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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, 2000
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.
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(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 [X] No [ ]
At February 3, 2001 there were 17,907,378 shares of registrant's common stock
outstanding.
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PFSweb, INC. AND SUBSIDIARIES
FORM 10-Q
DECEMBER 31, 2000
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
-----------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of December 31, 2000
(unaudited) and March 31, 2000.......................................... 3
Unaudited Interim Condensed Consolidated Statements of Operations for
the Three and Nine Months Ended December 31, 2000 and 1999.............. 4
Unaudited Interim Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended December 31, 2000 and 1999....................... 5
Notes to Unaudited Interim Condensed Consolidated Financial Statements...... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................................... 10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.............................. 17
Item 6. Exhibits and Reports on Form 8-K ................................................ 17
SIGNATURES ............................................................................. 18
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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,
2000 2000
------------- -------------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents .................................................. $ 18,143 $ 24,896
Accounts receivable, net of allowance for doubtful accounts of
$1,180 and $690 at December 31, 2000 and March 31, 2000, respectively .. 12,204 8,892
Other receivables .......................................................... -- 3,482
Prepaid expenses and other current assets .................................. 6,047 1,052
------------- -------------
Total current assets ......................................... 36,394 38,322
------------- -------------
NET PROPERTY AND EQUIPMENT ..................................................... 21,172 21,555
OTHER ASSETS ................................................................... 127 528
------------- -------------
Total assets ................................................. $ 57,693 $ 60,405
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt .......................................... $ 293 $ 274
Trade accounts payable ..................................................... 9,579 6,277
Accrued expenses ........................................................... 5,239 3,525
Payable to Daisytek ........................................................ -- 272
------------- -------------
Total current liabilities .................................... 15,111 10,348
------------- -------------
CAPITAL LEASE OBLIGATIONS, less current portion ................................ 2,181 2,407
DEFERRED CREDIT ................................................................ 1,391 --
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 18
Additional paid-in capital ................................................. 50,711 50,673
Retained deficit ........................................................... (11,400) (2,836)
Accumulated other comprehensive loss ....................................... (319) (205)
------------- -------------
Total shareholders' equity ................................... 39,010 47,650
------------- -------------
Total liabilities and shareholders' equity ................... $ 57,693 $ 60,405
============= =============
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,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
REVENUES:
Product revenue .......................... $ -- $ -- $ -- $ 55,778
Service fee revenue ...................... 12,884 10,868 38,817 17,872
-------- -------- -------- --------
Total revenues ....................... 12,884 10,868 38,817 73,650
-------- -------- -------- --------
COSTS OF REVENUES:
Cost of product revenue .................. -- -- -- 52,639
Cost of service fee revenue .............. 8,567 9,772 27,381 14,670
-------- -------- -------- --------
Total costs of revenues .............. 8,567 9,772 27,381 67,309
-------- -------- -------- --------
Gross profit ......................... 4,317 1,096 11,436 6,341
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES . 6,456 6,593 19,044 12,464
OTHER ........................................ -- -- 1,800 --
-------- -------- -------- --------
Loss from operations ................. (2,139) (5,497) (9,408) (6,123)
INTEREST EXPENSE (INCOME), net ............... (248) 137 (880) 787
-------- -------- -------- --------
Loss before income taxes ............. (1,891) (5,634) (8,528) (6,910)
PROVISION (BENEFIT) FOR INCOME TAXES ......... (30) (857) 36 (1,360)
-------- -------- -------- --------
NET LOSS ..................................... $ (1,861) $ (4,777) $ (8,564) $ (5,550)
======== ======== ======== ========
NET LOSS PER SHARE:
Basic and diluted ....................... $ (0.10) $ (0.31) $ (0.48) $ (0.38)
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic and diluted ....................... 17,870 15,447 17,870 14,687
======== ======== ======== ========
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,
------------------------
2000 1999
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...................................................................... $ (8,564) $ (5,550)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization .............................................. 5,128 1,397
Non-cash compensation expense .............................................. 37 32
Provision for doubtful accounts ............................................ 2,493 198
Deferred income tax provision .............................................. -- 122
