon the Companys financial condition or results of operations.
The Company is subject to claims in the ordinary course of business, including claims of
alleged infringement by the Company or its subsidiaries of the patents, trademarks and other
intellectual property rights of third parties. PFS is generally required to indemnify its service
fee clients against any third party claims alleging infringement by PFS of the patents, trademarks
and other intellectual property rights of third parties.
10. DISCONTINUED OPERATIONS
In February 2011, the Company sold certain assets of eCOST to a third party for a total
aggregate cash purchase price of approximately $2.3 million (before expenses of approximately $0.2
million). Accordingly, the accompanying consolidated financial statements reflect the related
operating results of the eCOST segment as discontinued operations for all periods presented.
Summarized financial information in the accompanying consolidated statements of operations for
the discontinued eCOST operations is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30 |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Revenue, net |
|
$ |
47 |
|
|
$ |
16,408 |
|
|
$ |
6,858 |
|
|
$ |
52,490 |
|
Expenses |
|
|
27 |
|
|
|
16,742 |
|
|
|
7,418 |
|
|
|
53,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income
taxes |
|
|
20 |
|
|
|
(334 |
) |
|
|
(560 |
) |
|
|
(756 |
) |
Provision for income taxes |
|
|
|
|
|
|
(3 |
) |
|
|
(9 |
) |
|
|
(27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of income taxes |
|
$ |
20 |
|
|
$ |
(337 |
) |
|
$ |
(569 |
) |
|
$ |
(783 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Summarized financial information in the accompanying consolidated balance sheet for the
discontinued eCOST operations, which were sold in February 2011, is as follows (in thousands):
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
Inventories, net |
|
$ |
2,776 |
|
Identifiable intangibles |
|
|
316 |
|
Goodwill |
|
|
810 |
|
|
|
|
|
Assets of discontinued operations |
|
$ |
3,902 |
|
|
|
|
|
At December 31, 2010, the amount of allowance for slow moving inventory included in
discontinued operations was $0.2 million.
The original eCOST acquisition resulted in a purchase price in excess of the fair value of net
identifiable assets acquired and liabilities assumed. This excess purchase price was allocated to
goodwill. Goodwill, which is not deductible for tax purposes, is not amortized yet is subject to an
annual impairment test, using a fair-value-based approach. The remaining balance of goodwill, $0.8
million as of December 31, 2010, was included in assets of discontinued operations.
15
ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our results of operations and financial condition
should be read in conjunction with the unaudited interim condensed consolidated financial
statements and related notes appearing elsewhere in this Form 10-Q.
Forward-Looking Information
We have made forward-looking statements in this Report on Form 10-Q. These statements are
subject to risks and uncertainties, and there can be no guarantee that these statements will prove
to be correct. Forward-looking statements include assumptions as to how we may perform in the
future. When we use words like seek, strive, believe, expect, anticipate, predict,
potential, continue, will, may, could, intend, plan, target and estimate or
similar expressions, we are making forward-looking statements. You should understand that the
following important factors, in addition to those set forth above or elsewhere in this Report on
Form 10-Q and our Form 10-K for the year ended December 31, 2010, 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 Supplies Distributors subsidiarys dependence upon its agreements with
International Business Machines Corporation (IBM) and InfoPrint Solutions Company
(IPS); |
|
|
|
|
our dependence upon our agreements with our major clients; |
|
|
|
|
our client mix, their business volumes and the seasonality of their business; |
|
|
|
|
our ability to finalize pending contracts; |
|
|
|
|
the impact of strategic alliances and acquisitions; |
|
|
|
|
trends in e-commerce, outsourcing, government regulation both foreign and domestic and
the market for our services; |
|
|
|
|
whether we can continue and manage growth; |
|
|
|
|
increased competition; |
|
|
|
|
our ability to generate more revenue and achieve sustainable profitability; |
|
|
|
|
effects of changes in profit margins; |
|
|
|
|
the customer and supplier concentration of our business; |
|
|
|
|
the reliance on third-party subcontracted services; |
|
|
|
|
the unknown effects of possible system failures and rapid changes in technology; |
|
|
|
|
foreign currency risks and other risks of operating in foreign countries; |
|
|
|
|
potential litigation; |
|
|
|
|
our dependency on key personnel; |
|
|
|
|
the impact of new accounting standards, and changes in existing accounting rules or the
interpretations of those rules; |
|
|
|
|
our ability to raise additional capital or obtain additional financing; |
|
|
|
|
our ability and the ability of our subsidiaries to borrow under current financing
arrangements and maintain compliance with debt covenants; |
|
|
|
|
relationship with and our guarantees of certain of the liabilities and indebtedness of
our subsidiaries; and |
|
|
|
|
taxation on the sale of our products. |
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 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.
16
Overview
We are an international business process outsourcing provider of end-to-end eCommerce
solutions. We provide these solutions to major brand name companies seeking to optimize their
supply chain and to enhance their traditional and online business channels and initiatives. We
derive our revenues from providing a broad range of services as we process individual business
transactions on our clients behalf using three different seller services financial models: 1) the
Enablement model, 2) the Agent (or Flash) model and 3) the Retail model.
We refer to the standard PFS seller services financial model as the Enablement model. In this
model, our clients own the inventory and are the merchants of record and engage us to provide
various business outsourcing services in support of their business operations. We derive our
service fee revenues from a broad range of service offerings that include digital marketing,
eCommerce technologies, order management, customer care, logistics and fulfillment, financial
management and professional consulting. We offer our services as an integrated solution, which
enables our clients to outsource their complete infrastructure needs to a single source and to
focus on their core competencies. Our distribution services are conducted at warehouses we lease or
manage. We currently provide infrastructure and distribution solutions to clients that operate in a
range of vertical markets, including technology manufacturing, computer products, cosmetics,
fragile goods, contemporary home furnishings, apparel, aviation, telecommunications, consumer
electronics and consumer packaged goods, among others.
