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, 2008
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 check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company þ |
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 14, 2008 there were 9,935,095 shares of registrants common stock outstanding (after
giving effect to the 1-for-4.7 common share reverse stock split effective June 2, 2008).
PFSWEB, INC. AND SUBSIDIARIES
Form 10-Q
September 30, 2008
INDEX
2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
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September 30, |
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December 31, |
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2008 |
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2007 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
14,701 |
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$ |
14,272 |
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Restricted cash |
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2,780 |
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2,021 |
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Accounts receivable, net of allowance for doubtful accounts of $875
and $1,483 at September 30, 2008 and December 31, 2007, respectively |
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41,064 |
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48,493 |
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Inventories, net of reserves of $2,205 and $2,080 at September 30,
2008 and December 31, 2007, respectively |
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50,005 |
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46,392 |
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Other receivables |
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12,253 |
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10,372 |
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Prepaid expenses and other current assets |
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3,126 |
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2,608 |
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Total current assets |
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123,929 |
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124,158 |
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PROPERTY AND EQUIPMENT, net |
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12,422 |
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11,918 |
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IDENTIFIABLE INTANGIBLES |
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5,219 |
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5,824 |
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GOODWILL |
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15,362 |
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15,362 |
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OTHER ASSETS |
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990 |
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911 |
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Total assets |
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$ |
157,922 |
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$ |
158,173 |
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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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$ |
20,802 |
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$ |
22,238 |
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Trade accounts payable |
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62,860 |
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56,975 |
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Accrued expenses |
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21,265 |
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22,438 |
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Total current liabilities |
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104,927 |
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101,651 |
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LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current
portion |
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2,535 |
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6,378 |
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OTHER LIABILITIES |
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991 |
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1,302 |
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Total liabilities |
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108,453 |
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109,331 |
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COMMITMENTS AND CONTINGENCIES |
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SHAREHOLDERS EQUITY: |
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Preferred stock, $1.00 par value; 1,000,000 shares authorized;
none issued and outstanding |
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Common stock, $0.001 par value; 75,000,000 shares authorized;
9,931,137 and 9,909,401 shares issued at September 30, 2008
and December 31, 2007, respectively; and 9,912,776 and
9,891,040 outstanding at September 30, 2008 and December 31,
2007, respectively |
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10 |
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10 |
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Additional paid-in capital |
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92,610 |
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92,121 |
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Accumulated deficit |
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(45,219 |
) |
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(45,738 |
) |
Accumulated other comprehensive income |
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2,153 |
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2,534 |
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Treasury stock at cost, 18,361 shares |
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(85 |
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(85 |
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Total shareholders equity |
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49,469 |
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48,842 |
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Total liabilities and shareholders equity |
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$ |
157,922 |
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$ |
158,173 |
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The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
3
PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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REVENUES: |
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Product revenue, net |
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$ |
79,157 |
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$ |
85,263 |
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$ |
252,496 |
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$ |
250,398 |
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Service fee revenue |
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22,900 |
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18,398 |
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64,966 |
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53,006 |
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Pass-through revenue |
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7,852 |
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8,334 |
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21,600 |
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21,398 |
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Total net revenues |
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109,909 |
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111,995 |
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339,062 |
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324,802 |
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COSTS OF REVENUES: |
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Cost of product revenue |
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73,128 |
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78,874 |
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233,475 |
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231,443 |
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Cost of service fee revenue |
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15,588 |
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12,912 |
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44,537 |
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38,211 |
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Pass-through cost of revenue |
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7,852 |
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8,334 |
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21,600 |
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21,398 |
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Total costs of revenues |
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96,568 |
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100,120 |
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299,612 |
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291,052 |
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Gross profit |
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13,341 |
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11,875 |
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39,450 |
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33,750 |
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SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES, including stock based
compensation expense of $109 and
$172 in the three months ended
September 30, 2008 and 2007,
respectively, and $438 and $570 in
the nine months ended September 30,
2008 and 2007, respectively |
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12,454 |
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10,678 |
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36,397 |
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32,493 |
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MERGER INTEGRATION EXPENSE |
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150 |
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AMORTIZATION OF IDENTIFIABLE INTANGIBLES |
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202 |
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204 |
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605 |
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612 |
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Total operating expenses |
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12,656 |
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10,882 |
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37,002 |
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33,255 |
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Income from operations |
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685 |
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993 |
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2,448 |
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495 |
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INTEREST EXPENSE, NET |
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426 |
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615 |
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1,123 |
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1,857 |
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Income (loss) before income taxes |
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259 |
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378 |
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1,325 |
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(1,362 |
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INCOME TAX EXPENSE, NET |
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216 |
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216 |
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806 |
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683 |
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NET INCOME (LOSS) |
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$ |
43 |
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$ |
162 |
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$ |
519 |
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$ |
(2,045 |
) |
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NET INCOME (LOSS) PER SHARE: |
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Basic |
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$ |
0.00 |
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$ |
0.02 |
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$ |
0.05 |
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$ |
(0.21 |
) |
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Diluted |
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$ |
0.00 |
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$ |
0.02 |
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$ |
0.05 |
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$ |
(0.21 |
) |
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WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING: |
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Basic |
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9,913 |
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9,889 |
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9,902 |
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9,889 |
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Diluted |
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9,972 |
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10,113 |
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9,991 |
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9,889 |
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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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2008 |
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2007 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income (loss) |
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$ |
519 |
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$ |
(2,045 |
) |
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities: |
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Depreciation and amortization |
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4,819 |
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6,108 |
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Loss on sale of assets |
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17 |
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Provision for doubtful accounts |
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|
208 |
|
Provision for excess and obsolete inventory |
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950 |
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|
426 |
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Deferred income taxes |
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42 |
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70 |
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Stock-based compensation |
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438 |
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|
570 |
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Changes in operating assets and liabilities: |
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Restricted cash |
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227 |
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(607 |
) |
Accounts receivable |
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7,106 |
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|
1,596 |
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Inventories, net |
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(5,252 |
) |
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3,804 |
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Prepaid expenses, other receivables and other assets |
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(3,143 |
) |
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2,009 |
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Accounts payable, accrued expenses and other liabilities |
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5,585 |
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(10,002 |
) |
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Net cash provided by operating activities |
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11,308 |
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2,137 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchases of property and equipment |
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(4,738 |
) |
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(2,924 |
) |
Proceeds from sale of assets |
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117 |
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Decrease in restricted cash |
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146 |
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Net cash used in investing activities |
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(4,621 |
) |
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|
(2,778 |
) |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Payments on capital lease obligations |
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(1,354 |
) |
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|
(1,452 |
) |
Decrease (increase) in restricted cash |
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(986 |
) |
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|
503 |
|
Proceeds from issuance of common stock |
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|
50 |
|
|
|
13 |
|
Proceeds from (payments on) debt, net |
|
|
(3,953 |
) |
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|
248 |
|
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|
Net cash used in financing activities |
|
|
(6,243 |
) |
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|
(688 |
) |
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EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS |
|
|
(15 |
) |
|
|
435 |
|
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|
|
|
|
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|
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|
NET DECREASE (INCREASE) IN CASH AND CASH EQUIVALENTS |
|
|
429 |
|
|
|
(894 |
) |
|
|
|
|
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|
CASH AND CASH EQUIVALENTS, beginning of period |
|
|
14,272 |
|
|
|
15,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
CASH AND CASH EQUIVALENTS, end of period |
|
$ |
14,701 |
|
|
$ |
14,172 |
|
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|
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SUPPLEMENTAL CASH FLOW INFORMATION |
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|
|
|
|
|
|
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
Property and equipment acquired under capital leases |
|
$ |
240 |
|
|
$ |
2,413 |
|
|
|
|
|
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|
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
5
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
1. OVERVIEW AND BASIS OF PRESENTATION
PFSweb, Inc. and its subsidiaries, including Supplies Distributors, Inc., and eCOST.com, Inc.,
are collectively referred to as the Company; Supplies Distributors refers to Supplies
Distributors, Inc. and its subsidiaries; eCOST refers to eCOST.com, Inc.; and PFSweb refers to
PFSweb, Inc. and its subsidiaries excluding Supplies Distributors and eCOST.
PFSweb Overview
PFSweb is an international provider of integrated business process outsourcing services to
major brand name companies seeking to maximize their supply chain efficiencies and to extend their
traditional and e-commerce initiatives in the United States, Canada, and Europe. PFSweb offers a
broad range of services such as professional consulting, technology collaboration, managed web
hosting and internet application development, order management, web-enabled customer contact
centers, customer relationship management, financial services including billing and collection
services and working capital solutions, information management, facilities and operations
management, kitting and assembly services, and international fulfillment and distribution services.
Supplies Distributors Overview
Supplies Distributors, PFSweb and InfoPrint Solutions Company (IPS) a joint venture company
owned by Ricoh and International Business Machines Corporation (IBM), have entered into master
distributor agreements under which Supplies Distributors acts as a master distributor of various
products, primarily IPS product.
Supplies Distributors has obtained certain financing that allows it to fund the working
capital requirements for the sale of primarily IPS products. Pursuant to the transaction management
services agreements between PFSweb and Supplies Distributors, PFSweb provides to Supplies
Distributors transaction management and fulfillment services such as managed web hosting and
maintenance, procurement support, web-enabled customer contact center services, customer
relationship management, financial services including billing and collection services, information
management, and international distribution services. Supplies Distributors does not have its own
sales force and relies upon IPSs sales force and product demand generation activities for its sale
of IPS products. Supplies Distributors sells its products in the United States, Canada and Europe.
All of the agreements between PFSweb and Supplies Distributors were made in the context of a
related party relationship and were negotiated in the overall context of PFSwebs and Supplies
Distributors arrangement with IPS. Although management believes that the terms of these agreements
are generally consistent with fair market values, there can be no assurance that the prices charged
to or by each company under these arrangements are not higher or lower than the prices that may be
charged by, or to, unaffiliated third parties for similar services.
eCOST Overview
eCOST is a multi-category online discount retailer of new, close-out and recertified
brand-name merchandise, selling products primarily to customers in the United States. eCOST offers
products in several merchandise categories, including computer hardware and software, home
electronics, digital imaging, watches and jewelry, housewares, DVD movies, video games and
cellular/wireless. eCOST
carries products from leading manufacturers such as Sony, JVC, Canon, Hewlett-Packard, Denon,
Onkyo, Garmin, Panasonic, Toshiba and Microsoft.
