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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 1999
OR
[ ] 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)
DELAWARE 75-2837058
- ------------------------------------ ----------------------------
(State of Incorporation) (I.R.S. Employer I.D. No.)
500 NORTH CENTRAL EXPRESSWAY, PLANO, TEXAS 75074
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's 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 No X
----- -----
At February 3, 2000 there were 17,870,000 shares of registrant's common stock
outstanding.
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PFSWEB, INC. AND SUBSIDIARIES
FORM 10-Q
DECEMBER 31, 1999
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
-----------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of December 31, 1999
(unaudited) and March 31, 1999.......................................... 3
Unaudited Interim Condensed Consolidated Statements of
Operations for the Three and Nine Months Ended December 31,
1999 and 1998 .......................................................... 4
Unaudited Interim Condensed Consolidated Statement of Changes in
Shareholders' Equity for the Nine Months Ended December 31,
1999.................................................................... 5
Unaudited Interim Condensed Consolidated Statements of Cash
Flows for the Nine Months Ended December 31, 1999 and 1998............. 6
Notes to Unaudited Interim Condensed Consolidated Financial
Statements............................................................. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................................... 11
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.............................. 21
Item 6. Exhibits and Reports on Form 8-K ................................................ 21
SIGNATURES ............................................................................. 22
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PFSWEB, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
December 31, March 31,
1999 1999
------------ ------------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents ....................................................... $ 30,798 $ 587
Accounts receivable, net of allowance for doubtful accounts of
$383 and $635 at December 31, 1999 and March 31, 1999, respectively ......... 8,260 22,190
Inventories, net ................................................................ -- 29,856
Prepaid expenses and other current assets ....................................... 1,419 997
Deferred tax asset .............................................................. 331 453
------------ ------------
Total current assets .............................................. 40,808 54,083
------------ ------------
NET PROPERTY AND EQUIPMENT .......................................................... 17,674 2,711
OTHER ASSETS ........................................................................ 8,624 12,263
------------ ------------
Total assets ...................................................... $ 67,106 $ 69,057
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable .......................................................... $ 7,207 $ 38,329
Accrued expenses ................................................................ 4,987 1,118
Payable to Daisytek ............................................................. 6,613 --
------------ ------------
Total current liabilities ......................................... 18,807 39,447
------------ ------------
PAYABLE TO DAISYTEK -- 29,029
------------ ------------
LONG-TERM DEBT, less current portion ................................................ 225 --
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000,000 shares authorized; none issued and
outstanding ................................................................. -- --
Common stock, $0.001 par value; 40,000,000 shares authorized;
17,870,000 shares issued and outstanding .................................... 18 --
Additional paid-in capital ...................................................... 50,817 --
Retained deficit ................................................................ (2,447) --
Deferred compensation expense ................................................... (160) --
Daisytek's net equity investment ................................................ -- 712
Accumulated other comprehensive loss ............................................ (154) (131)
------------ ------------
Total shareholders' equity ........................................ 48,074 581
------------ ------------
Total liabilities and shareholders' equity ........................ $ 67,106 $ 69,057
============ ============
The accompanying notes are an integral part of these unaudited interim
condensed consolidated statements.
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PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------------ ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
REVENUES:
Product revenue .............................. $ -- $ 23,635 $ 55,778 $ 64,962
Service fee revenue .......................... 10,868 2,026 17,872 4,787
------------ ------------ ------------ ------------
Total revenues ........................... 10,868 25,661 73,650 69,749
------------ ------------ ------------ ------------
COSTS OF REVENUES:
Cost of product revenue ...................... -- 22,265 52,639 61,508
Cost of service fee revenue .................. 9,772 1,317 14,670 3,472
------------ ------------ ------------ ------------
Total costs of revenues .................. 9,772 23,582 67,309 64,980
------------ ------------ ------------ ------------
Gross profit ............................. 1,096 2,079 6,341 4,769
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ..... 6,593 1,850 12,464 4,426
------------ ------------ ------------ ------------
Income (loss) from operations ............ (5,497) 229 (6,123) 343
INTEREST EXPENSE (INCOME), net ................... 137 (52) 787 87
------------ ------------ ------------ ------------
Income (loss) before income taxes ........ (5,634) 281 (6,910) 256
PROVISION (BENEFIT) FOR INCOME TAXES ............. (857) 117 (1,360) 108
------------ ------------ ------------ ------------
NET INCOME (LOSS) ................................ $ (4,777) $ 164 $ (5,550) $ 148
============ ============ ============ ============
NET INCOME (LOSS) PER SHARE:
Basic and diluted ........................... $ (0.31) $ 0.01 $ (0.38) $ 0.01
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic and diluted ........................... 15,447 14,305 14,687 14,305
============ ============ ============ ============
The accompanying notes are an integral part of these unaudited interim
condensed consolidated statements.
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PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
Nine Months Ended
December 31, 1999
----------------------------
Shares Amounts
----------- ----------
Common stock:
Balance, beginning of year.......................................... -- $ --
Issuance of common stock to Daisytek................................ 14,305,000 14
Initial public offering............................................. 3,565,000 4
----------- ----------
Balance, end of period.............................................. 17,870,000 $ 18
-========== ==========
Additional paid-in capital:
Balance, beginning of year.......................................... $ --
Issuance of common stock to Daisytek................................ 6
Deferred compensation expense - issuance of stock options........... 192
Contribution of Daisytek's net equity investment.................... (2,391)
Initial public offering, net proceeds............................... 53,010
----------
Balance, end of period.............................................. $ 50,817
==========
Retained deficit:
Balance, beginning of year.......................................... $ --
Net loss subsequent to initial public offering...................... (2,447)
----------
Balance, end of period.............................................. $ (2,447)
==========
Deferred compensation expense:
Balance, beginning of year.......................................... $ --
Deferred compensation expense - issuance of stock options........... (192)
Stock based compensation expense.................................... 32
----------
Balance, end of period.............................................. (160)
==========
Daisytek's net equity investment:
Balance, beginning of year.......................................... $ 712
Net loss prior to initial public offering........................... (3,103)
Contribution of Daisytek's net equity investment.................... 2,391
----------
Balance, end of period.............................................. $ --
==========
Accumulated other comprehensive loss:
Balance, beginning of year.......................................... $ (131)
Other comprehensive loss - foreign currency translation adjustment..
(23)
----------
Balance, end of period.............................................. $ (154)
==========
Total shareholders' equity.............................................. $ 48,074
==========
The accompanying notes are an integral part of these unaudited interim
condensed consolidated statements.