Changes in operating assets and liabilities:
Accounts receivables ................................................... (5,700) 13,743
Inventories, net ....................................................... -- 29,856
Prepaid expenses and other current assets .............................. (4,645) (422)
Accounts payable, accrued expenses and other liabilities ............... 6,025 (27,261)
---------- ----------
Net cash provided by (used in) operating activities ............... (5,226) 12,115
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ........................................... (4,621) (16,370)
Decrease in other assets ...................................................... 3,417 3,639
---------- ----------
Net cash used in investing activities ............................. (1,204) (12,731)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in long-term debt ......................................... (207) 225
Issuance of common stock to Daisytek .......................................... 20
Net proceeds from initial public offering of common stock ..................... 53,014
Decrease in payable to Daisytek, net .......................................... -- (22,416)
---------- ----------
Net cash provided by (used in) financing activities ............... (207) 30,843
---------- ----------
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS ............................. (116) (16)
---------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS .............................. (6,753) 30,211
CASH AND CASH EQUIVALENTS, beginning of period .................................... 24,896 587
---------- ----------
CASH AND CASH EQUIVALENTS, end of period .......................................... $ 18,143 $ 30,798
========== ==========
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 at a price of $17 per share. Prior to the Offering, the financial
position, results of operations and cashflows of PFS were referred to as the
combined financial statements of PFSweb. Subsequent to the Offering and for all
periods presented herein, the financial position, results of operations and cash
flows of the Company are referred to as the consolidated financial statements of
PFSweb, Inc. and subsidiaries.
PFSweb is an international outsourcing provider of integrated business
infrastructure solutions to major brand name companies seeking to maximize their
supply chain efficiencies and to extend their e-commerce initiatives in the
United States, Canada, and Europe. The company offers such services as
professional consulting, e-marketplace logistics, order management, web-enabled
customer contact centers, customer relationship management, billing and
collection services, information management, and international distribution
services.
On June 8, 2000, the Daisytek Board of Directors approved the separation of
PFSweb from Daisytek by means of a tax-free dividend of Daisytek's remaining
ownership of PFSweb after receiving a favorable ruling from the IRS to the
effect that the distribution by Daisytek of its shares of PFSweb stock would be
tax-free to Daisytek and to Daisytek's shareholders for U.S. federal income tax
purposes. The distribution of Daisytek's 14,305,000 shares of PFSweb occurred at
the close of business on July 6, 2000, to Daisytek shareholders of record as of
June 19, 2000.
On June 8, 2000, the Company's Board of Directors declared a dividend
distribution of one preferred stock purchase right (a "Right") for each share of
the Company's common stock outstanding on July 6, 2000. Each Right entitles the
registered shareholders to purchase from the Company one one-thousandth of a
share of preferred stock at an exercise price of $67, subject to adjustment. The
Rights are not currently exercisable, but would become exercisable if certain
events occurred relating to a person or group acquiring or attempting to acquire
15 percent or more of the Company's outstanding shares of common stock. The
Rights expire on July 6, 2010, unless redeemed or exchanged by the Company
earlier.
The unaudited interim condensed consolidated financial statements as of
December 31, 2000, and for the three and nine months ended December 31, 2000 and
1999, 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. For the
three months ended December 31, 1999 and for the nine months ended December 31,
1999 and 2000, 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 were 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.
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PFSweb, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
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, 2000,
its results of operations for the three and nine months ended December 31, 2000
and 1999 and its results of cash flows for the nine months ended December 31,
2000 and 1999. Results of the Company's 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, shareholders' equity or cash flows.
2. COMPREHENSIVE LOSS (IN THOUSANDS):
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Net loss ............................. $ (1,861) $ (4,777) $ (8,564) $ (5,550)
Comprehensive income adjustments:
Foreign currency translation
adjustment ................... 7 23 (114) (23)
--------- --------- --------- ---------
Comprehensive loss ................... $ (1,854) $ (4,754) $ (8,678) $ (5,573)
========= ========= ========= =========
3. NET LOSS PER COMMON SHARE AND COMMON SHARE EQUIVALENT:
Basic and diluted net loss per common share attributable to PFSweb common
stock were determined based on dividing the 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 the periods presented prior to the
Offering. There were no potentially dilutive securities outstanding during the
period presented prior to the Offering. During the three and nine months ended
December 31, 2000 and 1999, outstanding options to purchase common shares were
anti-dilutive and have been excluded from the weighted average share
computation.