The Companys liquidity has been negatively impacted as a result of the merger with eCOST.
Since the merger, eCOST has experienced a net usage of cash primarily due to losses incurred. As a
result, the Company has had to support eCOSTs cash needs with the goal of achieving a stabilized
operational position and profitable performance. The amount of additional cash needed to support
eCOST operations
6
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
will depend upon working capital requirements, bank financing availability as well
as eCOSTs continued ability to improve its financial results. Further advances to eCOST may be
limited by the Companys current cash and future cash flow and may be restricted by the Companys
credit facility obligations.
In the event eCOST is unable to increase its revenue and/or gross profit from its present
levels, it may fail to comply with one or more of the financial covenants required under its
working capital line of credit. In such event, absent a waiver, the working capital lender would
be entitled to accelerate all amounts outstanding thereunder and exercise all other rights and
remedies, including sale of collateral and demand for payment under the Company parent guaranty.
Any acceleration of the repayment of the credit facilities would have a material adverse impact on
the Companys financial condition and results of operations and no assurance can be given that the
Company would have the financial ability to repay all of such obligations.
Management currently believes eCOST will meet the Companys expectations related to improved
overall profitability. The Company reported improvement in eCOSTs financial results during 2007
and the first nine months of 2008 and currently expects continued improvement as a result of
efforts to increase sales, improve product mix and control operating costs, although there can be
no assurance that these future improvements will be achieved. If eCOST does not meet future
expectations, the Company currently anticipates that it would be able to terminate or sublease
eCOSTs facilities, liquidate remaining inventory through the eCOST website and reduce personnel
related costs as needed so as to minimize any material impact upon the Companys other segments.
Basis of Presentation
The unaudited interim condensed consolidated financial statements as of September 30, 2008,
and for the three and nine months ended September 30, 2008 and 2007, have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission (SEC) and are unaudited.
Certain information and note disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of America have been
condensed or omitted pursuant to the rules and regulations promulgated by the SEC. In the opinion
of management and subject to the foregoing, the unaudited interim condensed consolidated financial
statements of the Company include all adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation of the Companys financial position as of September 30, 2008, its
results of operations for the three and nine months ended September 30, 2008 and 2007 and its cash
flows for the nine months ended September 30, 2008 and 2007. 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 operating expenses in these consolidated financial statements also require management estimates
and assumptions.
7
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
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, 2007 in the section entitled Risk Factors. Based on a critical assessment
of accounting policies and the underlying judgments and uncertainties affecting the application of
those policies, management believes that the Companys consolidated financial statements are fairly
stated in accordance with generally accepted accounting principles in the United States of America,
and provide a fair presentation of the Companys financial position and results of operations.
Investment in Affiliates
Priority Fulfillment Services, Inc. (PFS), a wholly-owned subsidiary of PFSweb, has made
advances to Supplies Distributors that are evidenced by a Subordinated Demand Note (the
Subordinated Note). Under the terms of certain of the Companys debt facilities, the outstanding
balance of the Subordinated Note cannot be increased to more than $6.5 million or decreased to less
than $5.5 million without prior approval of the Companys lenders. As of September 30, 2008, the
outstanding balance of the Subordinated Note was $5.5 million. The Subordinated Note is eliminated
in the Companys consolidated financial statements.
PFS has also made advances to eCOST, which aggregated $10.6 million as of September 30, 2008.
Certain of the Companys debt facilities provide that the total advances to eCOST may not be less
than $2.0 million without prior approval of eCOSTs lender or increased above $11.5 million without
the approval of PFS lender. PFSweb has also advanced to eCOST $4.7 million as of September 30,
2008. PFS has received the approval of its lender to advance an additional $0.9 million to certain
of its subsidiaries and/or affiliates, including eCOST, if needed.
Concentration of Business and Credit Risk
The Companys service fee revenue is generated under contractual service fee relationships
with multiple client relationships. No clients/customers exceeded 10% of consolidated revenue
during the nine months ended September 30, 2008. A summary of the customer and client
concentrations is as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2008 |
|
2007 |
Product Revenue (as a percentage of
Product Revenue): |
|
|
|
|
|
|
|
|
Customer 1 |
|
|
11 |
% |
|
|
10 |
% |
Customer 2 |
|
|
10 |
% |
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
Service Fee Revenue (as a percentage of
Service Fee Revenue): |
|
|
|
|
|
|
|
|
Client 1 |
|
|
40 |
% |
|
|
27 |
% |
Client 2 |
|
|
10 |
% |
|
|
11 |
% |
Client 3 |
|
|
6 |
% |
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
Accounts Receivable: |
|
|
|
|
|
|
|
|
Client/Customer 1 |
|
|
9 |
% |
|
|
11 |
% |
Client 1 has advised PFS that it is not renewing its contract with PFS, which non-renewal is
currently expected to be effective sometime in the first quarter of 2009.
8
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
PFSweb has provided certain collateralized guarantees of its subsidiaries financings and
credit arrangements. These subsidiaries ability to obtain financing on similar terms would be
significantly impacted without these guarantees.
The Company has multiple arrangements with IBM and IPS and is dependent upon the continuation
of such arrangements. Substantially all of the Supplies Distributors revenue is generated by its
sale of product purchased from IPS. These arrangements, which are critical to the Companys
ongoing operations, include Supplies Distributors master distributor agreements, certain of
Supplies Distributors working capital financing agreements, product sales to IBM and IPS business
units and an IBM term master lease agreement. Supplies Distributors also relies upon IPSs sales
force and product demand generation activities and the discontinuance of such activities would have
a material impact upon Supplies Distributors business.
eCOSTs arrangements with its vendors are terminable by either party at will. Loss of any
vendors could have a material adverse effect on eCOSTs financial position, results of operations
and cash flows. Sales of HP and HP-related products represented 48% of eCOSTs net revenues (11%
of the Companys consolidated total net revenues) in the nine months ended September 30, 2008 and
51% of eCOSTs net revenues (12% of the Companys consolidated total net revenues) in the
comparable 2007 period.
Inventories
The Company establishes inventory reserves based upon estimates of declines in values due to
inventories that are slow moving or obsolete, excess levels of inventory or values assessed at
lower than cost. Recoverability of the inventory on hand is measured by comparison of the carrying
value of the inventory to the estimated fair value of the inventory.
Supplies Distributors assumes responsibility for slow-moving inventory under certain master
distributor agreements, subject to certain termination rights, but has the right to return product
rendered obsolete by engineering changes, as defined. In the event PFSweb, Supplies Distributors
and IPS terminate the master distributor agreements, the agreements provide for the parties to
mutually agree on a plan of disposition of Supplies Distributors then existing inventory.
Property and Equipment
The Companys property held under capital leases amounted to approximately $3.6 million and
$4.6 million, net of accumulated amortization of approximately $8.0 million and $10.5 million, at
September 30, 2008 and December 31, 2007, respectively.
Long-Lived Assets
The Company reviews long-lived assets for impairment periodically, but at a minimum annually,
or whenever events or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Long-lived assets include property, intangible assets, goodwill and certain
other assets. Recoverability of assets is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured as the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Fair value would be determined
using appraisals, discounted cash flow analysis or similar valuation techniques. The Company makes
judgments and estimates in conjunction with the
carrying value of these assets, including amounts to be capitalized, depreciation and
amortization methods and useful lives. The Company records impairment losses in the period in
which it determines that the carrying amount is not recoverable. This may require the Company to
make judgments regarding long-term forecasts of their future revenues and costs related to the
assets subject to review.
9
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
Cash Paid
The Company made payments for interest of approximately $1.2 million and $2.1 million during
the nine months ended September 30, 2008 and 2007, respectively. Income taxes of approximately
$1.5 million and $1.4 million were paid by the Company during the nine months ended September 30,
2008 and 2007, respectively.
3. COMPREHENSIVE INCOME (LOSS) (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income (loss) |
|
$ |
43 |
|
|
$ |
162 |
|
|
$ |
519 |
|
|
$ |
(2,045 |
) |
Other
comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
Adjustment |
|
|
(1,041 |
) |
|
|
255 |
|
|
|
(381 |
) |
|
|
252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
(998 |
) |
|
$ |
417 |
|
|
$ |
138 |
|
|
$ |
(1,793 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
4. NET INCOME (LOSS) PER COMMON SHARE
Basic and diluted net income (loss) per share is computed by dividing net income (loss)
by the weighted-average number of common shares outstanding for the reporting period. For the
three and nine months ended September 30, 2008, common stock equivalents of 0.1 million and 0.8
million, respectively, of outstanding options are included in the diluted weighted average number
of shares outstanding. For the three months ended September 30, 2007, common stock equivalents of
0.8 million are included in the diluted weighted average number of shares outstanding. For the
three and nine months ended September 30, 2008, 1.3 million and 0.6 million, respectively, of
outstanding options to purchase common shares were anti-dilutive and have been excluded from the
weighted diluted average share computation. For the three and nine months ended September 30, 2007,
outstanding options of 0.5 and 0.5 million, respectively, to purchase common shares were
antidilutive and have been excluded from the weighted diluted average share computation for each
period. Warrants not included in the calculation of diluted net loss per share for both the three
and nine months ended September 30, 2007 were 0.1 million.
5. STOCK AND STOCK OPTIONS:
On June 2, 2008, the Company effected a 1-for-4.7 reverse split (Reverse Split) of the
Companys common stock. Pursuant to the Reverse Split, the common stock was combined and
reclassified based on a ratio of 4.7 shares of issued and outstanding common stock being combined
and reclassified into one share of common stock. No fractional shares were issued in connection
with the Reverse Split. Shareholders who were entitled to fractional shares received cash in lieu
of fractional shares. All share and per share amounts have been restated to reflect the Reverse
Split on a retro-active basis.
During the nine months ended September 30, 2008, the Company issued an aggregate of 182,556
options to purchase shares of common stock to officers, directors, employees and consultants of the
Company.