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PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Nine Months Ended
December 31,
------------------------------
1999 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................................... $ (5,550) $ 148
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization ................................................ 1,397 166
Non cash compensation expense ................................................ 32 --
Provision for doubtful accounts .............................................. 198 234
Deferred income tax provision (benefit) ...................................... 122 (135)
Changes in operating assets and liabilities:
Accounts receivable ...................................................... 13,743 (9,442)
Inventories, net ......................................................... 29,856 (21,440)
Prepaid expenses and other current assets ................................ (422) (21)
Trade accounts payable and accrued expenses .............................. (27,261) 16,183
------------ ------------
Net cash provided by (used in) operating activities ................. 12,115 (14,307)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............................................. (16,370) (1,545)
Decrease (increase) in other assets ............................................. 3,639 (9,466)
------------ ------------
Net cash used in investing activities ............................... (12,731) (11,011)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in long-term debt ...................................................... 225 --
Issuance of common stock to Daisytek ............................................ 20 --
Net proceeds from initial public offering of common stock ....................... 53,014 --
Increase (decrease) in payable to Daisytek, net ................................. (22,416) 25,354
------------ ------------
Net cash provided by financing activities ........................... 30,843 25,354
------------ ------------
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS ............................... (16) (127)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................. 30,211 (91)
CASH AND CASH EQUIVALENTS, beginning of period ...................................... 587 113
------------ ------------
CASH AND CASH EQUIVALENTS, end of period ............................................ $ 30,798 $ 22
============ ============
The accompanying notes are an integral part of these unaudited interim
condensed consolidated statements.
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PFSWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. OVERVIEW AND BASIS OF PRESENTATION:
In June 1999, Daisytek International Corporation ("Daisytek") created a
separate wholly-owned subsidiary named PFSweb, Inc. (the "Company" or "PFSweb"),
a Delaware corporation, to become a holding company for certain of Daisytek's
wholly-owned subsidiaries ("PFS") in contemplation of an initial public offering
(the "Offering") of PFSweb. Daisytek contributed $20,000 for 14,305,000 shares
of common stock of PFSweb. In December 1999, PFSweb sold 3,565,000 shares of
common stock, including the underwriters' over-allotment, at a price of $17 per
share (See Note 2). Simultaneous with the completion of the Offering, Daisytek
contributed to PFSweb all the assets, liabilities and equity comprising PFS. For
periods prior to the completion of the Offering the accompanying financial
statements reflect the business operations of PFS.
PFSweb is an international provider of transaction management services to
both traditional and e-commerce companies in the United States, Canada and
Europe. The company offers such services as order management, customer care
services, billing services, credit management and collection, information
management and fulfillment and distribution.
Daisytek, which currently owns approximately 80.1% of the outstanding
shares of PFSweb's common stock, has announced that it plans to divest its
interest in PFSweb. The divestiture involves Daisytek distributing to holders of
its common stock all of its interest in PFSweb through a spin-off transaction in
which the shares of PFSweb would be distributed to Daisytek common stockholders
on a pro-rata basis. Daisytek has filed a ruling request with the Internal
Revenue Service ("IRS") with regard to the tax-free treatment of the
distribution of Daisytek's remaining ownership of PFSweb to the Daisytek
shareholders. Daisytek has announced that it currently expects a response from
the IRS within four to six months and plans to spin-off its remaining ownership
of PFSweb in calendar year 2000. The spin-off is subject to certain conditions,
and the Company cannot provide assurance as to whether or when it will occur.
The unaudited interim condensed consolidated financial statements as of
December 31, 1999, and for the nine months ended December 31, 1999 and 1998,
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC") and are unaudited. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations promulgated by the SEC. The unaudited
interim condensed consolidated financial statements are presented on a carve-out
basis and reflect the consolidated results of operations and assets and
liabilities of PFSweb. For all periods presented, certain expenses reflected in
the unaudited interim condensed consolidated financial statements include an
allocation of certain Daisytek corporate expenses and infrastructure costs.
Management believes that the methods used to allocate expenses are reasonable,
although the cost of services could be higher if obtained from other sources. In
addition, certain service fee revenue and cost of service fee revenue have been
reflected by PFSweb for services subcontracted to PFSweb by Daisytek. The
service fee revenue, cost of service fee revenue and allocated expenses have
been reflected on bases that Daisytek and PFSweb consider to be a reasonable
reflection of the services provided and revenue earned by PFSweb and the
utilization of services provided by Daisytek and the benefit received by PFSweb.
The financial information included herein may not reflect the consolidated
financial position, operating results, and cash flows of PFSweb in the future or
what it would have been had PFSweb been a separate, stand-alone entity during
the periods presented.
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 Company's financial position as of December 31, 1999,
its results of operations and its results of cash flows for the nine months
ended December 31, 1999 and 1998. Results of the Company's operations for
interim periods may not be indicative of results for the full fiscal year.
The unaudited interim condensed combined financial statements should be
read in conjunction with the audited financial statements and accompanying notes
of the Company included in the Company's Prospectus as filed with the SEC on
December 2, 1999 (the "Company's Prospectus"). Accounting policies
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PFSWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
used in the preparation of the unaudited interim condensed consolidated
financial statements are consistent in all material respects with the accounting
policies described in the notes to consolidated financial statements in the
Company's Prospectus.
2. PFSWEB COMMON STOCK
In December 1999, PFSweb successfully completed the Offering and sold
3,565,000 shares of common stock at $17 per share. Net proceeds from the
Offering aggregated approximately $53 million and were used to repay its payable
to Daisytek of approximately $28 million, of which approximately $22 million was
paid as of December 31, 1999, and to acquire from Daisytek all fixed assets in
its Memphis distribution facility, as well as certain assets providing
information technology services for approximately $5 million. The remaining net
proceeds are intended to be used for currently anticipated annual capital
expenditures of $7 - $10 million, a portion of which may be financed through
capital or operating leases, for general working capital, the remaining balance
of the payable to Daisytek and possible acquisitions.