4. TRANSACTIONS WITH DAISYTEK:
Until October 25, 2000, and for all periods presented prior to that date,
two of the Company's executive officers served as directors of Daisytek.
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 of 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 zero and
$0.2 million for the three and nine months ended December 31, 2000,
respectively, and $0.4 million and $1.5 million for the three and nine months
ended December 31, 1999, respectively.
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PFSweb, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
The Company's product revenue from sales to Daisytek was zero for the three
and nine months ended December 31, 2000, and zero and $7.2 million for the three
and nine months ended December 31, 1999, 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, a 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 costs 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 $7.2 million and $21.5 million for the three and
nine months ended December 31, 2000, respectively, and $4.1 million and $4.9
million for the three and nine months ended December 31, 1999, respectively.
5. COSTS FROM CERTAIN TERMINATED CONTRACTS
Included in cost of service fee revenue are costs from certain terminated
contracts, net of approximately $1.7 million of termination fees to be collected
by the Company. Costs that resulted from the contract terminations primarily
include approximately $0.4 million of employee severance costs, approximately
$0.5 million of asset impairments from fixed assets which were specific to
terminated contracts and have no further value to PFSweb, and approximately $1.5
million of certain unbillable or uncollectible amounts receivable from, and
liabilities applicable to, clients who have terminated contracts.
6. OTHER EXPENSE
Other expense represents a foreign currency transaction loss as a result of
changes in the valuation of the Euro.
7. DEFERRED CREDIT
The deferred credit included in the accompanying financial statements
represents the long-term portion of a governmental grant received by the Company
related to investments in fixed assets made in its Belgium operation. The total
grant of approximately $1.8 million has been deferred and will be recognized as
a reduction to depreciation expense over the same period over which the costs of
the related fixed assets will be depreciated. The current unrecognized portion
of the grant is included in accrued expenses. The grant was earned by the
Company upon the achievement of certain minimum capital expenditure
requirements. However, the Company could be required to refund some or all of
the grant if a certain minimum workforce is not maintained through December
2004. The Company's management currently believes that the likelihood of a
refund of this grant is remote.
8. OTHER MATTERS
During the quarter ended December 31, 2000, the Company entered into a
forward exchange contract for $1 million to partially hedge the Company's Euro
based VAT receivables in Europe. VAT receivables
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PFSweb, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
of approximately $3.9 million at December 31, 2000 are included in prepaid
expenses and other current assets in the accompanying balance sheet.
In January, the Company received notification from NASDAQ indicating that
since the stock price had failed to maintain the minimum bid price of $1.00 over
a period of 30 consecutive trading days, the Company was not in compliance with
one of the NASDAQ listing requirements. The NASDAQ indicated in their
notification that the Company's stock price would need to maintain a $1 bid
price for a period of at least 10 consecutive trading days by April 9, 2001 to
avoid a delisting determination. If the Company is unable to maintain the $1
minimum bid price requirement by that date, the Company would then have the
right to appeal NASDAQ's determination.
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ITEM 2. MANAGEMENT'S 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, our Prospectus dated
December 2, 1999, and our Form 10-K for the year ended March 31, 2000, could
cause our results to differ materially from those expressed in our
forward-looking statements. These factors include:
o our reliance on the fees generated by the transaction volume or product
sales of our clients;
o our reliance on our clients' projections of transaction volume or product
sales;
o the impact of strategic alliances;
o trends in the market for our services;
o trends in e-commerce;
o whether we can continue and manage growth;
o changes in the trend toward outsourcing;
o increased competition;
o effects of changes in profit margins;
o the unknown effects of possible system failures and rapid changes in
technology;
o trends in government regulation, both foreign and domestic;
o foreign currency risks and other risks of operating in foreign countries;
and
o our relationship with and separation from Daisytek, our former parent
corporation.