10
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
6. VENDOR FINANCING:
|
|
Outstanding obligations under vendor financing arrangements consist of the following (in
thousands): |
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Inventory and working capital financing agreements: |
|
|
|
|
|
|
|
|
United States |
|
$ |
19,581 |
|
|
$ |
23,667 |
|
Europe |
|
|
19,436 |
|
|
|
13,340 |
|
|
|
|
|
|
|
|
Total |
|
$ |
39,017 |
|
|
$ |
37,007 |
|
|
|
|
|
|
|
|
Inventory and Working Capital Financing Agreement, United States
Supplies Distributors has a short-term credit facility with IBM Credit LLC to finance its
distribution of IPS products in the United States, providing financing for eligible IPS inventory
and for certain receivables up to $30.5 million through its expiration in March 2009. As of
September 30, 2008, Supplies Distributors had $5.6 million of available credit under this facility.
The credit facility contains cross default provisions, various restrictions upon the ability of
Supplies Distributors to, among others, merge, consolidate, sell assets, incur indebtedness, make
loans and payments to related parties (including entities directly or indirectly owned by PFSweb,
Inc.), provide guarantees, make investments and loans, pledge assets, make changes to capital stock
ownership structure and pay dividends, as well as financial covenants, such as annualized revenue
to working capital, net profit after tax to revenue, and total liabilities to tangible net worth,
as defined, and are secured by certain of the assets of Supplies Distributors, as well as a
collateralized guaranty of PFSweb. Additionally, PFS is required to maintain a minimum Subordinated
Note receivable balance from Supplies Distributors of $5.5 million and a minimum shareholders
equity of $18.0 million. Borrowings under the credit facility accrue interest, after a defined free
financing period, at prime rate plus 0.5% (5.5% as of September 30, 2008). 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 subsidiaries have a short-term credit facility with IBM
Belgium Financial Services S.A. (IBM Belgium) to finance their distribution of IPS products in
Europe. The asset based credit facility with IBM Belgium provides up to 16.0 million euros
(approximately $22.9 million) in financing for purchasing IPS inventory and for certain receivables
through its expiration in March 2009. As of September 30, 2008, Supplies Distributors European
subsidiaries had 1.9 million euros ($2.7 million) of available credit under this facility. The
credit facility contains cross default provisions, various restrictions upon the ability of
Supplies Distributors and its European subsidiaries to, among others, merge, consolidate, sell
assets, incur indebtedness, make loans and payments to related parties (including entities directly
or indirectly owned by PFSweb, Inc.), provide guarantees, make investments and loans, pledge
assets, make changes to capital stock ownership structure and pay dividends, as well as financial
covenants, such as annualized revenue to working capital, net profit after tax to revenue, and
total liabilities to tangible net worth, as defined, and are secured by certain of the assets of
Supplies Distributors European subsidiaries, as well as collateralized guaranties of Supplies
Distributors and PFSweb. Additionally, PFSweb is required to maintain a minimum Subordinated Note
receivable balance from Supplies Distributors of $5.5 million and a minimum shareholders equity of
$18.0 million. Borrowings under the credit facility accrue interest, after a defined free financing
period, at Euribor plus 1.5% (6.6% as of September 30, 2008). Supplies Distributors European
subsidiaries pay a monthly service fee on the commitment. Given the structure of this facility and
as outstanding balances, which represent inventory purchases, are repaid within twelve months, the
Company has classified the outstanding amounts under this facility as accounts payable in the
consolidated balance sheets.
11
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
7. DEBT AND CAPITAL LEASE OBLIGATIONS;
Outstanding obligations under debt and capital lease obligations consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Loan and security agreements, United States |
|
|
|
|
|
|
|
|
Supplies Distributors |
|
$ |
8,413 |
|
|
$ |
10,353 |
|
PFS |
|
|
3,000 |
|
|
|
7,225 |
|
Credit facility eCOST |
|
|
|
|
|
|
|
|
Factoring agreement, Europe |
|
|
3,289 |
|
|
|
1,212 |
|
Taxable revenue bonds |
|
|
3,200 |
|
|
|
4,000 |
|
Master lease agreements |
|
|
4,433 |
|
|
|
5,033 |
|
Other |
|
|
1,002 |
|
|
|
793 |
|
|
|
|
|
|
|
|
Total |
|
|
23,337 |
|
|
|
28,616 |
|
Less current portion of long-term debt |
|
|
20,802 |
|
|
|
22,238 |
|
|
|
|
|
|
|
|
Long-term debt, less current portion |
|
$ |
2,535 |
|
|
$ |
6,378 |
|
|
|
|
|
|
|
|
Loan and Security Agreement Supplies Distributors
Supplies Distributors has a loan and security agreement with Wachovia Bank, N.A. (Wachovia)
to provide financing for up to $25 million of eligible accounts receivable in the United States and
Canada. As of September 30, 2008, Supplies Distributors had $3.1 million of available credit under
this agreement. The Wachovia facility expires on the earlier of March 29, 2009 or the date on which
the parties to the IPS master distributor agreement no longer operate under the terms of such
agreement and/or IPS no longer supplies products pursuant to such agreement. Borrowings under the
Wachovia facility accrue interest at prime rate or Eurodollar rate plus 1.75% to 2.25%, dependent
on excess availability, as defined. The interest rate as of September 30, 2008 was 5.0% for $4.4
million of outstanding borrowings and 4.5% for $4.0 million of outstanding borrowings. This
agreement contains cross default provisions, various restrictions upon the ability of Supplies
Distributors to, among other things, merge, consolidate, sell assets, incur indebtedness, make
loans and payments to related parties (including entities directly or indirectly owned by PFSweb,
Inc.), provide guarantees, make investments and loans, pledge assets, make changes to capital stock
ownership structure and pay dividends, as well as financial covenants, such as minimum net worth,
as defined, and is secured by all of the assets of Supplies Distributors, as well as a
collateralized guaranty of PFSweb. Additionally, PFS is required to maintain a Subordinated Note
receivable balance from Supplies Distributors of no less than $5.5 million and restricted cash of
less than $5.0 million, and is restricted with regard to transactions with related parties,
indebtedness and changes to capital stock ownership structure. Supplies Distributors has entered
into blocked account agreements with its banks and Wachovia pursuant to which a security interest
was granted to Wachovia for all U.S. and Canadian customer remittances received in specified bank
accounts. At September 30, 2008 and December 31, 2007, these bank accounts held $0.8 million and
$1.4 million, respectively, which was restricted for payment to Wachovia.
Loan and Security Agreement PFS
PFS has a Loan and Security Agreement (Comerica Agreement) with Comerica Bank (Comerica).
The Comerica Agreement provides for up to $10.0 million of eligible accounts receivable financing
through March 2009. There was $3.0 million of outstanding advances as of September 30, 2008. As of
September 30, 2008, PFS had $4.7 million of available credit under this facility. The Comerica
Agreement contains cross default provisions, various restrictions upon PFS ability to, among other
things, merge, consolidate, sell assets, incur indebtedness, make loans and payments to related
parties (including entities directly or indirectly owned by PFSweb, Inc.), make capital
expenditures, make investments and loans, pledge assets, make changes to capital stock ownership
structure, as well as
financial covenants of a minimum tangible net worth of $20 million, as defined, a minimum
earnings before interest and taxes, plus depreciation, amortization and non-cash compensation
accruals, if any, as defined, and a minimum liquidity ratio, as defined. The Comerica Agreement
restricts the amount of the subordinated note receivable from Supplies Distributors to a maximum of
$6.5 million. Comerica has provided approval for PFS to advance an additional $0.9 million to
certain of its subsidiaries, including eCOST, if needed. The Comerica Agreement is secured by all
of the assets of PFS, as well as a guarantee of PFSweb, Inc.
12
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
Credit Facility eCOST
eCOST has an asset-based line of credit facility of up to $7.5 million from Wachovia, through
May 2009, which is collateralized by substantially all of eCOSTs assets. Borrowings under the
facility are limited to a percentage of eligible accounts receivable and inventory. Outstanding
amounts under the facility bear interest at rates ranging from the prime rate to the prime rate
plus 0.5% (5.5% as of September 30, 2008), depending on eCOSTs financial results. As of September
30, 2008, eCOST had $1.2 million of letters of credit outstanding and $2.4 million of available
credit under this facility. In connection with the line of credit, eCOST entered into a cash
management arrangement whereby eCOSTs operating amounts are considered restricted and swept and
used to repay outstanding amounts under the line of credit. As of September 30, 2008 and December
31, 2007, the restricted cash amount was $0.3 million and $0.5 million, respectively. The credit
facility restricts eCOSTs ability to, among other things, merge, consolidate, sell assets, incur
indebtedness, make loans, investments and payments to subsidiaries, affiliates and related parties
(including entities directly or indirectly owned by PFSweb, Inc.), make investments and loans,
pledge assets, make changes to capital stock ownership structure, and requires a minimum tangible
net worth of $0 million, as defined. PFSweb has guaranteed all current and future obligations of
eCOST under this line of credit.
Factoring Agreement
Supplies Distributors European subsidiary has a factoring agreement with Fortis Commercial
Finance N.V. (Fortis) to provide factoring for up to 7.5 million euros (approximately $10.7
million) of eligible accounts receivables through March 2009. As of September 30, 2008, Supplies
Distributors European subsidiary had approximately 1.7 million euros ($2.4 million) of available
credit under this agreement. Borrowings accrue interest at Euribor plus 0.6% (5.7% at September 30,
2008). This agreement contains various restrictions upon the ability of Supplies Distributors
European subsidiary to, among other things, merge, consolidate and incur indebtedness, as well as
financial covenants, such as minimum net worth. This agreement is secured by a guarantee of
Supplies Distributors, up to a maximum of 200,000 euros.
Taxable Revenue Bonds
PFS has a Loan Agreement with the Mississippi Business Finance Corporation (the MBFC) in
connection with the issuance by the MBFC of $5 million MBFC Taxable Variable Rate Demand Limited
Obligation Revenue Bonds, Series 2004 (Priority Fulfillment Services, Inc. Project) (the Bonds).