PFSweb has authorized 6,000,000 shares of common stock for issuance under
two 1999 stock option plans (the "Option Plans"). The Option Plans, which are
currently administered by the Compensation Committee of the Board of Directors
of PFSweb provide for the granting of incentive awards in the form of stock
options to directors, executive management, key employees, and outside
consultants of PFSweb. The right to purchase shares under the stock option
agreements typically vest over a three year period. Stock options must be
exercised within 10 years from the date of grant. Stock options are generally
issued at fair market value. In July 1999, PFSweb issued options to purchase
1,344,250 common shares at $10.45, of which 35,000 of these options were issued
to a non-employee of the Company. The Company recorded $192,000 of deferred
compensation expense associated with this grant. In August 1999, PFSweb issued
options to purchase 32,250 common shares at $13.00. Through December 31, 1999,
options to purchase an additional 47,500 shares at $13.00 to $17.00 per share
were issued. As of December 31, 1999 there were an aggregate of 1,392,500
options outstanding with a weighted average exercise price of $10.70 per share.
All of these options are subject to a three year vesting schedule under which no
options vest for three years, subject to acceleration, in part, upon completion
of the spin-off of PFSweb from Daisytek. Certain of the Company's employees have
been granted Daisytek stock options which may convert to PFSweb stock options at
the spin-off date, and are not included in the data above.
3. COMPREHENSIVE INCOME (LOSS) (IN THOUSANDS):
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Net income (loss) .................... $ (4,777) $ 164 $ (5,550) $ 148
Comprehensive income adjustments:
Foreign currency translation
adjustment ................... 23 (136) (23) (193)
---------- ---------- ---------- ----------
Comprehensive income (loss) .......... $ (4,754) $ 28 $ (5,573) $ (45)
========== ========== ========== ==========
4. NET INCOME (LOSS) PER COMMON SHARE AND COMMON SHARE EQUIVALENT:
Basic and diluted net income or loss per common share attributable to
PFSweb common stock were determined based on dividing the income or loss
available to common stockholders by the weighted-average number of common shares
outstanding. For purposes of this calculation, the 14,305,000 shares of PFSweb
issued prior to the Offering were treated as outstanding for all periods
presented prior to the Offering. There were no potentially dilutive securities
outstanding during the periods presented prior to the Offering. During the three
and nine month periods ended December 31, 1999, outstanding options to purchase
1,392,500 common shares were anti-dilutive and have been excluded from the
weighted average share computation.
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PFSWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
5. TRANSACTIONS WITH DAISYTEK AND OTHER RELATED PARTIES:
The Company's costs and expenses include allocations from Daisytek for
certain general administrative services including information technology,
financial, treasury, legal, insurance and other corporate functions as well as
certain costs of operations including facility charges. These allocations have
been estimated on bases that Daisytek and the Company consider to be a
reasonable reflection of the utilization of services provided or the benefit
received by the Company. The methods used for allocation or expenses from
Daisytek were either (i) percentage of: revenue, shipped orders, or number of
employees or (ii) management's best estimate. However, these allocations of
costs and expenses do not necessarily indicate the costs and expenses that would
have been or will be incurred by the Company on a stand-alone basis. Management
estimates that incremental selling, general and administrative expenses
associated with PFSweb operating as a stand-alone publicly traded company,
including executive management, overhead and public company costs, insurance and
risk management costs, and other costs would have been approximately $0.4
million and $1.5 million for the three and nine months ended December 31, 1999,
respectively, and $0.5 million and $1.6 million for the three and nine months
ended December 31, 1998, respectively.
The Company's product revenue from sales to Daisytek was zero and $1.7
million for the three months ended December 31, 1999 and 1998, respectively, and
$7.2 million and $10.4 million for the nine months ended December 31, 1999 and
1998, respectively.
During the quarter ended September 30, 1999 and in connection with the
restructuring of certain IBM master distribution agreements, the Company
transferred to Daisytek certain related product inventory, accounts receivable
and accounts payable that it held under its prior agreements. In consideration
of this transfer, the Company received the net book value of these assets and
liabilities of approximately $20 million and reduced its payable to Daisytek by
a corresponding amount.
In conjunction with the successful completion of the Offering, PFSweb
entered into agreements with Daisytek, including a tax sharing agreement, a
transaction management services agreement, transition services agreement and a
master separation agreement which are expected to have a significant impact on
the financial position and results of operations of PFSweb.
In addition, included in the financial statements are service fee revenues
and cost of service fee revenue which have been reflected by PFSweb for certain
services subcontracted to PFSweb by Daisytek under Daisytek's contractual
agreements.
Service fee revenues charged to Daisytek under (i) the new IBM contracts,
entered into during the quarter ended September 30, 1999, (ii) terms of the
transaction management services agreement with Daisytek and (iii) for certain
subcontracted services, were $4.1 million and $4.9 million for the three and
nine months ended December 31, 1999. Service fee revenues applicable to the
subcontracted service were $0.2 million and $0.6 for the three and nine months
ended December 31, 1998.
In May 1999, the Company entered into an agreement to provide services to a
certain company. An executive officer and director of PFSweb serves on the Board
of Directors of this company. Service fee revenue earned from this company was
approximately $0.8 million for both the three and nine months ended December 31,
1999.
PFS had previously guaranteed an unsecured revolving line of credit with
commercial banks of Daisytek (the "Facility"). On October 29, 1999, Daisytek
amended the Facility. This amendment also provided for the release of PFS as
guarantor on the Facility upon (i) the effective date of the Offering of the
shares of common stock of PFSweb and (ii) the payment from PFSweb to Daisytek in
settlement of the outstanding payable to Daisytek. In satisfaction of these
conditions, PFS has been released from its guarantee. Additionally, this
amendment also prohibits Daisytek from advancing funds to PFSweb following the
completion of the Offering, except in the normal course of business.
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PFSWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Simultaneous with the Offering, PFSweb acquired all of Daisytek's fixed
assets in the Memphis distribution center, as well as certain assets providing
information technology services for approximately $5 million. In conjunction
with this acquisition, as well as certain other recent lease obligations, PFSweb
has assumed future incremental operating lease commitments of approximately $12
million. These leases, for facilities, and warehouse, office, transportation and
other equipment, expire in various years through fiscal year 2005.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion 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
The matters discussed in this report on Form 10-Q other than historical
information, and, in particular, information regarding future revenue, earnings
and business plans and goals, consist of forward-looking information under the
Private Securities Litigation Reform Act of 1995, and are subject to and involve
risks and uncertainties which could cause actual results to differ materially
from the forward-looking information. These risks and uncertainties include, but
are not limited to, the "Risk Factors" set forth in the Company's Prospectus.