In this model, we typically charge for our services on a cost-plus basis, a percent of shipped
revenue basis or a per-transaction basis, such as a per-minute basis for web-enabled customer
contact center services and a per-item basis for fulfillment services. Additional fees are billed
for other services. We price our services based on a variety of factors, including the depth and
complexity of the services provided, the amount of capital expenditures or systems customization
required, the length of contract and other factors.
Many of our service fee contracts involve third-party vendors who provide additional services
such as package delivery. The costs we are charged by these third-party vendors for these services
are often passed on to our clients. Our billings for reimbursements of these costs and other
out-of-pocket expenses include travel, shipping and handling costs and telecommunication charges
and are included in pass-through revenue.
As an additional service, we offer our second model, the Agent, or Flash, financial model, in
which our clients maintain ownership of the product inventory stored at our locations as in the
Enablement model. When a customer orders the product from our clients, a flash sale transaction
passes product ownership to us for each order and we, in turn, immediately re-sell the product to
the customer. The flash ownership exchange establishes us as the merchant of record, which
enables us to use our existing merchant infrastructure to process sales to end customers, removing
the need for the clients to establish these business processes internally, but permitting them to
control the sales process to end customers. In this model, based on the terms of our current
client arrangements, we record product revenue on a net basis.
Finally, our Retail model allows us to purchase inventory from the client just as any other
client reseller partner. In this model, we place the initial and replenishment purchase orders
with the client and take ownership of the product upon delivery to our facility. Consequently, in
this model, we generate product revenue as we own the inventory and the accounts receivable arising
from our product sales. Under the Retail model, depending upon the product category and sales
characteristics, we may require the client to provide product price protection as well as product
purchase payment terms, right of return, and obsolescence protection appropriate to the product
sales profile. In this model we recognize product revenue for customer sales. Freight costs billed
to customers are reflected as components of product revenue. This business model requires
significant working capital requirements, for which we have credit available either through credit
terms provided by our client or under senior credit facilities.
In general, we provide the Enablement model through our PFS and Supplies Distributors
subsidiaries, the Agent or Flash model through our PFS and Supplies Distributors subsidiaries and
the Retail model
17
through our Supplies Distributors subsidiaries and our Retail Connect subsidiary.
In connection with the sale of certain of the assets of eCOST.com (eCOST), the name of eCOST was
changed to PFSweb Retail Connect, Inc., in March 2011.
Growth is a key element to achieving our future goals, including achieving and maintaining
sustainable profitability. Growth in our Enablement and Agent models is driven by two main elements: new
client relationships and organic growth from existing clients. We focus our sales efforts on
larger contracts with brand-name companies within two primary target markets, online brands and
retailers and technology manufacturers, which, by nature, require a longer duration to close but
also have the potential to be higher-quality and longer duration engagements.
Growth within our Retail model is currently primarily driven by our ability to attract new
master distributor arrangements with InfoPrint Solutions Company (IPS), a wholly-owned subsidiary
of RICOH Company Limited (RICOH), or other manufacturers and the sales and marketing efforts of
the manufacturers and third party sales partners. RICOH has advised us that it is restructuring
its IPS business, which will include certain realignment and operational changes in the sale and
distribution of IPS products. We are currently evaluating the impact of these changes to our business, though we believe the changes will result in reduced revenues and
profitability under our Retail model beginning in 2012.
We continue to monitor and control our costs to focus on profitability. While we are
targeting our new service fee contracts to yield incremental gross profit, we also expect to incur
incremental investments in technology development, operational and support management and sales and
marketing expenses.
Our expenses comprise primarily four categories: 1) cost of product revenue, 2) cost of
service fee revenue, 3) cost of pass-through revenue and 4) selling, general and administrative
expenses.
Cost of product revenues consists of the purchase price of product sold and freight costs,
which are reduced by certain reimbursable expenses. These reimbursable expenses include
pass-through customer marketing programs, direct costs incurred in passing on any price decreases
offered by vendors to cover price protection and certain special bids, the cost of products
provided to replace defective product returned by customers and certain other expenses as defined
under the master distributor agreements.
Cost of service fee revenue consists primarily of compensation and related expenses for our
web-enabled customer contact center services, international fulfillment and distribution services
and professional consulting services, and other fixed and variable expenses directly related to
providing services under the terms of fee based contracts, including certain occupancy and
information technology costs and depreciation and amortization expenses.
Cost of pass-through revenue the related reimbursable costs for pass-through expenditures
are reflected as cost of pass-through revenue.
Selling, General and Administrative expenses consist of expenses such as compensation and
related expenses for sales and marketing staff, distribution costs (excluding freight) applicable
to the Supplies Distributors business and the Retail model, executive, management and
administrative personnel and other overhead costs, including certain occupancy and information
technology costs and depreciation and amortization expenses.
Monitoring and controlling our available cash balances and our expenses continues to be a
primary focus. Our cash and liquidity positions are important components of our financing of both
current operations and our targeted growth. To aid this, in May 2010, we completed a public
offering of 2.3 million shares of our common stock that provided net proceeds of $7.3 million.