The MBFC loaned the proceeds of the Bonds to PFS for the purpose of financing the acquisition and
installation of equipment, machinery and related assets located in the Companys Southaven,
Mississippi distribution facility. The Bonds bear interest at a variable rate (4.2% as of
September 30, 2008), as determined by Comerica Securities, as Remarketing Agent. PFS, at its
option, may convert the Bonds to a fixed rate, to be determined by the Remarketing Agent at the
time of conversion.
The primary source of repayment of the Bonds is a letter of credit (the Letter of Credit) in
the initial face amount of $5.1 million issued by Comerica pursuant to a Reimbursement Agreement
between PFS and Comerica under which PFS is obligated to pay to Comerica all amounts drawn under
the Letter of Credit. The Letter of Credit has a maturity date of April 2009 at which time, if not
renewed or replaced, will result in a draw on the undrawn face amount thereof. If the Letter of
Credit is renewed or replaced, the Bonds require future annual principal repayments of $800,000 in
January of each year through 2012. PFS obligations under the Reimbursement Agreement are secured
by substantially all of the assets of
PFS, including restricted cash of $1.5 million and a Company parent guarantee.
Debt Covenants
To the extent the Company or any of its subsidiaries fail to comply with its covenants
applicable to its debt or vendor financing obligations, including the monthly financial covenant
requirements and required level of shareholders equity or net worth, and one or all of the lenders
accelerate the repayment of the credit facility obligations, the Company would be required to repay
all amounts outstanding thereunder. In particular, in the event eCOST is unable to increase its
revenue and/or gross profit from its present levels, it may fail to comply with one or more of the
financial covenants required under its working capital
13
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
line of credit. In such event, absent a
waiver, the working capital lender would be entitled to accelerate all amounts outstanding
thereunder and exercise all other rights and remedies, including sale of collateral and demand for
payment under the Company parent guaranty. Any acceleration of the repayment of the credit
facilities would have a material adverse impact on the Companys financial condition and results of
operations and no assurance can be given that the Company would have the financial ability to repay
all of such obligations.
Master Lease Agreements
The Company has a Term Lease Master Agreement with IBM Credit Corporation (Master Lease
Agreement) that provides for leasing or financing transactions of equipment and other assets,
which generally have terms of 3 years. The outstanding leasing transactions ($0.8 million as of
September 30, 2008 and $0.9 million as of December 31, 2007) are secured by the related equipment.
The Company also has two other master agreements with financing companies that provide for
leasing or financing transactions of certain equipment. The amounts outstanding under these
agreements were $1.4 million and $1.8 million as of September 30, 2008 and December 31, 2007,
respectively, and are secured by the related equipment.
The Company has other leasing and financing agreements and will continue to enter into those
arrangements as needed to finance the purchasing or leasing of certain equipment or other assets.
Borrowings under these agreements are generally secured by the related equipment.
8. SEGMENT INFORMATION
The Company is organized into three operating segments: PFSweb is an international provider of
integrated business process outsourcing solutions and operates as a service fee business; Supplies
Distributors is a master distributor primarily of IPS products; and eCOST is a multi-category
online discount retailer of new, close-out and recertified brand-name merchandise.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenues (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PFSweb |
|
$ |
32,645 |
|
|
$ |
28,814 |
|
|
$ |
92,637 |
|
|
$ |
80,729 |
|
Supplies Distributors |
|
|
55,448 |
|
|
|
58,313 |
|
|
|
177,795 |
|
|
|
174,718 |
|
eCOST |
|
|
23,709 |
|
|
|
26,950 |
|
|
|
74,701 |
|
|
|
75,680 |
|
Eliminations |
|
|
(1,893 |
) |
|
|
(2,082 |
) |
|
|
(6,071 |
) |
|
|
(6,325 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
109,909 |
|
|
$ |
111,995 |
|
|
$ |
339,062 |
|
|
$ |
324,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations (in
thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PFSweb |
|
$ |
6 |
|
|
$ |
115 |
|
|
$ |
(289 |
) |
|
$ |
(1,658 |
) |
Supplies Distributors |
|
|
1,427 |
|
|
|
1,570 |
|
|
|
5,136 |
|
|
|
4,998 |
|
eCOST |
|
|
(748 |
) |
|
|
(692 |
) |
|
|
(2,399 |
) |
|
|
(2,845 |
) |
Eliminations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
685 |
|
|
$ |
993 |
|
|
$ |
2,448 |
|
|
$ |
495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
(in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PFSweb |
|
$ |
1,426 |
|
|
$ |
1,760 |
|
|
$ |
4,074 |
|
|
$ |
5,342 |
|
Supplies Distributors |
|
|
2 |
|
|
|
6 |
|
|
|
12 |
|
|
|
15 |
|
eCOST |
|
|
248 |
|
|
|
255 |
|
|
|
733 |
|
|
|
751 |
|
Eliminations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,676 |
|
|
$ |
2,021 |
|
|
$ |
4,819 |
|
|
$ |
6,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Capital expenditures (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PFSweb |
|
$ |
2,987 |
|
|
$ |
818 |
|
|
$ |
4,467 |
|
|
$ |
2,667 |
|
Supplies Distributors |
|
|
|
|
|
|
|
|
|
|
77 |
|
|
|
7 |
|
eCOST |
|
|
96 |
|
|
|
115 |
|
|
|
194 |
|
|
|
250 |
|
Eliminations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,083 |
|
|
$ |
933 |
|
|
$ |
4,738 |
|
|
$ |
2,924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Assets (in thousands): |
|
|
|
|
|
|
|
|
PFSweb |
|
$ |
103,759 |
|
|
$ |
102,950 |
|
Supplies Distributors |
|
|
83,134 |
|
|
|
79,446 |
|
eCOST |
|
|
30,856 |
|
|
|
33,615 |
|
Eliminations |
|
|
(59,827 |
) |
|
|
(57,838 |
) |
|
|
|
|
|
|
|
|
|
$ |
157,922 |
|
|
$ |
158,173 |
|
|
|
|
|
|
|
|
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 has disputed the adjustment, but
if the dispute is not resolved favorably, additional taxes of approximately $1.7 million could be
assessed against the Company.
On July 25, 2007 a purported class action lawsuit entitled Darral Frank and Joseph F. Keeley,
Jr.. v. PC Mall, Inc. dba eCOST.com and eCOST.com, Inc. was filed in the Superior Court of
California, Los Angeles County. The purported class consists of all of current and former sales
representatives who worked for the defendants in California from July 24, 2003 through July 24,
2007. The lawsuit alleges that the defendants failed to pay overtime compensation and interest
thereon, failed to timely pay compensation to terminated employees and failed to provide meal and
rest periods, all in violation of the California Labor Code and Business and Professions Code. An
order granting preliminary approval of a settlement of the matter for $0.1 million has been entered
and final approval is expected in December 2008.
The Company is subject to claims in the ordinary course of business, including claims of
alleged infringement by the Company or its subsidiaries of the patents, trademarks and other
intellectual property rights of third parties. If the party asserting such claims commences
litigation, the Company could be required to defend itself or its customers. Except as disclosed
herein, the Company is not aware of any such litigation.
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, 2007, could cause our results to differ
materially from those expressed in our forward-looking statements. These factors include:
|
|
|
our ability to retain and expand relationships with existing clients and attract and
implement new clients; |
|
|
|
|
our reliance on the fees generated by the transaction volume or product sales of our
clients; |
|
|
|
|
our reliance on our clients projections or transaction volume or product sales; |
|
|
|
|
our dependence upon our agreements with International Business Machines Corporation
(IBM) and InfoPrint Solutions Company (IPS), a joint venture company owned by Ricoh and
IBM; |
|
|
|
|
our dependence upon our agreements with our major clients; |
|
|
|
|
our client mix, their business volumes and the seasonality of their business; |
|
|
|
|
our ability to finalize pending contracts; |
|
|
|
|
the impact of strategic alliances and acquisitions; |
|
|
|
|
trends in e-commerce, outsourcing, government regulation both foreign and domestic and
the market for our services; |
|
|
|
|
whether we can continue and manage growth; |
|
|
|
|
increased competition; |
|
|
|
|
our ability to generate more revenue and achieve sustainable profitability; |
|
|
|
|
effects of changes in profit margins; |
|
|
|
|
the customer and supplier concentration of our business; |
|
|
|
|
the unknown effects of possible system failures and rapid changes in technology; |
|
|
|
|
foreign currency risks and other risks of operating in foreign countries; |
|
|
|
|
potential litigation; |
|
|
|
|
impact of reverse stock split; |
|
|
|
|
our dependency on key personnel; |
|
|
|
|
the impact of new accounting standards, and changes in existing accounting rules or the
interpretations of those rules; |
|
|
|
|
our ability to raise additional capital or obtain additional financing; |
|
|
|
|
our ability and the ability of our subsidiaries to borrow under current financing
arrangements and maintain compliance with debt covenants; |
|
|
|
|
relationship with and our guarantees of certain of the liabilities and indebtedness of
our subsidiaries; |
|
|
|
|
whether outstanding warrants issued in a prior private placement will be exercised in
the future; |
|
|
|
|
our ability to successfully achieve the anticipated benefits of our merger with eCOST; |
|
|
|
|
taxation on the sale of our products; |
|
|
|
|
eCOSTs potential indemnification obligations to its former parent; |
|
|
|
|
eCOSTs ability to maintain existing and build new relationships with manufacturers and
vendors and the success of its advertising and marketing efforts; |
|
|
|
|
eCOSTs ability to increase its sales revenue and sales margin and improve operating
efficiencies; and |
|
|
|
|
eCOSTs ability to generate projected cash flows sufficient to cover the values of its
intangible assets. |
16
We have based these statements on our current expectations about future events. Although we
believe that the expectations reflected in our forward-looking statements are reasonable, we cannot
guarantee you that these expectations actually will be achieved. In addition, some forward-looking
statements are based upon assumptions as to future events that may not prove to be accurate.
Therefore, actual outcomes and
results may differ materially from what is expected or forecasted in such forward-looking
statements. We undertake no obligation to update publicly any forward-looking statement for any
reason, even if new information becomes available or other events occur in the future.