Forward-looking statements relating to the continued listing of the
Company's stock on the NASDAQ, any appeal and hearing of any NASDAQ delisting
determination, the success of any appeal and hearing, the postponement of any
NASDAQ determination, and the time within which NASDAQ would deliver a decision
from any appeal or hearing and such matters as our financial condition and
operations are based on our management's current intent, belief or expectations
regarding our industry or us. In addition, some forward-looking statements are
based upon assumptions as to future events that may not prove to be accurate.
Forward-looking statements are based upon assumptions as to future events that
may not prove to be accurate. Therefore, actual outcomes and results may differ
materially from what is expected or forecasted in such forward-looking
statements. We undertake no obligation to update publicly any forward-looking
statement for any reason, even if new information becomes available or other
events occur in the future. There may be additional risks that we do not
currently view as material or that are not presently known.
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OVERVIEW
PFSweb is an international outsourcing provider of integrated business
infrastructure solutions to major brand name companies seeking to maximize their
supply chain efficiencies and to extend their e-commerce initiatives. We derive
our revenues from a broad range of services, including professional consulting,
e-marketplace logistics, order management, web-enabled customer contact centers,
customer relationship management, billing and collection services, payment
processing and fraud protection, data mining, and international 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
our warehouses and include real-time inventory management and customized
picking, packing and shipping of our clients' customer orders. We currently
provide infrastructure and distribution solutions to over 30 clients that
operate in a range of vertical markets, including apparel, computer products,
printers, cosmetics, fragile goods, pharmaceuticals, housewares,
telecommunications and consumer electronics, among others.
Our service fee revenue is typically charged on 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 contracts with our clients 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
passed on to our clients (and, in many cases, our clients' customers) and are
not reflected in our revenue or expense. Historically, our services have also
included purchasing and reselling client product inventory. In these
arrangements, our product revenue was recognized at the time product was
shipped. During the quarter ended September 30, 1999, our primary client
agreement under which we previously purchased and sold inventory was
restructured to provide transaction management services only on a service fee
basis.
Our expenses are comprised of:
o on an historical basis prior to September 30, 1999, cost of product
revenue, which consisted of the purchase price of product sold and net
freight costs;
o cost of service fee revenue, which 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; and
o selling, general and administrative expenses, which consist primarily
of compensation and related expenses for sales and marketing staff,
executive, management and administrative personnel and other overhead
costs, including certain occupancy and information technology costs
and depreciation and amortization expenses. In addition, on an
historical basis, certain direct contract costs related to our IBM
master distributor agreements have been reflected as selling and
administrative expenses.
HISTORICAL FINANCIAL PRESENTATION
We believe our historical financial statements for the three and nine months
ended December 31, 1999 may not provide a meaningful comparison to our current
and future financial statements for the reasons 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 customer contact 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
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entered into several 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 acts 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 for the nine months ended December 31, 1999 may not provide
a meaningful comparison to our current and 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. Currently, however, our revenue
under the new IBM agreements is service fee revenue that is payable by Daisytek
and is 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 receive service fee revenue based upon a percentage of Daisytek's
shipped product revenue. Consequently, the service fee revenue we receive from
Daisytek under this new agreement have been recognized only subsequent to the
Offering.
Additionally, upon completion of the Offering, Daisytek transferred to us
fixed assets and other assets which are 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------- ---------------------
2000 1999 2000 1999
-------- -------- -------- --------
Product revenue .................................... 0.0% 0.0% 0.0% 75.7%
Service fee revenue ................................ 100.0 100.0 100.0 24.3
-------- -------- -------- --------
Total revenues .............................. 100.0 100.0 100.0 100.0
Cost of product revenue (as % of product revenue) .. 0.0 0.0 0.0 94.4
Cost of service fee revenue (as % of service fee
revenue) ....................................... 66.5 89.9 70.5 82.1
-------- -------- -------- --------
Total costs of revenues ..................... 66.5 89.9 70.5 91.4
-------- -------- -------- --------
Gross profit ....................................... 33.5 10.1 29.5 8.6
Selling, general and administrative expenses ....... 50.1 60.7 49.1 16.9
Other .............................................. 0.0 0.0 4.7 0.0
-------- -------- -------- --------
Loss from operations ............................... (16.6) (50.6) (24.3) (8.3)
Interest (income) expense, net ..................... (1.9) 1.3 (2.3) 1.1
-------- -------- -------- --------
Loss before income taxes ........................... (14.7) (51.9) (22.0) (9.4)
Provision (benefit) for income taxes ............... (0.3) (7.9) 0.1 (1.9)
-------- -------- -------- --------
Net loss ........................................... (14.4)% (44.0)% (22.1)% (7.5)%
======== ======== ======== ========
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RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED DECEMBER 31, 2000 AND 1999
We believe our historical financial statements for the three and nine months
ended December 31, 1999 may not provide a meaningful comparison to our current
and future financial statements for the reasons described above.
