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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED MARCH 31, 2001
COMMISSION FILE NUMBER 000-28275
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PFSweb, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 75-2837058
(State or other jurisdiction of (I.R.S. Employer Number)
incorporation or organization)
500 NORTH CENTRAL EXPRESSWAY, PLANO, TEXAS 75074
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 972-881-2900
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of June 15, 2001 (based on the closing price as reported by
the National Association of Securities Dealers Automated Quotation System) was
$18,453,874.
As of June 15, 2001, there were 17,970,429 shares outstanding of the
registrant's Common Stock, $.001 par value.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Annual Report, to the extent
not set forth herein, is incorporated herein by reference from the registrant's
definitive proxy statement relating to the annual meeting of stockholders to be
held in 2001, which definitive proxy statement shall be filed with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year to which this Annual Report relates.
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INDEX
PAGE
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PART 1
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 26
Item 3. Legal Proceedings........................................... 26
Item 4. Submission of Matters to a Vote of Security Holders......... 26
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 27
Item 6. Selected Consolidated Financial Data........................ 27
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 29
Item 7a. Quantitative and Qualitative Disclosure about Market Risk... 38
Item 8. Financial Statements and Supplementary Data................. 39
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 62
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 62
Item 11. Executive Compensation...................................... 62
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 62
Item 13. Certain Relationships and Related Transactions.............. 62
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 63
SIGNATURES............................................................ 67
Unless otherwise indicated, all references to "PFSweb," "the Company,"
"we," "us" and "our" refer to PFSweb, Inc., a Delaware corporation, and its
subsidiaries. All references to "Daisytek" refer to Daisytek International
Corporation, a Delaware corporation, and its subsidiaries. Reference in this
Report to the Company's fiscal year means the 12 months period ending on March
31 of such year.
The Company has elected to change its fiscal year end date from March 31 to
December 31.
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PART I
ITEM 1. BUSINESS
GENERAL
PFSweb serves as the "brand behind the brand" for companies seeking to
increase their supply chain efficiencies. As a business process outsourcer,
offering proven, fast and secure infrastructure solutions for manufacturers,
distributors and retailers, we are able to provide our clients with seamless and
transparent solutions to support their business strategies. Utilizing our
technology and infrastructure expertise, we enable our clients to develop and
deploy new products and new business strategies rapidly through our solutions.
Our clients engage us as both a consultant to assist them in the design of a
business solution, as well as the virtual and physical infrastructure needed to
build and operate that solution.
We help our clients define new ways to do business. Each client has unique
specifications that require highly customized solutions. Clients turn to us to
help address such business issues as customer satisfaction, production capacity
requirements, vendor integration, supply chain compression, and international
expansion, among others. Our clients are seeking solutions that will provide
them substantial supply chain and channel marketing efficiencies, while
simultaneously creating a world-class customer service experience.
Our technology and business infrastructure are adaptable, changeable and
reliable. This flexibility allows us to custom design solutions to fit the
business requirements of our client's strategies. Our revenue is primarily
earned from service fees charged to process individual business transactions
through our technology and infrastructure capabilities, on our client's behalf.
These business transactions may include the answering of a phone call or an
e-mail, the processing of an electronic credit card authorization, the receipt
and storage of our client's inventory, the shipping of products to our client's
customer, the management of a complex set of electronic data transactions
designed to keep our client's suppliers and customers accounting records in
balance, or the processing of a returned package.
Our capabilities are quite expansive. In an ongoing quest to offer the most
necessary and resourceful products to our clients, we are continually developing
capabilities to meet the most pressing business issues in the marketplace. Our
business objective is to focus on "Leading the Evolution of Outsourcing(sm)." As
our tagline suggests, we will continue to evolve our service offerings to meet
the needs of the marketplace and the demands of the unique client requirement.