Overview
We are an international provider of integrated business process outsourcing solutions to major
brand name companies seeking to maximize their supply chain efficiencies and to extend their
traditional business and e-commerce initiatives as well as a leading multi-category online discount
retailer of new, close-out and recertified brand-name merchandise. We derive our revenues from
three business segments: business process outsourcing, a master distributor and a discount online
retailer.
First, in our business process outsourcing segment we derive our revenues from a broad range
of services, including professional consulting, technology collaboration, order management, managed
web hosting and web development, customer relationship management, financial services including
billing and collection services and working capital solutions, kitting and assembly services,
information management and international fulfillment and distribution services. We offer our
services as an integrated solution, which enables our clients to outsource their complete
infrastructure needs to a single source and to focus on their core competencies. Our distribution
services are conducted at warehouses that we lease or manage and include real-time inventory
management and customized picking, packing and shipping of our clients customer orders. We
currently offer the ability to provide infrastructure and distribution solutions to clients that
operate in a range of vertical markets, including technology manufacturing, computer products,
printers, cosmetics, fragile goods, high security collectibles, pharmaceuticals, contemporary home
furnishings, apparel, aviation, telecommunications and consumer electronics, among others.
In this business process outsourcing segment, we do not own the underlying inventory or the
resulting accounts receivable, but provide management services for these client-owned assets. We
typically charge our service fee revenue on a cost-plus basis, a percent of shipped revenue basis
or a per-transaction basis, such as a per-minute basis for web-enabled customer contact center
services and a per-item basis for fulfillment services. Additional fees are billed for other
services. We price our services based on a variety of factors, including the depth and complexity
of the services provided, the amount of capital expenditures or systems customization required, the
length of contract and other factors.
Many of our service fee contracts involve third-party vendors who provide additional services
such as package delivery. The costs we are charged by these third-party vendors for these services
are often passed on to our clients. Our billings for reimbursements of these and other
out-of-pocket expenses include travel, shipping and handling costs and telecommunication charges
are included in pass-through revenue.
Our second business segment is a product revenue model. In this segment, we are a master
distributor of product for IPS and certain other clients. In this capacity, we purchase, and thus
own, inventory and recognize the corresponding product revenue. As a result, upon the sale of
inventory, we own the accounts receivable. Freight costs billed to customers are reflected as
components of product revenue. This business segment requires significant working capital
requirements, for which we have senior credit facilities to provide for approximately $90 million
of available financing.
Our third business segment is a web-commerce product revenue model focused on the sale of
products to a broad range of consumer and small business customers. In this segment we operate as
a multi-category online discount retailer of new, close-out and recertified brand-name
merchandise. Our product line currently offers approximately 200,000 products in several primary
merchandise categories, primarily including computer hardware and software, home electronics,
digital imaging, watches and jewelry, housewares, DVD movies, video games and cellular/wireless.
Growth is a key element to achieving our future goals, including achieving and maintaining
sustainable profitability. Growth in our business process outsourcing segment is driven by two
main elements: new
17
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,
which, by nature, require a longer duration to close but also often provide the opportunity to be
higher-quality and longer duration engagements.
Growth within our product revenue business is primarily driven by our ability to attract new
master
distributor arrangements with IPS or other manufacturers and the sales and marketing efforts
of the manufacturers and third party sales partners.
Growth within our web-commerce product revenue model is primarily driven by eCOSTs ability to
increase sales and expand its product line.
We continue to monitor and control our costs to focus on profitability. While we are
targeting our new service fee contracts to yield increased gross profit, we also expect to incur
incremental investments to implement new contracts, investments in infrastructure and sales and
marketing to support our targeted growth and increased public company professional fees.
Our expenses comprise primarily four categories: 1) cost of product revenue, 2) cost of
service fee revenue, 3) cost of pass-through revenue and 4) operating expenses.
Cost of product revenues consists of the purchase price of product sold and freight costs,
which are reduced by certain reimbursable expenses. These reimbursable expenses include
pass-through customer marketing programs, direct costs incurred in passing on any price decreases
offered by vendors to cover price protection and certain special bids, the cost of products
provided to replace defective product returned by customers and certain other expenses as defined
under the master distributor agreements. Vendor marketing programs, such as co-op advertising,
also reduce cost of product revenue.
Cost of service fee revenue consists primarily of compensation and related expenses for our
web-enabled customer contact center services, international fulfillment and distribution services
and professional consulting services, and other fixed and variable expenses directly related to
providing services under the terms of fee based contracts, including certain occupancy and
information technology costs and depreciation and amortization expenses.
Cost of pass-through revenue the related reimbursable costs for pass-through expenditures
are reflected as cost of pass-through revenue.
Operating expenses consist primarily of selling, general and administrative (SG&A)
expenses such as compensation and related expenses for sales and marketing staff, advertising,
on-line marketing and catalog production, distribution costs (excluding freight) applicable to the
Supplies Distributors and eCOST businesses, executive, management and administrative personnel and
other overhead costs, including certain occupancy and information technology costs and depreciation
and amortization expenses.
Monitoring and controlling our available cash balances continues to be a primary focus. Our
cash and liquidity positions are important components of our financing of both current operations
and our targeted growth. In recent years we have added to our available cash and liquidity
positions through various transactions:
|
|
|
Each of our primary operating subsidiaries has one or more asset based working
capital financing agreements with various lenders. |
|
|
|
|
Between 2003 and 2006, we raised approximately $9.3 million in net proceeds from the
sale of common stock in private placements to certain investors. |
18
Results of Operations
For the Interim Periods Ended September 30, 2008 and 2007
The following table sets forth certain historical financial information from our unaudited
interim condensed consolidated statements of operations expressed as a percent of net revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net Revenues |
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue, net |
|
$ |
79.1 |
|
|
$ |
85.3 |
|
|
$ |
(6.2 |
) |
|
|
72.0 |
% |
|
|
76.1 |
% |
|
$ |
252.5 |
|
|
$ |
250.4 |
|
|
$ |
2.1 |
|
|
|
74.4 |
% |
|
|
77.1 |
% |
Service fee revenue |
|
|
22.9 |
|
|
|
18.4 |
|
|
|
4.5 |
|
|
|
20.9 |
% |
|
|
16.4 |
% |
|
|
65.0 |
|
|
|
53.0 |
|
|
|
12.0 |
|
|
|
19.2 |
% |
|
|
16.3 |
% |
Pass-through revenue |
|
|
7.9 |
|
|
|
8.3 |
|
|
|
(0.4 |
) |
|
|
7.1 |
% |
|
|
7.5 |
% |
|
|
21.6 |
|
|
|
21.4 |
|
|
|
0.2 |
|
|
|
6.4 |
% |
|
|
6.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
109.9 |
|
|
|
112.0 |
|
|
|
(2.1 |
) |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
339.1 |
|
|
|
324.8 |
|
|
|
14.3 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue (1) |
|
|
73.1 |
|
|
|
78.9 |
|
|
|
(5.8 |
) |
|
|
92.4 |
% |
|
|
92.5 |
% |
|
|
233.5 |
|
|
|
231.5 |
|
|
|
2.0 |
|
|
|
92.5 |
% |
|
|
92.4 |
% |
Cost of service fee revenue (2) |
|
|
15.6 |
|
|
|
12.9 |
|
|
|
2.7 |
|
|
|
68.1 |
% |
|
|
70.2 |
% |
|
|
44.5 |
|
|
|
38.2 |
|
|
|
6.3 |
|
|
|
68.6 |
% |
|
|
72.1 |
% |
Pass-through cost of revenue
(3) |
|
|
7.9 |
|
|
|
8.3 |
|
|
|
(0.4 |
) |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
21.6 |
|
|
|
21.4 |
|
|
|
0.2 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
|
96.6 |
|
|
|
100.1 |
|
|
|
(3.5 |
) |
|
|
87.9 |
% |
|
|
89.4 |
% |
|
|
299.6 |
|
|
|
291.1 |
|
|
|
8.5 |
|
|
|
88.4 |
% |
|
|
89.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue gross profit |
|
|
6.0 |
|
|
|
6.4 |
|
|
|
(0.4 |
) |
|
|
7.6 |
% |
|
|
7.5 |
% |
|
|
19.0 |
|
|
|
18.9 |
|
|
|
0.1 |
|
|
|
7.5 |
% |
|
|
7.6 |
% |
Service fee gross profit |
|
|
7.3 |
|
|
|
5.5 |
|
|
|
1.8 |
|
|
|
31.9 |
% |
|
|
29.8 |
% |
|
|
20.5 |
|
|
|
14.8 |
|
|
|
5.7 |
|
|
|
31.4 |
% |
|
|
27.9 |
% |
Pass-through gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit |
|
|
13.3 |
|
|
|
11.9 |
|
|
|
1.4 |
|
|
|
12.1 |
% |
|
|
10.6 |
% |
|
|
39.5 |
|
|
|
33.7 |
|
|
|
5.8 |
|
|
|
11.6 |
% |
|
|
10.4 |
% |
|
Operating Expenses |
|
|
12.7 |
|
|
|
10.9 |
|
|
|
1.8 |
|
|
|
11.5 |
% |
|
|
9.7 |
% |
|
|
37.0 |
|
|
|
33.2 |
|
|
|
3.8 |
|
|
|
10.9 |
% |
|
|
10.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
0.6 |
|
|
|
1.0 |
|
|
|
(0.4 |
) |
|
|
0.6 |
% |
|
|
0.9 |
% |
|
|
2.5 |
|
|
|
0.5 |
|
|
|
2.0 |
|
|
|
0.7 |
% |
|
|
0.2 |
% |
Interest expense, net |
|
|
0.4 |
|
|
|
0.6 |
|
|
|
(0.2 |
) |
|
|
0.4 |
% |
|
|
0.6 |
% |
|
|
1.2 |
|
|
|
1.9 |
|
|
|
(0.7 |
) |
|
|
0.3 |
% |
|
|
0.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income
taxes |
|
|
0.2 |
|
|
|
0.4 |
|
|
|
(0.2 |
) |
|
|
0.2 |
% |
|
|
0.3 |
% |
|
|
1.3 |
|
|
|
(1.4 |
) |
|
|
2.7 |
|
|
|
0.4 |
% |
|
|
(0.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense, net |
|
|
0.2 |
|
|
|
0.2 |
|
|
|
|
|
|
|
0.2 |
% |
|
|
0.2 |
% |
|
|
0.8 |
|
|
|
0.7 |
|
|
|
0.1 |
|
|
|
0.2 |
% |
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
0.0 |
|
|
$ |
0.2 |
|
|
$ |
(0.2 |
) |
|
|
|
% |
|
|
0.1 |
% |
|
$ |
0.5 |
|
|
$ |
(2.0 |
) |
|
$ |
2.5 |
|
|
|
0.2 |
% |
|
|
(0.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
% of net revenues represents the percent of Product revenue, net. |
|
(2) |
|
% of net revenues represents the percent of Service fee revenue. |
|
(3) |
|
% of net revenues represents the percent of Pass-through revenue. |
Product Revenue, net. eCOST product revenue was $23.7 million in the three months ended
September 30, 2008, a 12.0% decrease as compared to $26.9 million in the comparable quarter of the
prior year. eCOST product revenue was $74.7 million in the nine months ended September 30, 2008, a
1.3% decrease as compared to $75.7 million in the comparable period of the prior year. The
decrease for both periods is primarily due to a decline in sales to its business to business
channel during the 2008 period partially offset by an increase in its higher margin business to
consumer sales channel. The business to consumer sales channel increase is primarily due to
continued emphasis on growth through an expanded product line, improved service capabilities and
enhanced website capabilities.