These include, among others, our reliance on the fees generated by the
transaction volume or product sales of our clients, trends in the market for our
services, trends in e-commerce, whether we can continue and manage growth,
changes in the trend toward outsourcing, increased competition, effects of
changes in profit margins, the unknown effects of possible system failures and
rapid changes in technology, trends in government regulation, and our
relationship with and separation from Daisytek. This report on Form 10-Q also
contains other forward-looking statements, including those related to an
anticipated spin-off from Daisytek. Consummation of the spin-off is uncertain
and realization of the anticipated results could take longer than expected and
implementation difficulties and market factors could alter anticipated results.
Actual results could differ materially from those projected in the
forward-looking statements.
OVERVIEW
We are an international provider of transaction management services to both
traditional and e-commerce companies. We derive our revenues from a broad range
of services, including order management, customer care services, billing
services, information management and fulfillment and distribution services. Our
fulfillment and distribution services are conducted at our warehouses and
include picking, packing and shipping our clients' customer orders. We offer our
services as an integrated solution, which enables our clients to outsource their
complete transaction management needs to a single source and to focus on their
core competencies. We currently provide transaction management services to over
30 clients that operate in a range of vertical markets, including apparel,
computer products, printers, sporting goods and consumer electronics, among
others.
We act as a virtual infrastructure for our clients, which helps them
enhance their traditional commerce operations and meet the operational
challenges associated with the deployment of their e-commerce initiatives. We
believe we offer a unique comprehensive integrated solution which handles the
lifecycle of the transaction "from the click of a mouse, to the knock at the
house" (SM). This solution enables our clients to focus on their core business,
products and services while at the same time quickly and efficiently
implementing traditional and e-commerce business initiatives. By utilizing our
services, our clients are able to:
Quickly Capitalize on E-commerce Market Opportunities. Our services enable
our clients to rapidly implement their e-commerce strategies and take advantage
of e-commerce opportunities without lengthy start-up and integration efforts.
Our services allow our clients to deliver consistent quality of service as
transaction volumes grow and to handle daily and seasonal peak periods. Through
our international locations and capabilities, we enable our clients to use the
broad reach of the Internet and e-commerce to sell their products almost
anywhere in the world.
Improve the Customer Experience. We enable our clients to provide their
customers with a positive buying experience thereby maintaining and promoting
brand loyalty. Through our use of advanced technology, we can respond directly
to customer inquiries by e-mail, voice or data communication and assist them
with on-line ordering and product information. We believe we offer our clients a
"world class" level of service, including 24 hour, seven day a week customer
care service centers and a high order accuracy.
Minimize Investment and Improve Operating Efficiencies. We provide our
clients with access to a wide array of services that cover a broad spectrum of
e-commerce transaction management issues, eliminating
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their need to expend management time and resources to coordinate these services
from different providers. By utilizing our services, our clients can capitalize
on our economies of scale and expertise to grow their e-commerce business
without incurring the substantial fixed costs necessary to create and maintain
their own transaction management infrastructure. Our clients also have the
flexibility to purchase any or all of our offered services according to their
transaction volume and existing transaction management infrastructure so that
they do not have to invest scarce capital resources as their business grows.
Access a Sophisticated Technology Infrastructure. We provide our clients
with ready access to a sophisticated technology infrastructure, which is
designed to interface seamlessly with their systems. We provide our clients with
vital product and customer information which can be immediately available to
them on their own systems for use in data mining, analyzing sales and marketing
trends, monitoring inventory levels and performing other transaction management
functions.
The key elements of our business strategy are to:
Target Clients with Major Brand Names We intend to aggressively expand our
business by targeting brand names who are seeking to enter the e-commerce
marketplace or introduce new products or business programs. We believe that the
electronic commerce marketplace will be led by companies with major brand names
and our focus on these companies will provide us with meaningful opportunities
to grow along with our clients' e-commerce initiatives.
Expand Existing Client Relationships. By providing superior operating
results, we believe we can expand relationships with existing clients to serve
additional products and business segments and to provide additional services.
Our objective is to integrate ourselves as our clients' "virtual infrastructure"
so that we become a critical component of their transaction management process
across the enterprise. Based upon our clients' needs, we plan to introduce new
services to solve e-commerce transaction processing problems as they emerge. We
also intend to continue our commitment to invest in state-of-the-art technology,
equipment and systems to provide new, high-quality, innovative services to our
existing clients and to attract new clients.
Promote Our PFSweb Brand. We intend to build PFSweb brand awareness by
expanding the number of clients, increasing our advertising in trade journals
and other print media and by further participation in trade shows and similar
expositions. We also intend to increase our Internet advertising and search
engine presence.
Seek Strategic Alliances and Acquisitions. We intend to pursue strategic
alliances with Web site designers, Web hosting services, e-commerce software
companies and other providers of Internet related services to assist in
developing relationships with major brand names that are entering the e-commerce
marketplace. We may also consider acquisitions of synergistic e-commerce
businesses in order to offer a complete Internet implementation solution to
clients looking to introduce the sale of their products over the Internet.
Expand Our International Presence. We intend to expand the availability of
our services throughout the world so that we can enhance our
international-commerce transaction processing solutions. For example, in
response to market opportunities, we intend to expand our multi-lingual call
center services and foreign currency order processing.
ADJUSTED FINANCIAL PRESENTATION
We believe our historical financial statements may not provide a meaningful
comparison to our future financial statements. This is because the financial
presentation of our operations in the future will be different from what they
have been historically, as described below.
In 1996, we entered into an agreement with the printer supplies division of
IBM. Under this agreement, we provided IBM with various transaction management
services, such as call center services and order fulfillment and distribution.
We also served as an IBM master distributor of printer supply products. Under
this master distributor arrangement, we purchased the printer supply products
from IBM and resold them to IBM customers. Following our initial agreement with
the printer supplies division, we entered into several
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similar agreements with other divisions of IBM, both in the U.S. and Europe, and
expanded our then existing agreements to include more product lines.
During the quarter ended September 30, 1999, we, Daisytek and IBM entered
into new agreements to conform to our current business model. Under these new
agreements, Daisytek will act as the master distributor of the IBM products and
we will continue to provide various transaction management services. As part of
this restructuring, we transferred to Daisytek the IBM product inventory, which
we held as the master distributor, together with our customer accounts
receivable and our accounts payable owing to IBM in respect of the product
inventory. The purpose of the restructuring was to separate the master
distributor and transaction management responsibilities between ourselves and
Daisytek so that each could focus on its core competencies.
As a result of the restructuring of the IBM agreements, our historical
financial statements may not provide a meaningful comparison to our future
financial statements. This is because, as a master distributor under our prior
agreements, we recorded revenue as product revenue as we sold the product to IBM
customers. Similarly, our gross profit was based upon the difference between our
revenue from product sales and the cost of purchasing the product from IBM. In
the future, however, our revenue under the new IBM agreements will be service
fee revenue that will be payable by Daisytek and will be based upon a variable
percentage of Daisytek's gross profit arising from its IBM product sales.