Product Revenue. Product revenue was zero for the three and nine months
ended December 31, 2000. Product revenue was zero and $55.8 million for the
three and nine months ended December 31, 1999. As stated above, during the
quarter ended December 31, 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. In future
periods, we do not expect to have any product revenue.
Service Fee Revenue. Service fee revenue was $12.9 million for the three
months ended December 31, 2000, as compared to $10.9 million during the three
months ended December 31, 1999, an increase of $2.0 million or 18.5%. Service
fee revenue was $38.8 million for the nine months ended December 31, 2000, as
compared to $17.9 million during the nine months ended December 31, 1999, an
increase of $20.9 million or 117.2%. Changes in service fee revenues over prior
periods were due to the further expansion of existing contracts, the
restructuring of all the IBM contracts, new service contract relationships,
including our new transaction management services agreement with Daisytek which
commenced on the completion of the Offering in December 1999 and the impact of
certain contract terminations. Service fee revenue from existing contracts
decreased $0.2 million primarily as a result of certain client terminations
offset by growth in other clients while new service contract relationships added
$2.2 million for the three months ended December 31, 2000. Service fee revenue
from existing contracts increased $16.9 million while new service contract
relationships added $3.5 million for the nine months ended December 31, 2000.
Service fee revenue for the nine months ended December 31, 2000, also includes
approximately $0.5 million of previously deferred revenue associated with
terminated contracts. For the three and nine months ended December 31, 2000,
service fee revenue totaling $7.2 million and $21.5 million, respectively,
included fees earned from Daisytek under our new transaction management services
agreement, effective as of the Offering, our new IBM contracts that, prior to
the September 1999 quarter, would have been reported as product revenue, and for
certain subcontracted services. During calendar 2000 we effected certain
contract terminations with service fee revenues of approximately $10 million and
have experienced a longer implementation cycle associated with new larger
contracts. As a result, our service fee revenue performance is expected to be
generally flat or declining for the next few quarters.
Cost of Product Revenue. Cost of product revenue was zero for the three and
nine months ended December 31, 2000. Cost of product revenue as a percent of
product revenue was zero and 94.4% during the three and nine months ended
December 31, 1999, respectively. As a result of the new IBM arrangements, we do
not expect to incur any cost of product revenue in future periods.
Cost of Service Fee Revenue. Cost of service fee revenue was $8.6 million
for the three months ended December 31, 2000, as compared to $9.8 million during
the three months ended December 31, 1999, a decrease of $1.2 million or 12.3%.
The resulting service fee gross profit margin was 33.5% during the three months
ended December 31, 2000, and 10.1% during the three months ended December 31,
1999. Cost of service fee revenue was $27.4 million for the nine months ended
December 31, 2000, as compared to $14.7 million during the nine months ended
December 31, 1999, an increase of $12.7 million or 86.6%. The resulting service
fee gross profit margin was 29.5% during the nine months ended December 31,
2000, and 17.9% during the nine months ended December 31, 1999. The increases in
gross profit margins, for the three and nine month comparable periods, resulted
primarily from the further expansion of existing 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, and the termination of certain lower margin producing contracts.