Supplies Distributors product revenue of $55.4 million decreased $2.9 million, or 4.9% in the
three months ended September 30, 2008 as compared to the same quarter of the prior year. The
decrease is primarily due to decreased sales volume on certain products partially offset by the
impact of foreign exchange rates.
Supplies Distributors product revenue of $177.8 million increased $3.1 million, or 1.8% in the
nine months ended September 30, 2008 as compared to the same period of the prior year. The
increase is
19
primarily due to the negative impact of foreign currency fluctuations during the 2007
nine month period that created alternative purchasing channels for certain customers, which did not
occur in 2008.
Service Fee Revenue. Service fee revenue for the three and nine months ended September 30,
2008 included increased service fees generated from the impact of new service contract
relationships that were added in 2007, benefits from incremental project work and a modified
contract with an existing client. The change in service fee revenue is shown below ($ millions):
|
|
|
|
|
|
|
|
|
|
|
Three |
|
|
Nine |
|
|
|
Months |
|
|
Months |
|
Period ended September 30, 2007 |
|
$ |
18.4 |
|
|
$ |
53.0 |
|
New service contract relationships, including
certain incremental projects under new
contracts |
|
|
2.0 |
|
|
|
5.1 |
|
Change in existing client service fees and
certain incremental projects with existing
clients |
|
|
3.6 |
|
|
|
9.8 |
|
Terminated clients not included in 2008 revenue |
|
|
(1.1 |
) |
|
|
(2.9 |
) |
|
|
|
|
|
|
|
Period ended September 30, 2008 |
|
$ |
22.9 |
|
|
$ |
65.0 |
|
|
|
|
|
|
|
|
Cost of Product Revenue. The gross margin for eCOST was $2.2 million or 9.2% of product
revenue in the three months ended September 30, 2008 and $2.4 million or 8.8% of product revenue
during the comparable period of 2007. eCOST gross margin was $6.3 million or 8.5% of product
revenue in the nine months ended September 30, 2008 and $6.4 million or 8.4% of product revenue
during the comparable period of 2007. The increase in gross margin is primarily due to a shift in
product sales to the higher margin business to consumer channel.
Supplies Distributors cost of product revenue decreased by $2.7 million, or 5.0%, to $51.6
million in the three months ended September 30, 2008, primarily as a result of decreased product
sales. The resulting gross profit margin was $3.8 million or 6.9% of product revenue for the three
months ended September 30, 2008 and $4.0 million or 6.9% of product revenue for the comparable 2007
period.
Supplies Distributors cost of product revenue increased by $3.0 million, or 1.8%, to $165.1
million in the nine months ended September 30, 2008, primarily as a result of increased product
sales. The resulting gross profit margin was $12.7 million or 7.1% of product revenue for the nine
months ended September 30, 2008 and $12.6 million or 7.2% of product revenue for the comparable
2007 period. The gross profit margin in each of the nine month periods ended September 30, 2008
and 2007 includes the impact of certain incremental inventory cost reductions.
Cost of Service Fee Revenue. The increase in gross profit as a percentage of service fees to
31.9% in the three months ended September 30, 2008 from 29.8% in same period of 2007 is primarily
due to the impact of certain existing client projects and the impact of a modified contract with an
existing client.
The increase in gross profit as a percentage of service fees to 31.4% in the nine months ended
September 30, 2008 from 27.9% in same period of 2007 is primarily due to the impact of certain
existing client projects and the impact of a modified contract with an existing client. We expect
to earn an overall average gross profit of 25-30% on existing and new service fee contracts, but we
have and may continue to accept lower gross margin percentages on certain contracts depending on
contract scope and other factors.
Operating Expenses. Operating expenses for the three months ended September 30, 2008 increased
$1.8 million to $12.7 million from the same 2007 period. Operating expenses were $37.0 million for
the nine months ended September 30, 2008, or 10.9% of total net revenues, as compared to $33.3
million, or 10.2% of total net revenues, for the nine months ended September 30, 2007. The
increase is primarily due to certain personnel related expenses and the prior year results
benefitting from a favorable impact of exchange rates on certain intercompany balances.
Income Taxes. We recorded a tax provision associated primarily with state income taxes and our
subsidiary Supplies Distributors Canadian and European operations. A valuation allowance has been
provided for the majority of our net deferred tax assets as of September 30, 2008 and December 31,
2007, which are primarily related to our net operating loss carryforwards, and certain foreign
deferred tax assets.
20
We expect that we will continue to record an income tax provision associated
with state income taxes and Supplies Distributors Canadian and European results of operations.
Liquidity and Capital Resources
Net cash provided by operating activities was $11.3 million for the nine months ended
September 30, 2008, and primarily resulted from cash income before working capital changes of $6.8
million, a $5.6 million of increase in accounts payable, accrued expenses and other liabilities and
a $7.1 million decrease in accounts receivable. These benefits were offset by a $3.1 million
increase in prepaid expenses, other receivables and other assets and a $5.3 million increase in
inventories.
Net cash provided by operating activities was $2.1 million for the nine months ended September
30, 2007, and primarily resulted from $5.3 million of benefit from net loss as adjusted for
non-cash items, a $3.8 million decrease in inventory, a decrease in prepaid expenses, other
receivables and other assets of $2.0 million and a $1.6 million decrease in accounts receivable
partially offset by a decrease in accounts payable, accrued expenses and other liabilities of $10.0
million and an increase in restricted cash of $0.6 million.
Net
cash used in investing activities for the nine months ended
September 30, 2008 and 2007 totaled
$4.6 million and $2.8 million, respectively, resulting primarily from capital expenditures.
Capital expenditures have historically consisted primarily of additions to upgrade our
management information systems, and general expansion and upgrades to our facilities, both domestic
and foreign. We expect to incur capital expenditures to support new contracts and anticipated
future growth opportunities. Based on our current client business activity and our targeted growth
plans, we anticipate our total investment in upgrades and additions to facilities and information
technology services for the upcoming twelve months will be approximately $4 to $7 million, although
additional capital expenditures may be necessary to support the infrastructure requirements of new
clients as well as the eCOST infrastructure. To maintain our current operating cash position, a
portion of these expenditures may be financed through debt, operating or capital leases or
additional equity. We may elect to modify or defer a portion of such anticipated investments in
the event we do not obtain the financing or achieve the financial results necessary to support such
investments.
Net cash used in financing activities was approximately $6.2 million for the nine months ended
September 30, 2008, primarily representing $4.0 million of payments on debt, a $1.0 million
increase in restricted cash and payments on capital leases of $1.4 million.
Net cash used in financing activities was approximately $0.7 million for the nine months ended
September 30, 2007, primarily representing $1.5 million of payments on capital leases partially
offset by a $0.5 million decrease in restricted cash and $0.2 million of proceeds from debt.
Our liquidity has been negatively impacted as a result of the merger with eCOST. eCOST has
experienced a net usage of cash primarily due to losses incurred. As a result, PFSweb has had to
support eCOSTs cash needs with the goal of achieving a stabilized operational position. The
amount of further cash needed to support eCOST operations will depend upon the financing available
as well as eCOSTs continued ability to improve its financial
results. eCOSTs results improved in 2007 and during the first nine months of 2008 and we currently expect continued improvement
as a result of efforts to increase sales, improve product mix and further improve operational
efficiencies.
Our liquidity may also be negatively impacted by an expected decline in service fee revenue
due to the current general economic decline as well as the nonrenewal of a large contract with an
agency of the U.S. government. We currently intend to seek to offset the impact of lower service
fee revenue by reducing variable costs and expenses and redeploying existing infrastructure to
other client activities. No assurance can be given that we will be successful, in whole or in part,
in such efforts, nor can any assurance be given that the decline in service fee revenue will not
have a material adverse effect upon our business, financial condition or results of operations.
21
In June 2008, our Board of Directors authorized a 1-for-4.7 reverse stock split to reduce the
number of outstanding shares of common stock. There was no impact on the number of authorized
shares or the stated par value of our common stock as a result of the reverse stock split.
During the nine months ended September 30, 2008, our working capital decreased to $19.0
million from $22.5 million at December 31, 2007, primarily due to the reclassification of $2.4
million in taxable revenue bonds to short-term debt due to the April 2009 maturity of the related
letters of credit securing the taxable revenue bonds. To obtain additional financing in the
future, in addition to our current cash position, we plan to evaluate various financing
alternatives including the sale of equity, utilizing capital or operating leases, borrowing under
our credit facilities, expanding our current credit facilities, entering into new debt agreements
or transferring to third parties a portion of our subordinated loan balance due from Supplies
Distributors. In conjunction with certain of these alternatives, we may be required to provide
certain letters
of credit to secure these arrangements. No assurances can be given that we will be successful
in obtaining any additional financing or the terms thereof. In particular, all of our material
credit agreements expire, by their terms, in March 2009. If we are unable to renew such credit
facilities upon the same or substantially the same terms, our business and financial condition will
be materially adversely affected. We currently believe our cash position, financing available
under our credit facilities (assuming renewal in March 2009) and funds generated from operations
(including targeted cost reductions related to the nonrenewal of our U.S. government contract) will
satisfy our presently known operating cash needs, our working capital and capital expenditure
requirements, our current debt and lease obligations, and additional loans to our subsidiaries
Supplies Distributors and eCOST, if necessary, for at least the next twelve months.