As a result of this restructuring of our IBM agreements, our total revenues
arising under our new IBM agreements will be reduced, as compared to the total
revenues arising under the prior IBM agreements. However, our gross profit
margin as a percent of service fee revenue under the new IBM agreements is
anticipated to be significantly higher as compared to our gross profit margin as
a percent of product revenue under the prior IBM agreements.
In addition, upon completion of the Offering in December 1999, we entered
into a new transaction management services agreement with Daisytek. Under this
agreement, we provide transaction management services for Daisytek's U.S.
wholesale consumable computer supplies business. We receive service fee revenue
based upon a percentage of Daisytek's shipped product revenue. Consequently, our
historical financial statements reflect the service fee revenue we received from
Daisytek under this new agreement for only one month in the three and nine
months results ended December 31, 1999.
Additionally, upon completion of the Offering, Daisytek transferred to us
fixed assets and other assets which will be used in our business. We paid to
Daisytek a portion of the net proceeds of the Offering and assumed capital and
operating lease obligations related to these assets.
Our historical financial statements for the three and nine months ended
December 31, 1999, also include incremental costs on new contract
implementations as well as certain incremental selling, general and
administrative expenses.
We have set forth below an adjusted presentation of our total historical
revenue and cost of revenue. This presentation shows, retroactively, what our
service fee revenue and cost of service fee revenue would have been if (i) our
modified agreement with IBM had been in effect during the periods presented,
(ii) our new agreement with Daisytek had been in effect for the entire calendar
year ended 1999, (iii) our acquisition of the assets and liabilities that
Daisytek transferred to us upon completion of the Offering had occurred as of
the beginning of the calendar year 1999, and (iv) for the three months and
calendar year ended December 31, 1999, an adjustment was made to the costing
methodology applied to start-up activity on new client implementations.
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ADJUSTED FINANCIAL PRESENTATION
Three Months Ended Calendar Year Ended
December 31, December 31,
---------------------- ----------------------
1999 1999
---------------------- ----------------------
Service fee revenue ........... $ 13,965 $ 42,287
Cost of service fee revenue ... 9,349 26,781
Service fee gross profit ...... 4,616 15,506
Service fee gross profit margin 33.1% 36.7%
We based the adjusted operating data on available information and certain
estimates and assumptions. We believe that such assumptions provide a reasonable
basis for presenting our results, adjusting for the transactions described
above. This adjusted financial information does not reflect what our operating
income or net income would have been during the periods presented or what our
results of operations may be in the future.
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RESULTS OF OPERATIONS
Three Months Ended Nine Months Ended
December 31, December 31,
--------------------------- ---------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Product revenue ................................... -- % 92.1% 75.7% 93.1%
Service fee revenue ............................... 100.0 7.9 24.3 6.9
---------- ---------- ---------- ----------
Total revenues ............................. 100.0 100.0 100.0 100.0
Cost of product revenue (as % of product revenue)
-- 94.2 94.4 94.7
Cost of service fee revenue (as % of service fee
revenue) ...................................... 89.9 65.0 82.1 72.5
---------- ---------- ---------- ----------
Total costs of revenues .................... 89.9 91.9 91.4 93.2
---------- ---------- ---------- ----------
Gross profit ...................................... 10.1 8.1 8.6 6.8
Selling, general and administrative expenses ...... 60.7 7.2 16.9 6.3
---------- ---------- ---------- ----------
Income (loss) from operations ..................... (50.6) 0.9 (8.3) 0.5
Interest (income) expense, net .................... 1.3 (0.2) 1.1 0.1
---------- ---------- ---------- ----------
Income (loss) before income taxes ................. (51.9) 1.1 (9.4) 0.4
Provision (benefit) for income taxes .............. (7.9) 0.5 (1.9) 0.2
---------- ---------- ---------- ----------
Net income (loss) ................................. (44.0)% 0.6% (7.5)% 0.2%
========== ========== ========== ==========
RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED DECEMBER 31, 1999 AND 1998
We believe our historical financial statements may not provide a meaningful
comparison to our future financial statements. This is because the financial
presentation of our operations in the future will be different from what they
have been historically, as described above.
Product Revenue. Product revenue was zero for the three months ended
December 31, 1999 as compared to $23.6 million for the three months ended
December 31, 1998. Product revenue was $55.8 million for the nine months ended
December 31, 1999 as compared to $65.0 million for the nine months ended
December 31, 1998. As stated above, during the quarter ended September 30, 1999,
we, Daisytek and IBM entered into new agreements applicable to all of our IBM
relationships. As a result of these agreements, the activities performed under
these contracts since that date were accounted for as service fee revenue as
opposed to product revenue. Prior to the impact of these new agreements, product
revenue had increased as compared to prior periods due to the addition of our
European IBM distribution agreement as well as growth from the existing North
America IBM master distributor agreements. In future periods, we do not expect
to have any product revenue.
Service Fee Revenue. Service fee revenue was $10.9 million for the three
months ended December 31, 1999 as compared to $2.0 million during the three
months ended December 31, 1998, an increase of $8.9 million or 436.4%. Service
fee revenue was $17.9 million for the nine months ended December 31, 1999 as
compared to $4.8 million during the nine months ended December 31, 1998, an
increase of $13.1 million or 273.3%. The increase in service fee revenues over
prior periods was due to the further expansion of existing contracts, the
restructuring of all the IBM contracts, and new service contract relationships,
including our new transaction management services agreement with Daisytek which
commenced on the completion of the Offering in December 1999. Service fee
revenue from existing contracts increased $0.2 million and new service contract
relationships added $8.7 million for the three months ended December 31, 1999.
Service fee revenue from existing contracts increased $2.6 million and new
service contract relationships added $10.5 million for the nine months ended
December 31, 1999. For the three and nine months ended December 31, 1999, new
service fee revenue totaling $3.9 million and $4.3 million, respectively,
included fees earned from Daisytek under our new transaction management services
agreement, effective as of the Offering, and our new IBM contracts that, prior
to the September 1999 quarter, would have been reported as product revenue.