18
Results of Operations
For the Interim Periods Ended September 30, 2011 and 2010
The results of operations related to the eCOST business unit that was sold in February 2011
have been reported as discontinued operations for all periods presented below. The following table
discloses certain financial information for the periods presented, expressed in terms of dollars,
dollar change, percentage change and as a percentage of total revenue (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net Revenues |
|
Revenues: |
|
2011 |
|
|
2010 |
|
|
Change |
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
Change |
|
|
2011 |
|
|
2010 |
|
Product revenue, net |
|
$ |
37.9 |
|
|
$ |
39.3 |
|
|
$ |
(1.4 |
) |
|
|
53.5 |
% |
|
|
61.9 |
% |
|
$ |
122.0 |
|
|
$ |
128.6 |
|
|
$ |
(6.6 |
) |
|
|
57.8 |
% |
|
|
64.9 |
% |
Service fee revenue |
|
|
23.0 |
|
|
|
16.4 |
|
|
|
6.6 |
|
|
|
32.4 |
% |
|
|
25.8 |
% |
|
|
62.8 |
|
|
|
48.9 |
|
|
|
13.9 |
|
|
|
29.7 |
% |
|
|
24.7 |
% |
Pass-through revenue |
|
|
10.0 |
|
|
|
7.9 |
|
|
|
2.1 |
|
|
|
14.1 |
% |
|
|
12.3 |
% |
|
|
26.4 |
|
|
|
20.7 |
|
|
|
5.7 |
|
|
|
12.5 |
% |
|
|
10.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
70.9 |
|
|
|
63.6 |
|
|
|
7.3 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
211.2 |
|
|
|
198.2 |
|
|
|
13.0 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue (1) |
|
|
35.3 |
|
|
|
36.4 |
|
|
|
(1.1 |
) |
|
|
93.1 |
% |
|
|
92.6 |
% |
|
|
113.2 |
|
|
|
119.4 |
|
|
|
(6.2 |
) |
|
|
92.8 |
% |
|
|
92.8 |
% |
Cost of service fee revenue (2) |
|
|
17.7 |
|
|
|
11.9 |
|
|
|
5.8 |
|
|
|
77.0 |
% |
|
|
73.0 |
% |
|
|
47.2 |
|
|
|
35.4 |
|
|
|
11.8 |
|
|
|
75.2 |
% |
|
|
72.4 |
% |
Pass-through cost of revenue (3) |
|
|
10.0 |
|
|
|
7.9 |
|
|
|
2.1 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
26.4 |
|
|
|
20.7 |
|
|
|
5.7 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
|
63.0 |
|
|
|
56.2 |
|
|
|
6.8 |
|
|
|
88.8 |
% |
|
|
88.4 |
% |
|
|
186.8 |
|
|
|
175.5 |
|
|
|
11.3 |
|
|
|
88.5 |
% |
|
|
88.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue gross profit |
|
|
2.6 |
|
|
|
2.9 |
|
|
|
(0.3 |
) |
|
|
6.9 |
% |
|
|
7.4 |
% |
|
|
8.8 |
|
|
|
9.2 |
|
|
|
(0.4 |
) |
|
|
7.2 |
% |
|
|
7.2 |
% |
Service fee gross profit |
|
|
5.3 |
|
|
|
4.5 |
|
|
|
0.8 |
|
|
|
23.0 |
% |
|
|
27.0 |
% |
|
|
15.6 |
|
|
|
13.5 |
|
|
|
2.1 |
|
|
|
24.8 |
% |
|
|
27.6 |
% |
Pass-through gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit |
|
|
7.9 |
|
|
|
7.4 |
|
|
|
0.5 |
|
|
|
11.2 |
% |
|
|
11.6 |
% |
|
|
24.4 |
|
|
|
22.7 |
|
|
|
1.7 |
|
|
|
11.4 |
% |
|
|
11.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General and Administrative
expenses |
|
|
9.4 |
|
|
|
8.6 |
|
|
|
0.8 |
|
|
|
13.2 |
% |
|
|
13.4 |
% |
|
|
28.1 |
|
|
|
25.6 |
|
|
|
2.5 |
|
|
|
13.3 |
% |
|
|
12.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(1.5 |
) |
|
|
(1.2 |
) |
|
|
(0.3 |
) |
|
|
(2.0 |
)% |
|
|
(1.8 |
)% |
|
|
(3.7 |
) |
|
|
(2.9 |
) |
|
|
(0.8 |
) |
|
|
(1.9) |
% |
|
|
(1.4) |
% |
Interest expense, net |
|
|
0.3 |
|
|
|
0.3 |
|
|
|
|
|
|
|
0.4 |
% |
|
|
0.4 |
% |
|
|
0.8 |
|
|
|
0.7 |
|
|
|
0.1 |
|
|
|
0.4 |
% |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing
operations before income
taxes |
|
|
(1.8 |
) |
|
|
(1.5 |
) |
|
|
(0.3 |
) |
|
|
(2.4 |
)% |
|
|
(2.2 |
)% |
|
|
(4.5 |
) |
|
|
(3.6 |
) |
|
|
(0.9 |
) |
|
|
(2.3) |
% |
|
|
(1.8) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense, net |
|
|
|
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.2 |
% |
|
|
(0.2 |
)% |
|
|
0.3 |
|
|
|
0.2 |
|
|
|
0.1 |
|
|
|
0.1 |
% |
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(1.8 |
) |
|
|
(1.6 |
) |
|
|
(0.2 |
) |
|
|
(2.6 |
)% |
|
|
(2.4 |
)% |
|
|
(4.8 |
) |
|
|
(3.8 |
) |
|
|
(1.0 |
) |
|
|
(2.2) |
% |
|
|
(1.9) |
% |
Income (loss) from
discontinued operations, net
of tax |
|
|
|
|
|
|
(0.3 |
) |
|
|
0.3 |
|
|
|
0.1 |
% |
|
|
(1.2 |
)% |
|
|
(0.5 |
) |
|
|
(0.8 |
) |
|
|
0.3 |
|
|
|
(0.3) |
% |
|
|
(0.4) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1.8 |
) |
|
$ |
(1.9 |
) |
|
$ |
0.1 |
|
|
|
(2.5 |
)% |
|
|
(4.6 |
)% |
|
$ |
(5.3 |
) |
|
$ |
(4.6 |
) |
|
$ |
(0.7 |
) |
|
|
(2.5) |
% |
|
|
(2.3) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
% of net revenues represents the percent of Product revenue, net. |
|
(2) |
|
% of net revenues represents the percent of Service fee revenue. |
|
(3) |
|
% of net revenues represents the percent of Pass-through revenue. |
Product Revenue, net. Product revenue was $37.9 million for the three months ended
September 30, 2011, which represents a decrease of $1.4 million or 3.5% as compared to the same
quarter of the prior year. Product revenue in the nine months ended September 30, 2011 decreased
$6.6 million to $122.0 million or 5.1% compared to the nine months ended September 30, 2010. The
decrease was primarily due to the impact of lower sales volume, partially offset by increased unit
pricing on certain products, changes in end-user customer utilization and the impact of euro
currency conversion rates. We currently expect 2011 annual product revenue to be slightly lower
than in 2010.