Recently, the credit markets and the financial services industry have been experiencing a
period of unprecedented turmoil and upheaval characterized by the bankruptcy, failure, collapse or
sale of various financial institutions and an unprecedented level of intervention from the United
States and foreign governments. While the ultimate outcome of these events cannot be predicted,
they may have a material adverse effect on our liquidity, financial condition, results of
operations and our ability to renew our credit facilities.
The following is a schedule of our total contractual cash obligations which is comprised of
operating leases, debt, vendor financing and capital leases (including interest) as of September
30, 2008, (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period |
|
|
|
|
|
|
|
Less than |
|
|
1-3 |
|
|
3-5 |
|
|
More than |
|
Contractual Obligations |
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
Debt and vendor financing |
|
$ |
59,425 |
|
|
$ |
58,501 |
|
|
$ |
746 |
|
|
$ |
178 |
|
|
$ |
|
|
Capital lease obligations |
|
|
3,663 |
|
|
|
1,792 |
|
|
|
1,723 |
|
|
|
148 |
|
|
|
|
|
Operating leases |
|
|
18,719 |
|
|
|
7,830 |
|
|
|
9,690 |
|
|
|
1,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
81,807 |
|
|
$ |
68,123 |
|
|
$ |
12,159 |
|
|
$ |
1,525 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In support of certain debt instruments and leases, as of September 30, 2008, we had $2.8
million of cash restricted for payment of capital expenditures or repayments 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. To the extent we fail to comply with our debt covenants, including
the monthly financial covenant requirements and our required level of shareholders equity, and the
lenders accelerate the repayment of the credit facility obligations, we would be required to repay
all amounts outstanding thereunder. In particular, in the event eCOST is unable to increase its
revenue and/or gross profit from its present levels, it may fail to comply with one or more of the
financial covenants required under its working capital line of credit. In such event, absent a
waiver, the working capital lender would be entitled to accelerate all amounts outstanding
thereunder and exercise all other rights and remedies, including sale of collateral and payment
under our parent guaranty. A requirement to accelerate the repayment of the credit facility
obligations would have a material adverse impact on our financial condition and results of
operations. We can provide no assurance that we will have the financial ability to repay all of
such obligations. As of September 30, 2008, we were in compliance with all debt covenants. We do
not have any other material financial commitments, although future client contracts may require
capital expenditures and lease commitments to support the services provided to such clients.
22
In the future, we may attempt to acquire other businesses or seek an equity or strategic
partner to generate capital or expand our services or capabilities in connection with our efforts
to grow our business. Acquisitions involve certain risks and uncertainties and may require
additional financing. Therefore, we can give no assurance with respect to whether we will be
successful in identifying businesses to acquire or an equity or strategic partner, whether we or
they will be able to obtain financing to complete a transaction, or whether we or they will be
successful in operating the acquired business.
To finance their distribution of IPS products, Supplies Distributors and its subsidiaries have
short-term credit facilities with IBM Credit LLC (IBM Credit) and IBM Belgium Financial Services
S.A. (IBM Belgium). We have provided a collateralized guaranty to secure the repayment of these
credit facilities. These asset-based credit facilities provided financing for up to $30.5 million
and up to 16.0 million euros
(approximately $22.9 million) with IBM Credit and IBM Belgium, respectively. These agreements
expire in March 2009.
Supplies Distributors also has a loan and security agreement with Wachovia Bank, N.A.
(Wachovia) to provide financing for up to $25 million of eligible accounts receivables in the
United States and Canada. The Wachovia facility expires on the earlier of March 29, 2009 or the
date on which the parties to the IPS master distributor agreement no longer operate under the terms
of such agreement and/or IPS no longer supplies products pursuant to such agreement.
Supplies Distributors European subsidiary has a factoring agreement with Fortis Commercial
Finance N.V. (Fortis) to provide factoring for up to 7.5 million euros (approximately $10.7
million) of eligible accounts receivables through March 2009.
These credit facilities contain cross default provisions, various restrictions upon the
ability of Supplies Distributors and its subsidiaries to, among other things, merge, consolidate,
sell assets, incur indebtedness, make loans and payments to related parties (including entities
directly or indirectly owned by PFSweb, Inc.), provide guarantees, make investments and loans,
pledge assets, make changes to capital stock ownership structure and pay dividends, as well as
financial covenants, such as cash flow from operations, annualized revenue to working capital, net
profit after tax to revenue, minimum net worth and total liabilities to tangible net worth, as
defined, and are secured by all of the assets of Supplies Distributors, as well as a collateralized
guaranty of PFSweb. Additionally, we are required to maintain a subordinated loan to Supplies
Distributors of no less than $5.5 million, maintain restricted cash of less than $5.0 million, are
restricted with regard to transactions with related parties, indebtedness and changes to capital
stock ownership structure and a minimum shareholders equity of at least $18.0 million.
Furthermore, we are obligated to repay any over-advance made to Supplies Distributors or its
subsidiaries under these facilities if they are unable to do so. We have also provided a guarantee
of the obligations of Supplies Distributors and its subsidiaries to IBM and IPS, excluding the
trade payables that are financed by IBM credit.
Our subsidiary, Priority Fulfillment Services, Inc. (PFS), has a Loan and Security Agreement
with Comerica Bank (Comerica), which provides for up to $10.0 million of eligible accounts
receivable financing through March 2009. We entered this Agreement to supplement our existing cash
position, and provide funding for our current and future operations, including our targeted growth.
The Agreement contains cross default provisions, various restrictions upon our ability to, among
other things, merge, consolidate, sell assets, incur indebtedness, make loans and payments to
subsidiaries, affiliates and related parties (including entities directly or indirectly owned by
PFSweb, Inc.), make capital expenditures, make investments and loans, pledge assets, make changes
to capital stock ownership structure, as well as financial covenants of a minimum tangible net
worth of $20 million, as defined, and a minimum liquidity ratio, as defined. The agreement also
limits PFS ability to increase the subordinated loan to Supplies Distributors to more than $6.5
million and provides the approval for PFS to advance an additional $0.9 million to certain of its
subsidiaries and/or affiliates, including eCOST, if needed. The agreement is secured by all of the
assets of PFS, as well as a guarantee of PFSweb.
eCOST currently has an asset-based line of credit facility of up to $7.5 million with
Wachovia, which is collateralized by substantially all of eCOSTs assets and expires in May 2009.
Borrowings under the
23
facility are limited to a percentage of eligible accounts receivable and
letter of credit availability is limited to a percentage of accounts receivable and inventory. As
of September 30, 2008, eCOST had $1.2 million of letters of credit outstanding and $2.4 million of
available credit under this facility. The credit facility restricts eCOSTs ability to, among
other things, merge, consolidate, sell assets, incur indebtedness, make loans, investments and
payments to subsidiaries, affiliates and related parties, make investments and loans, pledge
assets, make changes to capital stock ownership structure, as well as a minimum tangible net worth
of $0 million, as defined. PFSweb has guaranteed all current and future obligations of eCOST under
this line of credit.
In 2004, PFS incurred more than $5 million in capital expenditures to support incremental
business from a distribution facility in Southaven, MS. PFS financed a significant portion of
these expenditures through a Loan Agreement with the Mississippi Business Finance Corporation (the
MBFC) pursuant to which the MBFC issued $5 million MBFC Taxable Variable Rate Demand Limited
Obligation Revenue Bonds, Series 2004 (Priority Fulfillment Services, Inc. Project) (the Bonds).
The MBFC loaned PFS the proceeds of the Bonds for the purpose of financing the acquisition and
installation of equipment, machinery and related
assets located in our Southaven, Mississippi distribution facility. The primary source of
repayment of the Bonds is a letter of credit (the Letter of Credit) in the initial face amount of
$5.1 million issued by Comerica pursuant to a Reimbursement Agreement between us and Comerica under
which 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 2009 at which time, if not renewed or replaced, will result
in a draw on the undrawn face amount thereof. The amount outstanding on this Loan Agreement as of
September 30, 2008 was $3.2 million. PFS obligations under the Reimbursement Agreement are
secured by substantially all of its assets, including restricted cash of $1.5 million and a Company
parent guarantee.
In June 2006, we entered into a Securities Purchase Agreement with certain institutional
investors in a private placement transaction pursuant to which we issued and sold shares of our
common stock resulting in net proceeds of $4.8 million. We advanced the net proceeds to eCOST to
support its operating requirements.
To the extent we fail to comply with the various debt covenants described above, and the
lenders accelerate the repayment of the credit facility obligations, we would be required to repay
all amounts outstanding thereunder. Any requirement to accelerate the repayment of the credit
facility obligations would have a material adverse impact on our financial condition and results of
operations. We can provide no assurance that we will have the financial ability to repay all of
such obligations. As of September 30, 2008, we were in compliance with all debt covenants.
eCOST has historically incurred significant operating losses and used cash to fund its
operations. As a result, we have been required to invest cash to fund eCOSTs operations, which we
may not be able to continue to do without approval from our lenders. The amount of further cash
needed to support eCOST operations depends upon the financing available under its credit line as
well as eCOSTs ability to improve its financial results. Through September 30, 2008, we have
advanced $15.3 million to eCOST to fund eCOSTs cash flow requirements and have lender approval to
advance an additional $0.9 million to certain of our subsidiaries and/or affiliates, including
eCOST. In the event we need to invest further cash to eCOST, we may be required to seek approval
from our lenders to provide such funds. We can provide no assurance that we will receive such
approval from our lenders or any terms or conditions required by our lenders in order to obtain
such approval. In addition, PFSweb has provided a guaranty of eCOSTs bank line of credit and
certain eCOST vendor trade payables.