Cost of Product Revenue. Cost of product revenue was zero during the three
months ended December 31, 1999 as compared to $22.3 million during the three
months ended December 31, 1998. Cost of product revenue as a percent of product
revenue was 94.2% during the three months ended December 31, 1998, with a
resulting product gross profit margin of 5.8%. Cost of product revenue was $52.6
million for the nine months ended December 31, 1999 as compared to $61.5 million
during the nine months ended December 31, 1998. Cost of product revenue as a
percent of product revenue was 94.7% during the nine months ended December 31,
1998, with a resulting product gross profit margin of 5.3%. As a result of the
new IBM arrangements, we do not expect to incur any cost of product revenue in
future periods.
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Cost of Service Fee Revenue. Cost of service fee revenue was $9.8 million
for the three months ended December 31, 1999 as compared to $1.3 million during
the three months ended December 31, 1998, an increase of $8.5 million or 642.0%.
The resulting service fee gross profit margin was 10.1% during the three months
ended December 31, 1999 and 35.0% during the three months ended December 31,
1998. Cost of service fee revenue was $14.7 million for the nine months ended
December 31, 1999 as compared to $3.5 million during the nine months ended
December 31, 1998, an increase of $11.2 million or 322.5%. The resulting service
fee gross profit margin was 17.9% during the nine months ended December 31, 1999
and 27.5% during the nine months ended December 31, 1998. During both the three
and nine months ended December 31, 1999, cost of service fee revenue increased
related to a large number of new client implementations.
Gross Profit. Gross profit was $1.1 million or 10.1% of revenues for the
three months ended December 31, 1999 as compared to $2.1 million or 8.1% of
revenues for the three months ended December 31, 1998. The decrease in total
gross profit resulted primarily from the increase in costs of service fee
revenue, discussed above. Gross profit was a $6.3 million or 8.6% of revenues
for the nine months ended December 31, 1999 as compared to $4.8 million or 6.8%
of revenues for the nine months ended December 31, 1998. In the Adjusted
Financial Presentation data above, we have provided, retroactively, what our
service fee gross profit margin would have been considering the impact of our
modified agreement with IBM, our new agreement with Daisytek, our acquisition of
the assets and liabilities which Daisytek transferred to us upon completion of
the Offering and an adjustment to the costing methodology applied to start-up
activity on new client implementations. The gross profit margin for the three
month period ended December 31, 1999, would have been 33.1% after giving effect
to these adjustments. Our service fee gross profit margin in the future is
targeted to be between 35-40%.
Selling, General and Administrative Expenses. SG&A expenses were $6.6
million for the three months ended December 31, 1999 or 60.7% of revenues as
compared to $1.9 million or 7.2% of revenues for the three months ended December
31, 1998. SG&A expenses were $12.5 million for the nine months ended December
31, 1999 or 16.9% of revenues as compared to $4.4 million or 6.3% of revenues
for the nine months ended December 31, 1998. As a result of incremental costs,
the restructuring of the IBM agreements and the related reduction in product
revenue, SG&A expenses as a percentage of total revenue are higher in the
current periods than in prior periods. SG&A expenses increased as a result of
costs incurred to support the higher sales volumes under both new and existing
contracts and incremental investments in resources and technology to support our
continued growth. SG&A expenses also increased as a result of certain
incremental charges effected during this quarter. In the future, while we
anticipate that we will continue to incur incremental costs as we make further
SG&A investments in our sales, marketing, and technology areas to support our
growth strategies and as a result of operating as a stand-alone public company,
we are targeting our SG&A, as a percent of sales, to decrease as we increase our
service fee revenue.
Interest Expense, Net. Interest expense was $0.1 million for the three
months ended December 31, 1999 as compared to interest income of $0.1 million
for the three months ended December 31, 1998. Interest expense was $0.8 million
for the nine months ended December 31, 1999 as compared to interest expense of
$0.1 million for the nine months ended December 31, 1998. Interest expense
increased as a result of an increase in the average payable to Daisytek to
support working capital requirements applicable primarily to our master
distributor agreements and for capital expenditures, offset by interest income
earned subsequent to the Offering. As indicated below, in December 1999, we used
a portion of the funds from the Offering to repay a portion of our intercompany
payable balance to Daisytek and purchase certain assets from Daisytek. The
remaining available cash will be used for future capital expenditures, general
working capital needs, the remaining balance of the payable to Daisytek and
possible acquisitions. To the extent that we have excess cash available, we
expect to generate interest income in future periods.
Income Taxes. Our income tax benefit as a percentage of pre-tax loss was
15.2% for the three months ended December 31, 1999 as compared to an income tax
provision as a percentage of pre-tax income of 41.6% for the three months ended
December 31, 1998. Our income tax benefit as a percentage of pre-tax
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loss was 19.7% for the nine months ended December 31, 1999 as compared to an
income tax provision as a percentage of pre-tax income of 42.2% for the three
months ended December 31, 1998. We will continue to be included in Daisytek's
consolidated tax return through the date of the spin-off from Daisytek. As part
of the tax sharing agreement entered into with Daisytek, we will be reimbursed
for any income tax benefit derived from our inclusion in the consolidated
return. However, for the period between the Offering and the spin-off any loss
generated by us in excess of established limits may not be utilized at a
consolidated level. Accordingly, we did not record a benefit for the pre-tax
loss generated in the U.S. subsequent to the Offering. Additionally, because of
our limited operating history in Europe, it is uncertain whether it is "more
likely than not" that we will be able to utilize our European losses in future
periods and therefore we did not record an income tax benefit for those pre-tax
losses. To the extent we have losses in the U.S. or in Europe in future
quarters, prior to the spin-off, it will continue to negatively impact our
income tax provision. For the three months and nine months ended December 31,
1998, the income tax percentage is impacted by the differences between our U.S.
and foreign subsidiaries, which are taxed at different rates.
USE OF OFFERING PROCEEDS
In December 1999, PFSweb sold an aggregate of 3,565,000 shares of common
stock, $0.001 par value, in an initial public offering led by Hambrecht & Quist,
Dain Rauscher Wessels and Jefferies & Company, Inc., managing underwriters. The
Registration Statement on Form S-1 for the Offering was declared effective on
December 2, 1999 (Commission File No. 333-87657). All of the securities
registered for the Offering were sold by the Company at an initial public
offering price of $17.00 per share.
The following sets forth certain information regarding the Offering as of
December 31, 1999 (in thousands):
Gross offering proceeds $ 60,605
Offering expenses:
Underwriting discount 4,242
Expenses paid to or for underwriters --
Other expenses 3,349
-----
Total offering expenses 7,591
--------
Net offering proceeds $ 53,014
========
All of such payments of Offering expenses were made to others, except
that James F. Reilly, a director of the Company, also serves as a Managing
Director of Hambrecht & Quist.