RICOH has advised Supplies Distributors that it is restructuring its IPS business which will
include certain operational changes in the sale and distribution of
IPS products. We are currently evaluating the impact of these changes to our business, though we believe the changes will result in reduced revenues and profitability for Supplies Distributors
beginning in 2012.
19
Service Fee Revenue. Service fee revenue of $23.0 million increased $6.6 million, or 39.9%,
in the three months ended September 30, 2011 as compared to the same quarter of the prior year.
Service fee revenue in the nine months ended September 30, 2011 increased $13.9 million to $62.8
million or 28.3% compared to the corresponding nine months in the prior year period. The increase
in service fee revenue for the three and nine months ended September 30, 2011 is primarily due to
increased service fees from existing client relationships along with service fees from new client
relationships that began in late 2010 and early 2011 partially offset by the impact of terminated
clients.
The change in service fee revenue is shown below ($ millions):
|
|
|
|
|
|
|
|
|
|
|
Three |
|
|
Nine |
|
|
|
Months |
|
|
Months |
|
Period ended September 30, 2010 |
|
$ |
16.4 |
|
|
$ |
48.9 |
|
New service contract relationships |
|
|
4.1 |
|
|
|
8.7 |
|
Change in existing client service fees |
|
|
3.4 |
|
|
|
10.4 |
|
Terminated clients not included in 2011 revenue |
|
|
(0.9 |
) |
|
|
(5.2 |
) |
|
|
|
|
|
|
|
Period ended September 30, 2011 |
|
$ |
23.0 |
|
|
$ |
62.8 |
|
|
|
|
|
|
|
|
Cost of Product Revenue. The cost of product revenue decreased by $1.1 million, or 3.0%, to
$35.3 million in the three months ended September 30, 2011. The resulting gross profit margin was
$2.6 million, or 6.9% of product revenue, for the three months ended September 30, 2011 and $2.9
million, or 7.4% of product revenue, for the comparable 2010 period. The cost of product revenue in
the nine months ended September 30, 2011 decreased $6.2 million, or 5.2%, compared to the nine
months ended September 30, 2010. The gross profit margin was $8.8 million, or 7.2%, in the nine
months ended September 30, 2011 compared to $9.2 million, or 7.2%, in the same period of the prior
year. The three and nine month periods ended September 30, 2011 and 2010 include the impact of
certain incremental gross margin earned on product sales resulting from certain product price
increases and the impact of certain incremental inventory cost reductions.
Cost of Service Fee Revenue. Gross profit as a percentage of service fees was 23.0% in three
month period ended September 30, 2011 and 27.0% in the same period of 2010. Gross profit as a
percentage of service fees in the nine months ended September 30, 2011 and 2010 was 24.8% and
27.6%, respectively. The gross profit percentage decrease is primarily due to a change in the
client mix, lower gross margins on certain new and/or high growth clients, including certain start
up costs and the impact of incremental costs incurred in implementing processes targeted to drive
future long-term operating efficiencies. The margin in the prior year period includes the benefit
of certain higher margin incremental project work.
We target to earn an overall average gross profit of 25-30% on existing and new service fee
contracts, but we have and may continue to accept lower gross margin percentages on certain
contracts depending on contract scope and other factors including projected volumes.
Selling, General and Administrative Expenses. Selling, General and Administrative expenses for
the three months ended September 30, 2011 and 2010 were $9.4 million and $8.6 million,
respectively. In the nine months ended September 30, 2011 and 2010 selling, general and
administrative expenses were $28.1 million and $25.6 million, respectively. As a percentage of
total net revenue, selling, general and administrative expenses were 13.2% in the three months
ended September 30, 2011 and 13.4% in the prior year period. Selling, general and administrative
expenses were 13.3% and 12.9% in the nine months ended September 30, 2011 and 2010, respectively.
The increase in costs is primarily attributable to increased non-cash stock compensation expense,
sales and marketing costs and personnel related expenses as we continue to make investments to
support current and future growth. In addition, during the three
months ended September 30, 2011,
we incurred approximately $0.3 million of incremental relocation related costs necessary to support
our growth. Due to planned facility expansions and relocation, we expect to incur certain ongoing
incremental relocation related costs during the next several quarters into mid-2012. The three and
nine months ended September 30, 2010 also included the impact of certain executive disability
benefit costs that did not occur in 2011.
Income Taxes. We record a tax provision associated primarily with state income taxes and our
subsidiary Supplies Distributors Canadian and European operations as well as our Philippines
operations. A valuation allowance has been provided for the majority of our net deferred tax
assets, which are
20
primarily related to our net operating loss carryforwards and certain foreign
deferred tax assets. We expect we will continue to record an income tax provision associated with
state income taxes and Supplies Distributors Canadian and European results of operations as well
as our Philippines operations.