We receive municipal tax abatements in certain locations. During 2004 we received notice from
a municipality that we did not satisfy certain criteria necessary to maintain the abatements. In
December 2006, we received notice that the municipal authority planned to make an adjustment to our
tax abatement. We have disputed the adjustment, but if the dispute is not resolved favorably,
additional taxes of $1.7 million could be assessed against us.
On July 25, 2007 a purported class action lawsuit entitled Darral Frank and Joseph F. Keeley,
Jr. v. PC Mall, Inc. dba eCOST.com and eCOST.com, Inc. was filed in the Superior Court of
California, Los Angeles County. The purported class consists of all of current and former sales
representatives who worked for the defendants in California from July 24, 2003 through July 24,
2007. The lawsuit alleges that
24
the defendants failed to pay overtime compensation and interest
thereon, failed to timely pay compensation to terminated employees and failed to provide meal and
rest periods, all in violation of the California Labor Code and Business and Professions Code. An
order granting preliminary approval of a settlement of the matter for $0.1 million has been entered
and final approval is expected in December 2008.
Seasonality
The seasonality of our service fee business is dependent upon the seasonality of our clients
business and sales of their products. Accordingly, our management must rely upon the projections of
our clients in assessing quarterly variability. We believe with our current client mix and their
current business volumes, our service fee business activity will be at it lowest in the quarter
ended March 31. We anticipate our Supplies Distributors product revenue will be highest during
the quarter ended December 31. Our eCOST business is moderately seasonal, reflecting the general
pattern of peak sales for the retail industry during the holiday shopping season. Typically, a
larger portion of our eCOST revenues occur during the fourth fiscal quarter. We believe our
historical revenue growth makes it difficult to predict the effect of seasonality on our future
revenues and results of operations.
We believe that results of operations for a quarterly period may not be indicative of the
results for any other quarter or for the full year.
Inflation
Management believes that inflation has not had a material effect on our operations.
Critical Accounting Policies
In 2008, our stock price has significantly declined to levels that may impact our goodwill
impairment test and our review of amortizable intangible assets during the fourth quarter of 2008.
A description of our critical accounting policies, including goodwill and long-lived assets, is
included in Note 2 of the consolidated financial statements in our December 31, 2007 Annual Report
on Form 10-K.
25
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
We are exposed to various market risks including interest rates on financial instruments and
foreign exchange rates.
Interest Rate Risk
Our interest rate risk exists from our outstanding balances on our inventory and working
capital financing agreements, taxable revenue bonds, loan and security agreements and factoring
agreement for the financing of inventory, accounts receivable and certain other receivables and
certain equipment, which amounted to $57.9 million at September 30, 2008. A 100 basis point
movement in interest rates would result in approximately $0.2 million annualized increase or
decrease in interest expense based on the outstanding balance of these agreements at September 30,
2008.
Foreign Exchange Risk
Currently, our foreign currency exchange rate risk is primarily limited to the Canadian Dollar
and the Euro. In the future, our foreign currency exchange risk may also include other currencies
applicable to certain of our international operations. We have and may continue, from time to
time, to employ derivative financial instruments to manage our exposure to fluctuations in foreign
currency rates. To hedge our net investment and intercompany payable or receivable balances in
foreign operations, we may enter into forward currency exchange contracts.
ITEM 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain a system of controls and procedures designed to provide reasonable assurance as to
the reliability of the financial statements and other disclosures included in this report, as well
as to safeguard assets from unauthorized use or disposition. We evaluated the effectiveness of the
design and operation of our disclosure controls and procedures under the supervision and with the
participation of management, including our Chief Executive Officer and Principal Financial and
Accounting Officer. Based upon the evaluation, our Chief Executive Officer and Principal Financial
and Accounting Officer concluded that our disclosure controls and procedures are effective in
timely alerting them to material information required to be included in our periodic Securities and
Exchange Commission filings. No significant changes were made to our internal controls or other
factors that could significantly affect these controls subsequent to the date of their evaluation.
26
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
On July 25, 2007 a purported class action lawsuit entitled Darral Frank and Joseph F. Keeley,
Jr. v. PC Mall, Inc. dba eCOST.com and eCOST.com, Inc. was filed in the Superior Court of
California, Los Angeles County. The purported class consists of all of current and former sales
representatives who worked for the defendants in California from July 24, 2003 through July 24,
2007. The lawsuit alleges that the defendants failed to pay overtime compensation and interest
thereon, failed to timely pay compensation to terminated employees and failed to provide meal and
rest periods, all in violation of the California Labor Code and Business and Professions Code. An
order granting preliminary approval of a settlement of the matter for $0.1 million has been entered
and final approval is expected in December 2008.
ITEM 1A. Risk Factors
There have been no material changes with regard to the risk factors set forth in Part I, Item
1A of the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2007 filed
with the Securities and Exchange Commissions on March 31, 2008 other than as previously noted in
our prior Quarterly Reports on Form 10-Q and as set forth below.
Risks Related to All Our Business Segments
Our business and future growth depend on our continued access to bank and commercial financing.
Recent turmoil in the credit markets and the financial services industry may negatively impact our
business, results of operations, financial condition or liquidity.
Recently, the credit markets and the financial services industry have been experiencing a
period of unprecedented turmoil and upheaval characterized by the bankruptcy, failure, collapse or
sale of various financial institutions and an unprecedented level of intervention from the United
States and foreign governments. The recent economic crisis could also adversely impact our
customers operations or ability to maintain liquidity which may negatively impact our business and
results of operations.
Our business and future growth currently depend on our ability to access bank and commercial
lines of credit. We currently depend on an aggregate of approximately $110 million in line of
credit facilities provided by various banks and commercial lenders. These lines of credit currently
mature in March through May 2009 and are secured by substantially all our assets. Our ability to
renew our line of credit facilities depends upon various factors, including the availability of
bank loans and commercial credit in general, as well as our financial condition and prospects.
Therefore, we cannot guarantee that these credit facilities will continue to be available beyond
their current maturity on reasonable terms or at all. Our inability to renew or replace our credit
facilities or find alternative financing would materially adversely affect our business, financial
condition, operating results and cash flow.
Risks Related to Our PFS and Supplies Distributors Operating Segments
Our business is subject to the risk of customer and supplier concentration.
For the nine months ended September 30, 2008 and 2007, a U.S. government agency, Xerox
Corporation and a consumer products company represented the source of approximately 40%, 10% and
6%, respectively, and approximately 27%, 11% and 13%, respectively of our total service fee
revenue, net of pass-through revenue. In particular, the agreements under which we provide services to such clients are
terminable at will upon notice by such clients. We have been advised that our contract with the U.S.
government agency will not be renewed and such nonrenewal, as well as the loss of, or non-payment
of invoices by, any or all of such other clients are likely to have a material adverse effect upon
our business.
A substantial portion of our Supplies Distributors product revenue is generated by sales of
product purchased under master distributor agreements with IPS. These agreements are terminable at
will and no assurance can be given that IPS will continue the master distributor agreements with
Supplies Distributors. Supplies Distributors does not have its own sales force and relies upon
IPSs sales force and product
27
demand generation activities. Discontinuance of such activities
would have a material adverse effect on Supplies Distributors business and the Companys financial
condition.
Sales by Supplies Distributors to two customers accounted for approximately 29% of Supplies
Distributors total product revenue for the nine months ended September 30, 2008. Sales to the same
two customers accounted for approximately 28% of Supplies Distributors product revenue for the
nine months ended September 30, 2007. The loss of any one or more of such customers, or non-payment
of any material amount by these or any other customer, would have a material adverse effect upon
Supplies Distributors business.
Risks Related to eCOST, our Online Discount Retailer Segment
Our business is subject to the risk of supplier concentration.
Our business is dependent on sales of Hewlett Packard (HP) and HP-related products, which
represented approximately 48% of eCOSTs net revenues (11% of our consolidated net revenues) in the
nine months ended September 30, 2008 and 51% of eCOSTs net revenues (12% of our consolidated net
revenues) in the comparable period of 2007. If our ability to purchase direct from HP is
terminated or restricted, or if the demand for HP and HP-related products declines, our business
will be materially adversely affected.
We may be required to record a significant charge to earnings if our goodwill or amortizable
intangible assets become impaired.
We are required under generally accepted accounting principles to review our amortizable
intangible for impairment when events or changes in circumstances indicate the carrying value may
not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors
that may be considered a change in circumstances indicating that the carrying value of our
amortizable intangible assets or goodwill may not be recoverable include a decline in stock price
and market capitalization and slower growth rates in our industry. We may be required to record a
significant charge to earnings in our consolidated financial statements during the period in which
any impairment of our amortizable intangible assets or goodwill is determined to exist. This could
adversely impact our results of operations.
ITEM 2. Changes in Securities and Use of Proceeds
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
28
ITEM 6. Exhibits
a) Exhibits:
|
|
|
Exhibit No. |
|
Description of Exhibits |
3.1(1)
|
|
Amended and Restated Certificate of Incorporation |
3.2(1)
|
|
Amended and Restated Bylaws |
31.1*
|
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
31.2*
|
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
32.1*
|
|
Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
(1) |
|
Incorporated by reference from PFSweb, Inc. Registration Statement on Form S-1 (Commission
File No. 333-87657) and Annual Report on Form 10-K for the Fiscal Year ended December 31, 2005
filed on March 31, 2006. |
|
* |
|
Filed 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, 2008
|
|
|
|
|
|
PFSweb, Inc.
|
|
|
By: |
/s/ Thomas J. Madden
|
|
|
|
Thomas J. Madden |
|
|
|
Chief Financial Officer,
Chief Accounting Officer,
Executive Vice President |
|
|
30
INDEX TO EXHIBITS
|
|
|
Exhibit |
|
|
No. |
|
Description of Exhibits |
3.1(1)
|
|
Amended and Restated Certificate of Incorporation |
3.2(1)
|
|
Amended and Restated Bylaws |
31.1*
|
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
31.2*
|
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
32.1*
|
|
Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
(1) |
|
Incorporated by reference from PFSweb, Inc. Registration Statement on Form S-1 (Commission
File No. 333-87657) and Annual Report on Form 10-K for the Fiscal Year ended December 31,
2005 filed on March 31, 2006. |
|
* |
|
Filed herewith |