Gross profit margins for the three and nine month comparable periods also
increased because cost of service fee revenue for the prior year periods
included incremental costs related to a large number of new client
implementations. For the nine month ended December 31, 2000, gross profit
increases were offset by approximately $0.5 million of previously deferred costs
associated with terminated contracts, approximately $0.7 million of costs, net
of approximately $1.7 million of termination fees, primarily related to certain
contract terminations, and approximately $0.6 million of other incremental costs
related to the terminated contracts and certain infrastructure costs that,
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due to late notification of reduced volume expectations by certain clients, we
were unable to reduce. In addition, certain excess infrastructure costs and
costs associated with improving service quality had a negative impact on gross
margin. As a percentage of total revenues, the gross profit margin for the nine
months ended December 31, 2000 of 29.5% increased when compared to the 8.6%
gross profit margin for the nine months ended December 31, 1999 due to the
factors discussed above as well as the restructuring of all of the IBM contracts
into service fee contracts, which typically have a higher gross profit margin as
a percent of revenue as compared to the gross profit margin as a percent of
revenue earned under the IBM master distributor agreements.
Selling, General and Administrative and Other Expenses. SG&A expenses were
$6.5 million for the three months ended December 31, 2000, or 50.1% of revenues,
as compared to $6.6 million, or 60.7% of revenues, for the three months ended
December 31, 1999. SG&A expenses were $20.8 million for the nine months ended
December 31, 2000, or 53.7% of revenues, as compared to $12.5 million, or 16.9%
of revenues, for the nine months ended December 31, 1999. Primarily, as a result
of the restructuring of the IBM agreements and the related reduction in product
revenue, SG&A expenses as a percentage of total revenue are higher for the nine
month comparable periods. For the three and nine month comparable periods, SG&A
expenses increased as a result of costs incurred to support the higher
transaction volumes, incremental investments in resources and technology to
support our continued growth, public company costs and certain excess
infrastructure costs. For the three month comparable periods, these increases
were offset by certain incremental charges effected during last year's quarter.
For the nine months ended December 31, 2000, we also incurred incremental costs
attributable to client disputed items and other costs of $1.8 million related to
a foreign currency transaction loss as a result of the devaluation in the Euro.
Interest (Income) Expense, Net. Interest income was $0.2 million for the
three months ended December 31, 2000 as compared to interest expense of $0.1
million for the three months ended December 31, 1999. Interest income was $0.9
million for the nine months ended December 31, 2000 as compared to interest
expense of $0.8 million for the nine months ended December 31, 1999. Our
intercompany payable to Daisytek, on which we incurred interest expense, was
repaid with a portion of the proceeds from our Offering. Subsequent to the
Offering, the remaining proceeds have been utilized to fund working capital
needs and capital expenditures and generate interest income. In future periods,
available cash will be used for future capital expenditures, general working
capital needs and possible acquisitions, and to the extent that we have excess
cash available, we expect to generate interest income.
Income Taxes. For the three and nine months ended December 31, 2000, we
recorded income taxes associated with our Canadian operations. 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 future losses in Europe, it will continue to negatively
impact our income tax provision. Additionally, since we ceased to be included in
Daisytek's consolidated return due to the completion of the spin-off and we have
not established a sufficient history of earnings from our U.S. operations, on a
stand-alone basis, a valuation allowance has been provided for the remaining net
deferred income tax asset as of December 31, 2000. As a result of our inclusion
in Daisytek's consolidated return prior to the spin-off, our income tax benefit
as a percentage of pre-tax loss was 15.2% and 19.7% for the three and nine
months ended December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
As a subsidiary of Daisytek, we historically funded our business through
intercompany borrowings from Daisytek. As a result of the Offering, we repaid
such intercompany borrowings. Since Daisytek is prohibited from advancing funds
to us, except in the normal course of business, in order to provide additional
financing flexibility in the future, in addition to our current cash position of
over $18 million, we plan to seek our own credit facility. Working capital
decreased to $21.3 million at December 31, 2000 from $28.0 million at March 31,
2000 as a result of funding operations and capital expenditures. 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 the next twelve months.
Net cash used in financing activities was $0.2 million for the nine months
ended December 31, 2000, representing payments on our capital lease obligations.