Income (Loss) from Discontinued Operations, Net of Tax. Discontinued operations generated
income of approximately $20,000 in the three months ended September 30, 2011 and a loss of $0.3
million in the three months ended September 30, 2010. A loss from discontinued operations of $0.5
million and $0.8 million was generated in the nine months ended September 30, 2011 and 2010,
respectively. In February 2011, we sold substantially all of the inventory and certain intangible
assets applicable to our eCOST business unit for a total aggregate cash purchase price of
approximately $2.3 million. For each of the three and nine
month periods ending September 30, 2011 and 2010, we have classified the operating results of
this business unit, excluding costs expected to continue to occur in the future, as discontinued
operations.
Liquidity and Capital Resources
During the nine months ended September 30, 2011 we generated $2.3 million in proceeds from the
February 2011 sale of our eCOST business plus $1.3 million applicable to a reduction of eCOST
inventory prior to the sale. In addition, we generated $2.6 million applicable to a decrease in
accounts receivable related to cash collected from our clients and customers following the December
31 seasonal peak period of our services business, and including $0.8 million from eCOST customers
following the February 2011 sale of that business. Additional proceeds of $3.1 million were
generated due to an increase in accounts payable, deferred revenue, accrued expenses and other
liabilities following the timing of payments we make for products and services, payment processing
and related transactions costs, net of a $5.0 million use of cash by our eCOST operations relating
to settling accounts payable, accrued expenses and other liabilities following our February 2011
sale of that business. We also received proceeds from the issuance of common stock of $2.1
million, primarily through the exercise of stock options. These cash inflows were partially offset
by an increase in inventories of $7.1 million, which is expected to be a temporary increase,
related to the timing of product receipts.
Our principal sources of cash in the nine months ended September 30, 2010 were $7.3 million in
proceeds from the issuance of common stock pursuant to a public offering and a $4.7 million
reduction in accounts receivable related to the collection of cash from our customers and clients
following the December 31 seasonal peak.
We incurred capital expenditures of $7.0 million and $3.1 million in the nine months ended
September 30, 2011 and 2010, respectively, which primarily consist of payments for internally
developed software, distribution equipment, leasehold improvements, and furniture and fixtures.
Payments on capital leases and net payments on debt were $2.0 million and $3.4 million in the
aggregate during the nine months ended September 30, 2011 and 2010, respectively.
Capital expenditures have historically consisted of additions to upgrade our management
information systems, development of customized technology solutions to support and integrate with
our service fee clients, and general expansion and upgrades to our facilities, both domestic and
foreign. We expect to incur capital expenditures to support new contracts and anticipated future
growth opportunities. Based on our current client business activity and our targeted growth plans,
we anticipate our total investment in upgrades and additions to facilities and information
technology services for the upcoming twelve months, including costs to implement new clients, will
be approximately $9 million to $11 million, although additional capital expenditures may be
necessary to support the infrastructure requirements of new clients. To maintain our current
operating cash position, a portion of these expenditures may be financed through client
reimbursements, debt, operating or capital leases or additional equity. We may elect to modify or
defer a portion of such anticipated investments in the event we do not obtain the financing or
achieve the financial results necessary to support such investments.
During the nine months ended September 30, 2011, our working capital decreased to $18.2
million from $22.6 million at December 31, 2010 primarily due to paydown of debt facilities and
capital expenditures, partially offset by cash proceeds from our sale of certain intangible assets
applicable to the eCOST.com business unit and proceeds from issuance of common stock related to
stock option exercises.
21
To obtain additional financing in the future, in addition to our current
cash position, we plan to evaluate various financing alternatives including the sale of equity,
utilizing capital or operating leases, borrowing under our credit facilities, expanding our current
credit facilities or entering into new debt agreements. In conjunction with certain of these
alternatives, we may be required to provide certain letters of credit to secure these arrangements.
No assurances can be given we will be successful in obtaining any additional financing or the terms
thereof. We currently believe our cash position, financing available under our credit facilities
and funds generated from operations will satisfy our presently known operating cash needs, our
working capital and capital expenditure requirements, our current debt and lease obligations, and
additional loans to our subsidiaries, if necessary, for at least the next twelve months.
During the past few years, the credit markets and the financial services industry have been
experiencing a period of unprecedented turmoil and upheaval characterized by the bankruptcy,
failure, collapse or sale of
various financial institutions and an unprecedented level of intervention from the United
States and foreign governments. While the ultimate outcome of these events cannot be predicted,
they may have a material adverse effect on our liquidity, financial condition, results of
operations and our ability to renew our credit facilities.
In support of certain debt instruments and leases, as of September 30, 2011, we had $0.5
million of cash restricted for repayment to lenders. In addition, as described above, we have
provided collateralized guarantees to secure the repayment of certain of our subsidiaries credit
facilities. Many of these facilities include both financial and non-financial covenants, and also
include cross default provisions applicable to other credit facilities and agreements. These
covenants include minimum levels of net worth for the individual borrower subsidiaries and
restrictions on the ability of the borrower subsidiaries to advance funds to other borrower
subsidiaries. As a result, it is possible for one or more of these borrower subsidiaries to fail
to meet their respective covenants even if another borrower subsidiary otherwise has available
excess funds, which, if not restricted, could be used to cure the default. To the extent we fail
to comply with our debt covenants, including the monthly financial covenant requirements and our
required level of shareholders equity, and the lenders accelerate the repayment of the credit
facility obligations, we would be required to repay all amounts outstanding thereunder. In
particular, if PFS service fee revenue declines from expected levels and it is unable to reduce
costs to correspond to such reduced revenue levels or if Supplies Distributors revenue or gross
profit declines from expected levels, such events may result in a breach of one or more of the
financial covenants required under their working capital lines of credit. In such event, absent a
waiver, the working capital lender would be entitled to accelerate all amounts outstanding
thereunder and exercise all other rights and remedies, including sale of collateral and payment
under our Company parent guarantee. 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 September 30, 2011, we were in compliance with all debt covenants. Further,
any non-renewal of any of our credit facilities would have a material adverse impact on our
business and financial condition. We do not have any other material financial commitments,
although future client contracts may require capital expenditures and lease commitments to support
the services provided to such clients.