The following sets forth certain information regarding the use by the
Company of the net offering proceeds as of December 31, 1999 (in thousands).
Repayment of payable to Daisytek $ 22,300
Acquisition of property and equipment and other assets from Daisytek 5,000
Working capital and temporary investments 25,714
--------
$ 53,014
========
The Company made additional payments to reduce the payable to Daisytek
in January 2000.
The Company's temporary investments consist of commercial bank money
market accounts pending use of such funds for the Company's operations.
All of such payments of Offering proceeds were made to others, except
for the payments to Daisytek, which is the holder of approximately 80% of the
Company's outstanding common stock.
LIQUIDITY AND CAPITAL RESOURCES
As a subsidiary of Daisytek, we have historically funded our business
through intercompany borrowings from Daisytek. As a result of the Offering, as
of the end of January 2000, we have repaid such intercompany borrowings. We
currently believe that the remaining net proceeds from the Offering and funds
generated from operations will satisfy our working capital and capital
expenditure requirements for
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the next twelve months. Daisytek is prohibited from advancing funds to us
following the completion of the Offering, except in the normal course of
business. Accordingly, in order to provide additional financing flexibility in
the future, we plan to seek our own credit facility.
PFS had previously guaranteed an unsecured revolving line of credit with
commercial banks of Daisytek (the "Facility"). On October 29, 1999, Daisytek
amended the Facility. This amendment also provided for the release of PFS as
guarantor on the Facility upon (i) the effective date of the Offering of the
shares of common stock of PFSweb and (ii) the payment from PFSweb to Daisytek in
settlement of the outstanding payable to Daisytek. In satisfaction of these
conditions, PFS has been released from its guarantee.
Working capital increased to $22.0 million at December 31, 1999 from $14.6
million at March 31, 1999. The amount as of December 31, 1999 was primarily the
result of the Offering, which on a net basis, contributed approximately $20
million to working capital. A significant portion of our working capital needs
has historically been related to our master distributor agreements with IBM,
which required us to purchase and resell the product inventory to IBM customers.
Under our new agreements with IBM, Daisytek now acts as the master distributor
(and is responsible for the purchase and resale of the product inventory and
retains the customer revenue), and we continue to perform most of the other
transaction management services we had provided previously. As part of these new
IBM agreements, we now receive service fees from Daisytek for the transaction
management services that we provide. In connection with the restructuring of our
IBM agreements, during the quarter ended September 30, 1999, we transferred to
Daisytek the IBM-related product inventory, customer accounts receivable and
accounts payable that we held under our prior agreements. In consideration of
this transfer, Daisytek paid to us the net book value of these assets and
liabilities (approximately $20 million). As a result of the modification to the
IBM agreements and the proceeds raised from the Offering, our historical working
capital requirements prior to December 1999 may not be indicative of our future
needs.
Net cash provided by financing activities was $30.8 million for the nine
months ended December 31, 1999. In December 1999, we successfully completed our
Offering and sold 3,100,000 shares of common stock at $17 per share. We also
granted to the underwriters an option to purchase 465,000 additional common
shares to cover over-allotments, which was exercised. Proceeds from the offering
aggregated approximately $53 million. Proceeds were used to repay an
intercompany payable to Daisytek of approximately $28 million, of which
approximately $22 million has been paid as of December 31, 1999, and to acquire
from Daisytek all fixed assets in its Memphis distribution facility, as well as
certain assets providing information technology services for approximately $5
million. The remaining net proceeds are intended to be used for working capital
and currently anticipated annual capital expenditures of $7 - $10 million, a
portion of which may be financed through capital or operating leases, the
remaining balance of the payable to Daisytek and possible acquisitions. Net cash
provided by financing activities was $25.4 million for the nine months ended
December 31, 1998. For the nine months ended December 31, 1998, cash provided by
Daisytek was used to fund the incremental financing of one of our client's
inventory, our capital expenditures and working capital requirements.
Cash flows provided by operating activities totaled $12.1 million during
the nine months ended December 31, 1999. Cash flows used in operating activities
totaled $14.3 million during the nine months ended December 31, 1998. For the
nine months ended December 31, 1999, the net cash provided by operating
activities primarily reflected a reduction in accounts payable and accrued
expenses of $27.3 million, accounts receivable of $13.7 million and inventory of
$29.9 million. These reductions primarily related to the transfer of the IBM
related working capital assets from us to Daisytek in conjunction with the new
IBM agreements. For the nine months ended December 31, 1998, the net cash used
in operating activities reflected an increase in inventory of $21.4 million,
accounts receivable of $9.4 million, and accounts payable and accrued expenses
of $16.2 million. Working capital requirements for the nine months ended
December 31, 1998 were primarily due to product revenue growth under our North
American IBM master distributor agreements. We also entered into new master
distributor agreements in December 1998 to provide services for IBM in Europe.
Our North American IBM revenue growth, as well as the new European IBM
contracts, resulted in significant increases in IBM contract related accounts
receivable, inventory and accounts payable.
Cash used in investing activities was $12.7 million for the nine months
ended December 31, 1999 as compared to $11.0 million for the nine months ended
December 31, 1998. During the nine months ended December 31, 1999, our capital
expenditures included the asset purchase from Daisytek at the completion of the
Offering, our new Belgium distribution facility, and the expansion of U.S. sales
and distribution facilities. Partially offsetting these capital expenditures was
a reduction of third-party financed inventory. Cash used in investing activities
for the nine months ended December 31, 1998 was primarily as a result of a
long-term contractual agreement with one of our clients pursuant to which, as
part of the services that we provide, we finance certain of the client's
inventory. Subsequent to December 31, 1999, this client gave us
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a preliminary indication that they might not have us finance this inventory in
the future. Capital expenditures have historically consisted primarily of
additions to upgrade our management information systems, including our
Internet-based customer tools, other methods of e-commerce and general expansion
of our facilities, both domestic and foreign. We expect to incur significant
capital expenditures in order to support new contracts and anticipated future
growth opportunities. We anticipate that our total investment in upgrades and
additions to facilities and information technology services for calendar year
2000 will be approximately $7 to $10 million. Some of these expenditures may be
financed through operating or capital leases.
We believe that international markets represent further opportunities for
growth. We may consider entering into forward exchange contracts in order to
hedge our net investment in our Canadian or European operations or in other
international countries in which we establish a presence, although no assurance
can be given that we will be able to do so on acceptable terms.