Net cash provided by financing activities was $30.8 million for the nine months
ended December 31, 1999. In December 1999, we successfully
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completed our Offering and sold 3,365,000 shares of common stock at $17 per
share. 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 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.
Cash flows used in operating activities totaled $5.2 million during the
nine months ended December 31, 2000. For the nine months ended December 31,
2000, the net cash used in operating activities primarily reflected increases in
prepaid expenses and accounts receivables of $10.3 million, primarily related to
$3.9 million of VAT receivables, partially offset by increases in accounts
payable, accrued expenses and deferred credit of $6.0 million. Cash flows
provided by operating activities totaled $12.1 million during the nine months
ended December 31, 1999. 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.
Cash used in investing activities was $1.2 million for the nine months
ended December 31, 2000 as compared to $12.7 million for the nine months ended
December 31, 1999. During the nine months ended December 31, 2000, our capital
expenditures of $4.6 million for property and equipment were offset by a $3.4
million reduction of third-party financed inventory. 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. 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 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 fiscal year 2001 will be
approximately $4 to $7 million. Some of these expenditures may be financed
through operating or capital leases.
During the quarter ended December 31, 2000, we entered into a forward
exchange contract for $1 million to partially hedge our Euro based VAT
receivables in Europe. In the future, we may consider entering into additional
forward exchange contracts in order to hedge our net investment in our 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.
Currently, we believe that we are operating with and incurring costs
applicable to excess capacity in both our North American and European
operations. We believe that as we add revenue that we will be able to more fully
cover our existing infrastructure and public company costs and reach
profitability. Based on current sales and contract implementation cycles, we are
targeting that profitability will be achieved in the last half of calendar year
2001. No assurance can be given that we can achieve such operating levels, or
that, if achieved, we will be profitable in any particular fiscal period.
In January, we received a notification from NASDAQ indicating that since
our stock had failed to maintain the minimum bid price of $1.00 over a period of
30 consecutive trading days, we were not in compliance with one of the NASDAQ
listing requirements. The NASDAQ indicated in their notification that our stock
price would need to maintain a $1 bid price for a period of at least 10
consecutive trading days by April 9, 2001 to avoid a delisting determination. If
we are unable to maintain the $1 minimum bid price requirement by that date, we
would then have the right to appeal NASDAQ's determination. At this
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appeal, we would present and discuss our strong financial position and business
plans towards achieving profitability and our hope would be that NASDAQ would
clearly see that continuing to list the PFSweb stock is in all parties' best
interest. Our continued performance towards our profitability targets, managing
our cash prudently, and continuing to explore other strategic avenues will
hopefully contribute to keeping our shares above the $1 bid price although no
assurance can be made in that regard.
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 with our current client mix, our business activity
is expected to be slightly 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
We believe that inflation has not had a material effect on our operations.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board 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. 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. We are currently evaluating the provisions of SFAS No. 133 and
its effect on the accounting treatment of our financial instruments.
During 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition." SAB No. 101 requires that
revenue generally is realized or realizable and earned when all of the following
criteria are met: (i) persuasive evidence of an arrangement exists, (ii)
delivery has occurred or services have been rendered, (iii) the seller's price
to the buyer is fixed or determinable, and (iv) collectibility is reasonably
assured. SAB No. 101 is effective for our fourth quarter ending March 31, 2001.
We are currently evaluating the provisions of SAB No. 101 and its effect, if
any, on our financial statements.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The carrying value of our financial instruments, which include cash and
cash equivalents, capital lease obligations and a $1 million forward exchange
contract, approximate their fair values based on current market prices and
rates.
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
------- -----------------------
3.1* Amended and Restated Certificate of Incorporation
3.2* Amended and Restated Bylaws
- --------------
* 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, 2001
PFSweb, Inc.
By: /s/ Thomas J. Madden
-----------------------------
Thomas J. Madden
Chief Financial Officer,
Chief Accounting Officer,
Executive Vice President
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INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
------- -----------------------
3.1* Amended and Restated Certificate of Incorporation
3.2* Amended and Restated Bylaws
- ----------
* Incorporated by reference from PFSweb, Inc. Registration Statement on Form
S-1 (Commission File No. 333-87657).
19