In the future, we may attempt to acquire other businesses or seek an equity or strategic
partner to generate capital or expand our services or capabilities in connection with our efforts
to grow our business. Acquisitions involve certain risks and uncertainties and may require
additional financing. Therefore, we can give no assurance with respect to whether we will be
successful in identifying businesses to acquire or an equity or strategic partner, whether we or
they will be able to obtain financing to complete a transaction, or whether we or they will be
successful in operating the acquired business.
We receive municipal tax abatements in certain locations. During 2004 we received notice from
a municipality that we did not satisfy certain criteria necessary to maintain the abatements. In
December 2006, we received notice that the municipal authority planned to make an adjustment to our
tax abatement. We disputed the adjustment and such dispute has been settled with the municipality.
However, the amount of additional property taxes to be assessed against us and the timing of the
related payments has not been finalized. As of September 30, 2011, we believe we have adequately
accrued for the expected assessment.
22
In April 2010, a sales employee of eCOST was charged with violating various federal criminal
statutes in connection with the sales of eCOST products to certain customers, and approximately
$620,000 held in an eCOST deposit account was seized and turned over to the Office of the U.S.
Attorney in connection with such activity. We received subpoenas from the Office of the U.S.
Attorney requesting information regarding the employee and other matters, and have responded to
such subpoenas and are fully cooperating with the Office of the U.S. Attorney. We have commenced
our own investigation into the actions of the employee. Neither the Company nor eCOST have been
charged with any criminal activity, and we intend to seek the recovery or reimbursement of the
funds, which are currently classified as other receivables in the September 30, 2011 financial
statements. Based on the information available to date, we are unable to determine the amount of
the loss, if any, relating to the seizure of such funds. No assurance can be given, however, that
the seizure of such funds, or our inability to recover such funds or any significant portion
thereof, or any costs and expenses we may incur in connection with such matter will not have a
material adverse effect upon our financial condition or results of operations.
Supplies Distributors Financing
To finance their distribution of IPS products, Supplies Distributors and its subsidiaries have
short-term credit facilities with IBM Credit LLC (IBM Credit) and IBM Belgium Financial Services
S.A. (IBM Belgium). We have provided a collateralized guarantee to secure the repayment of these
credit facilities. These asset-based credit facilities provided financing for up to $25.0 million
and up to 16 million euros (approximately $21.6 million at September 30, 2011) with IBM Credit and
IBM Belgium, respectively. These agreements expire in March 2012.
Supplies Distributors also has a loan and security agreement with Wells Fargo Bank, National
Association (Wells Fargo) to provide financing for up to $25 million of eligible accounts
receivables in the United States and Canada. The Wells Fargo facility expires on the earlier of
March 2014 or the date on which the parties to the IPS master distributor agreement no longer
operate under the terms of such agreement and/or IPS no longer supplies products pursuant to such
agreement.
Supplies Distributors European subsidiary has a factoring agreement with BNP Paribas Fortis
to provide factoring for up to 7.5 million euros (approximately $10.1 million as of September 30,
2011) of eligible accounts receivables through March 2014 as well as certain financial covenants,
including minimum tangible net worth.
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
other direct or indirect Company subsidiaries), 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
guarantees by their respective parent companies including Supplies Distributors and/or PFS and a
Company parent guarantee. Additionally, we are required to maintain a subordinated loan to Supplies
Distributors of no less than $3.5 million, not maintain restricted cash of more than $5.0 million,
are restricted with regard to transactions with related parties, indebtedness and changes to
capital stock ownership structure and a minimum shareholders equity of at least $18.0 million.
Furthermore, we are obligated to repay any over-advance made to Supplies Distributors or its
subsidiaries under these facilities if they are unable to do so. We have also provided a guarantee
of the obligations of Supplies Distributors and its subsidiaries to IBM and IPS, excluding the
trade payables that are financed by IBM credit.
PFS Financing
PFS has a Loan and Security Agreement (Agreement) with Comerica Bank (Comerica), which
provides for up to $10.0 million of eligible accounts receivable financing through September 2012.
The Agreement allows for up to $12.5 million of eligible accounts receivable financing during
certain seasonal peak months. We entered this Agreement to supplement our existing cash position,
and provide funding for our current and future operations, including our targeted growth. The
Agreement contains cross default provisions, various restrictions upon our ability to, among other
things, merge, consolidate, sell assets,
23
incur indebtedness, make loans and payments to
subsidiaries, affiliates and related parties (including other direct or indirect Company
subsidiaries), make capital expenditures, make investments and loans, pledge assets, make changes
to capital stock ownership structure, as well as financial covenants of a minimum tangible net
worth of $20.0 million, as defined, a minimum earnings before interest and taxes, plus
depreciation, amortization and non-cash compensation accruals, if any, as defined, and a minimum
liquidity ratio, as defined. The Agreement also limits PFS ability to increase the subordinated
loan to Supplies Distributors to more than $5.0 million and permits PFS to advance incremental
amounts subject to certain cash inflows to PFS, as defined, to certain of its subsidiaries and/or
affiliates. The Agreement is secured by all of the assets of PFS, as well as a Company parent
guarantee.