In the future, we may attempt to acquire other businesses to expand our
services or capabilities in connection with our efforts to grow our business. We
currently have no binding agreements to acquire any such businesses. Should we
be successful in acquiring other businesses, we may require additional
financing. Acquisitions involve certain risks and uncertainties. Therefore, we
can give no assurance with respect to whether we will be successful in
identifying businesses to acquire, whether we will be able to obtain financing
to complete an acquisition, or whether we will be successful in operating the
acquired business.
YEAR 2000 ISSUE
Daisytek and its subsidiaries (including PFSweb) completed its
identification, assessment and remediation of the year 2000 compliance issue
("Y2K") in December 1999. The total expenses incurred by Daisytek and its
subsidiaries (including PFSweb) related to Y2K was approximately $0.8 million,
which included both external costs, such as outside consultants, software and
hardware applications, as well as internal costs, primarily payroll related,
which are not reported separately. To date, the Company has not experienced any
material Y2K failures and to the best of its knowledge neither have any of its
significant clients or service providers. However, there can be no assurance
that in the future issues related to Y2K will not have a material adverse effect
on our financial condition or that of our significant clients or service
providers.
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INVENTORY MANAGEMENT
Prior to September 30, 1999, our agreements with IBM were structured as
master distributor agreements. The transaction management services we provided
for IBM under these agreements included purchasing and reselling IBM product
inventory to IBM customers. During the quarter ended September 30, 1999, we
restructured our agreements with IBM so that we will no longer be purchasing or
reselling the IBM product inventory. In addition, we have transferred to
Daisytek the IBM-related customer accounts receivables, inventory and accounts
payable. We do not expect to own product inventory in future periods.
SEASONALITY
The seasonality of our business is dependent upon the seasonality of our
clients' business and their sale of their products. Accordingly, our management
must rely upon the projections of our clients in assessing quarterly
variability. We believe that as our business grows with consumer product
clients, our business activity will be more significant in the quarter ended
December 31.
We believe that results of operations for a quarterly period may not be
indicative of the results for any other quarter or for the full year.
INFLATION
Management believes that inflation has not had a material effect on our
operations.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 requires that an entity recognize all derivative
financial instruments as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. If certain
conditions are met, a derivative may be used to hedge certain types of
transactions, including foreign currency exposures of a net investment in a
foreign operation. Our foreign currency exposure has historically been primarily
related to our Canadian operations and also now includes our European business.
Beginning in the year ended March 31, 1999, the foreign currency risks of PFSweb
were considered in Daisytek's corporate risk management program, which included
entering into certain forward currency exchange contracts. We did not enter into
any such contracts on our own. SFAS No. 133 requires gains or losses on
derivatives and hedging instruments to be recorded in other comprehensive income
as a part of the cumulative translation adjustment. We are currently evaluating
the provisions of SFAS No. 133 and its effect on the accounting treatment of
these financial instruments. SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000, with initial application as of the beginning of
an entity's fiscal quarter. Early adoption of the standard is allowed; however,
the statement cannot be applied retroactively to financial statements of prior
periods.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The carrying value of the Company's financial instruments, which include
cash and cash equivalents and a capital lease obligation, approximate their fair
values based on current market price and rates.
We are subject to market risk associated with changes in foreign currency
exchange rates. In order to manage these risks, beginning in the year ended
March 31, 1999, certain of our risks were considered in Daisytek's corporate
risk management program, which included entering into certain forward currency
exchange contracts. We did not enter into any such contracts on our own.
Currently, our foreign currency exchange rate risk is primarily limited to
Canadian dollars and the Euro. In the future, we believe our foreign currency
exchange risk will also include other currencies applicable to certain of our
international operations. In order to mitigate foreign currency rate risk, we
will consider entering into forward currency exchange contracts to hedge our net
investment and long-term intercompany payable balances.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
----------- --------------------------------------------------------
1.1 Underwriting Agreement by and among PFSweb, Inc.,
Daisytek International Corporation and the Underwriters
named therein.
2.1 Master Separation Agreement by and among Daisytek
International Corporation, Daisytek, Incorporated,
Priority Fulfillment Services, Inc. and PFSweb, Inc.
2.2 Initial Public Offering and Distribution Agreement by
and among Daisytek International Corporation, Daisytek
Incorporated and PFSweb, Inc.
2.3 Registration Rights Agreement by and among Daisytek
International Corporation, Daisytek, Incorporated and
PFSweb, Inc.
2.4 Tax Indemnification and Allocation Agreement between
Daisytek International Corporation and PFSweb, Inc.
2.5 Transition Services Agreement between Daisytek,
Incorporated and PFSweb, Inc.
2.6 Transaction Management Services Agreement between
Daisytek, Incorporated and Priority Fulfillment
Services, Inc.
3.1* Amended and Restated Certificate of Incorporation
3.2* Amended and Restated Bylaws
27.1 Financial Data Schedule for the nine months ended
December 31, 1999
- -------------
* Incorporated by reference from PFSweb, Inc. Registration Statement on Form S-1
(Commission File No. 333-87657).
b) Reports on Form 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 14, 2000
PFSweb, Inc.
By: /s/ Thomas J. Madden
-------------------------------------
Thomas J. Madden
Chief Financial Officer,
Chief Accounting Officer,
Executive Vice President
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3
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
------- -------------------------------------------------------------
1.1 Underwriting Agreement by and among PFSweb, Inc., Daisytek
International Corporation and the Underwriters named therein.
2.1 Master Separation Agreement by and among Daisytek
International Corporation, Daisytek, Incorporated, Priority
Fulfillment Services, Inc. and PFSweb, Inc.
2.2 Initial Public Offering and Distribution Agreement by and
among Daisytek International Corporation, Daisytek,
Incorporated and PFSweb, Inc.
2.3 Registration Rights Agreement by and among Daisytek
International Corporation, Daisytek, Incorporated and PFSweb,
Inc.
2.4 Tax Indemnification and Allocation Agreement between Daisytek
International Corporation and PFSweb, Inc.
2.5 Transition Services Agreement between Daisytek, Incorporated
and PFSweb, Inc.
2.6 Transaction Management Services Agreement between Daisytek,
Incorporated and Priority Fulfillment Services, Inc.
3.1* Amended and Restated Certificate of Incorporation
3.2* Amended and Restated Bylaws
27.1 Financial Data Schedule for the nine months ended December
31, 1999
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* Incorporated by reference from PFSweb, Inc. Registration Statement on Form S-1
(Commission File No. 333-87657).