On November 10, 2011, PFS entered into an amended agreement with Comerica to also provide for
up to $2.5 million of eligible equipment purchases (Equipment Advances). Outstanding Equipment
Advances under the amended Comerica Agreement accrue interest at prime rate plus 2.25% and have a
final maturity date of April 15, 2015.
PFS financed certain capital expenditures through a Loan Agreement with the Mississippi
Business Finance Corporation (the MBFC) pursuant to which the MBFC issued MBFC Taxable Variable
Rate
Demand Limited Obligation Revenue Bonds, Series 2004 (Priority Fulfillment Services, Inc.
Project) (the Bonds). The MBFC loaned PFS the proceeds of the Bonds for the purpose of financing
the acquisition and installation of equipment, machinery and related assets to support incremental
business from a Southaven, Mississippi distribution facility. The primary source of repayment of
the Bonds is a letter of credit (the Letter of Credit) issued by Comerica pursuant to a
Reimbursement Agreement between PFS and Comerica under which PFS is obligated to pay to Comerica
all amounts drawn under the Letter of Credit. The Letter of Credit has a maturity date of April
2012. The amount outstanding on this Loan Agreement as of September 30, 2011 was $0.8 million, the
payment of which is due in January 2012. PFS obligations under the Reimbursement Agreement are
secured by substantially all of its assets, including restricted cash of $0.1 million, and a
Company parent guarantee.
Retail Connect Financing
Retail Connect has an asset-based line of credit facility of up to $7.5 million with Wells
Fargo Bank National Association (Wells Fargo), which is collateralized by substantially all of
Retail Connects assets and expires in May 2012. Borrowings under the facility are limited to a
percentage of accounts receivable and inventory, up to specified maximums. As of September 30,
2011, Retail Connect had $0.1 million of letters of credit outstanding and $0.1 million of
available credit under this facility. Amounts available under the outstanding letters of credit
are currently secured by restricted cash in equivalent amounts. The credit facility restricts
Retail Connects ability to, among other things, merge, consolidate, sell assets, incur
indebtedness, make loans, investments and payments to subsidiaries, affiliates and related parties,
make investments and loans, pledge assets, make changes to capital stock ownership structure, as
well as a minimum tangible net worth of $0 million, as defined. The Company has guaranteed all
current and future obligations of Retail Connect under this line of credit.
In February 2011, we sold substantially all of the inventory and certain intangible assets of
eCOST for a cash purchase price of $2.3 million (before expenses of approximately $0.2 million) and
the assumption by the purchases of certain limited liabilities of eCOST. In connection with the
closing of this business unit, we incurred exit costs of approximately $0.3 million related to
employee termination costs, excess property and equipment and contract termination costs and may
incur additional costs, including excess facility costs. During 2010, we recorded a non-cash
goodwill impairment charge of approximately $2.8 million.
Public Offering
In May 2010, we completed a public offering of our common stock pursuant to which we issued
and sold an aggregate of 2.3 million shares of our common stock, par value $.001 per share, at
$3.50 per share, resulting in net proceeds after deducting offering expenses of approximately $7.3
million.
24
Seasonality
The seasonality of our service fee business is dependent upon the seasonality of our clients
business and sales of their products. Accordingly, we must rely upon the projections of our clients
in assessing quarterly variability. We believe that with our current client mix and their current
business volumes, our run rate service fee business activity will be at its lowest in the quarter
ended March 31 and highest in the quarter ended December 31. We anticipate our product revenue
will be highest during the quarter ended December 31. We believe our historical revenue pattern
makes it difficult to predict the effect of seasonality on our future revenues and results of
operations.
We believe that results of operations for a quarterly period may not be indicative of the
results for any other quarter or for the full year.
Inflation
Management believes that inflation has not had a material effect on our operations.
Critical Accounting Policies
A description of our critical accounting policies is included in Note 2 of the consolidated
financial statements in our December 31, 2010 Annual Report on Form 10-K.
25
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
Not required.
ITEM 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain a comprehensive set of disclosure controls and procedures as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act. As of September 30, 2011, an evaluation of the
effectiveness of our disclosure controls and procedures was carried out under the supervision and
with the participation of our management, including our Chief Executive Officer and Chief Financial
Officer. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that, as of the end of the period covered by this report, these disclosure controls and
procedures were effective.
Changes in Internal Control over Financial Reporting
During the period that ended on September 30, 2011, there was no change in internal control
over financial reporting (as defined in Rule 13a-15(f) or Rule 15d-15(f) under the Exchange Act)
that has materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
26
PART II. OTHER INFORMATION
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ITEM 1. |
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Legal Proceedings |
None
In addition to the risk factors set forth in Part I, Item 1A of the Companys Annual Report on
Form 10-K for the fiscal year ended December 31, 2010 filed with the Securities and Exchange
Commission on March 31, 2011, our business, financial condition and operating results could be
adversely affected by any or all of the following factors.
General Risks Related to 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 Retail Connect.
As of September 30, 2011, our total credit facilities outstanding, including debt, capital
lease obligations and our vendor accounts payable related to financing of IPS product inventory,
was approximately $54.0 million. Certain of the credit facilities have maturity dates in calendar
year 2012 or beyond, but are classified as current liabilities in our consolidated financial
statements given the underlying nature of the credit facility. We cannot provide assurance that
our credit facilities will be renewed by the lending parties. Additionally, these credit facilities
include both financial and non-financial covenants, many of which also include cross default
provisions applicable to other agreements. These covenants also restrict our ability to transfer
funds among our various subsidiaries, which may adversely affect the ability of our subsidiaries to
operate their businesses or comply with their respective loan covenants. We cannot provide
assurance that we will be able to maintain compliance with these covenants. Any non-renewal or any
default under any of our credit facilities would have a material adverse impact upon our business
and financial condition. In addition we have provided $3.5 million of subordinated indebtedness to
Supplies Distributors as of September 30, 2011. The maximum level of this subordinated indebtedness
to Supplies Distributors that may be provided without approval from our lenders is $5.0 million.
The restrictions on increasing this amount without lender approval may limit our ability to comply
with certain loan covenants or further grow and develop Supplies Distributors business. We have
guaranteed most of the indebtedness of Supplies Distributors. Furthermore, we are obligated to
repay any over-advance made to Supplies Distributors by its lenders to the extent Supplies
Distributors is unable to do so. We have also guaranteed Retail Connects $7.5 million credit line,
as well as certain of its vendor trade payables.
Specific Risks Related to Our Business Process Outsourcing Business
Our business is subject to the risk of customer and supplier concentration.
For the nine months ended September 30, 2011, two clients represented approximately 30% of our
total service fee revenue (excluding pass-through revenue) and approximately 13% of our total
consolidated revenue. The loss of either of these clients may have a material adverse effect upon
our business and financial condition.
The majority of our Supplies Distributors product revenue is generated by sales of product
purchased under master distributor agreements with IPS. These agreements are terminable at will
and no assurance can be given that IPS will continue the master distributor agreements with
Supplies Distributors. Supplies Distributors does not have its own sales force and relies upon
IPSs sales force and product demand generation activities for its sale of IPS product.
Discontinuance of such activities would have a material adverse effect on Supplies Distributors
business and our overall financial condition.
Sales by Supplies Distributors to two customers in the aggregate accounted for approximately
25% of Supplies Distributors total product revenue for the nine months ended September 30, 2011,
(15% of our consolidated net revenues in the nine month period ended September 30, 2011). The loss
of any one or
27
both 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.
RICOH has advised Supplies Distributors that it is restructuring its IPS business which will
include certain operational changes in the sale and distribution of
IPS products. We are currently evaluating the impact of these changes to our business, though we believe the changes will result in reduced revenues and profitability for Supplies Distributors
beginning in 2012.
Risks Related to Our Stock
Our stock price could decline if a significant number of shares become available for sale.
As of September 30, 2011, we have an aggregate of 2.3 million stock options outstanding to
employees, directors and others with a weighted average exercise price of $4.54 per share. The
shares of common stock that may be issued upon exercise of these options may be resold into the
public market. Sales of substantial amounts of common stock in the public market as a result of the
exercise of these options, or the perception that future sales of these shares could occur, could
reduce the market price of our common stock and make it more difficult to sell equity securities in
the future.
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ITEM 2. |
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Unregistered Sales of Equity Securities and Use of Proceeds |
None
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ITEM 3. |
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Defaults Upon Senior Securities |
None
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ITEM 4. |
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[Removed and Reserved] |
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ITEM 5. |
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Other Information |
None
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ITEM 6. |
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Exhibits and Reports on Form 8-K |
a) Exhibits:
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Exhibit |
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No. |
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Description of Exhibits |
3.1(1)
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Amended and Restated Certificate of Incorporation of PFSweb, Inc. |
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3.1.1(2)
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Certificate of Amendment to Amended and Restated Certificate of
Incorporation of PFSweb, Inc. |
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3.1.2(4)
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Certificate of Amendment to Certificate of Incorporation of
PFSweb, Inc. |
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3.1.3(5)
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Certificate of Amendment to Amended and Restated Certificate of
Incorporation of PFSweb, Inc. |
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3.2(1)
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Amended and Restated By-Laws |
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3.2.1(3)
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Amendment to the Amended and Restated By-Laws of PFSweb, Inc. |
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3.2.2(6)
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Amendment to the Amended and Restated By-Laws of PFSweb, Inc. |
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10.1*
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Tenth Amendment to First Amended and Restated Loan and Security
Agreement dated November 10, 2011 by and between Priority
Fulfillment Services, Inc., and Comerica Bank |
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31.1*
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Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
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31.2*
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Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
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32.1*
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Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 |
28
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Exhibit |
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No. |
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Description of Exhibits |
101.INS**
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XBRL Instance Document. |
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101.SCH**
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XBRL Taxonomy Extension Schema. |
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101.CAL**
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XBRL Taxonomy Extension Calculation Linkbase. |
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101.LAB**
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XBRL Taxonomy Extension Label Linkbase. |
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101.PRE**
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XBRL Taxonomy Extension Presentation Linkbase. |
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(1) |
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Incorporated by reference from PFSweb, Inc. Registration Statement on Form S-1 (Commission
File No. 333-87657). |
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(2) |
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Incorporated by reference from PFSweb, Inc. Form 10-K for the fiscal year ended December, 31,
2005 filed on March 31, 2006. |
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(3) |
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Incorporated by reference from PFSweb, Inc. Report on Form 8-K filed on November 13, 2007. |
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(4) |
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Incorporated by reference from PFSweb, Inc. Report on Form 8-K filed on June 2, 2008. |
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(5) |
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Incorporated by reference from PFSweb, Inc. Form 10-Q filed on August 14, 2009. |
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(6) |
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Incorporated by reference from PFSweb, Inc. Report on Form 8-K filed on July 2, 2010. |
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* |
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Filed Herewith |
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** |
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Furnished Herewith |
29
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 14, 2011
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PFSweb, Inc.
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By: |
/s/ Thomas J. Madden
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Thomas J. Madden |
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Chief Financial Officer,
Chief Accounting Officer,
Executive Vice President |
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30