We are most successful when we develop a new capability to enable a client to
pursue a new initiative and we are then able to leverage that new evolutionary
development across other clients or prospects as it becomes "best practice" in
the marketplace. Our team of experts designs and builds diverse solutions for
Fortune 1000, Global 2000 and brand name clients around a flexible core of
technology and physical infrastructure that includes:
- Technology collaboration provided by our suite of software products,
called the Entente Suite(SM), that are e-commerce and collaboration tools
that enable buyers and suppliers to fully automate their business
transactions within their supply chain. Entente supports industry
standard collaboration techniques including XML based protocols such as
Biztalk and RosettaNet, real-time application interfaces, text file
exchanges via secured FTP, and traditional EDI;
- Managed web hosting and web development, including web site design,
creation, integration and ongoing maintenance, support and enhancement of
web site;
- Order management including order processing from any source of entry,
back order processing and future order processing, tracking and tracing,
and credit management, all with multiple currency and language options;
- Customer Relationship Management (CRM), including web-enabled customer
contact services via world-class call centers utilizing voice, e-mail,
and Internet chat communications that are fully integrated with real-time
systems and historical data archives to provide complete customer
lifecycle management;
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- International fulfillment and distribution services, including warehouse
management, inventory management, product warehousing, order picking and
packing, kitting and light assembly, transportation management and
returns or reverse logistics administration;
- Information management, including real-time data interfaces, data
exchange services and data mining;
- Billing and collection services, including secure on-line credit card
processing, fraud protection, invoicing, credit management and
collection;
- Professional consulting services, including a consultative team of
experts that tailor solutions to each client and consistently seek out
ways to increase efficiencies and produce benefits for the client.
We are headquartered in Plano, Texas where our executive and administrative
offices are located as well as our primary technology hosting and development
laboratories. We operate world-class call centers from our U.S. facilities
located in Plano, Texas, and Memphis, Tennessee, and from our international
facilities located in Toronto, Ontario and Liege, Belgium. We have approximately
one million square feet of highly automated warehouse and distribution
capability located across our facilities in Memphis, Tennessee, Toronto, Ontario
and Liege, Belgium. Since our inception we have provided, and in many cases
continue to provide, solutions to clients that are positioned as market leaders
in a range of industries, including technology manufacturing, clothing,
retailing, high security collectibles, consumer goods, pharmaceuticals,
housewares and consumer electronics, among others.
Prior to December 1999, we were a wholly-owned subsidiary of Daisytek
International Corporation ("Daisytek"), one of the world's largest wholesale
distributors of computer supplies, office products, and film and tape media. Our
business unit was formed in 1991 to leverage Daisytek's core competencies in
customer service, order management, product fulfillment and distribution. From
1996 to 1999, the operations of our business unit were primarily focused in
several Daisytek subsidiaries operating collectively as Priority Fulfillment
Services, Inc. ("PFS"). In June 1999, Daisytek created a separate wholly owned
subsidiary named PFSweb, Inc., a Delaware corporation, to become a holding
company for PFS in contemplation of an initial public offering (the "Offering")
of PFSweb. In December 1999, we sold 3,565,000 shares of common stock in the
Offering and Daisytek contributed to us all the assets, liabilities and equity
comprising PFS. PFSweb and Daisytek completed their separation on July 6, 2000
through a pro rata distribution to Daisytek's common stockholders of all of the
shares of our common stock which Daisytek then held (which is also known as a
"spin-off").
Upon completion of the Offering, we entered into a number of agreements
with Daisytek relating to our business and our proposed spin-off from Daisytek.
See "Spin-off of PFSweb from Daisytek." In May 2001, certain of these agreements
were terminated as part of a transaction in which we sold to Daisytek certain
assets used to provide transaction management services to Daisytek. As part of
this sale transaction, we also entered into a short term transition services
agreement with Daisytek.
INDUSTRY OVERVIEW
Businesses today operate in an environment of rapid technological
advancements, increasing competition and continuous pressure to improve
operating efficiency. In response to these developments, several significant
trends have emerged. For example:
- Manufacturers are looking to restructure their supply chains to maximize
efficiency and reduce costs in both business-to-business and
business-to-consumer markets and to create a supply chain that is able to
support the multiple unique needs of each of their initiatives, including
traditional and electronic commerce.
- Retailers and other direct marketers are increasing their emphasis on
developing closer customer relationships and analyzing all forms of
customer contact through CRM tools.
- Companies in a variety of industries are using outsourcing as a method to
address one or more business functions that are not within their core
business competencies.
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SUPPLY CHAIN MANAGEMENT TREND
As companies continue to focus on improving their businesses and financial
ratios, significant efforts and investments are being contemplated and made in
order to define ways to maximize supply chain efficiency. Off balance sheet
inventory financing, vendor managed inventory, supply chain visibility software
solutions, distribution channel skipping, direct to consumer e-commerce sales
initiatives, and complex upstream supply chain collaborative technology are
products that manufacturers seek to help them achieve greater supply chain
efficiency and return on capital. AMR Research predicts that the Supply Chain
Management Market, which we believe includes the type of products described
above, will increase from $6.7 billion in 2001 to nearly $21.1 billion in 2005.
A key business challenge facing many manufacturers and retailers as they
evaluate their supply chain efficiency is in determining how the trend for
consumers to shop via the Internet in an electronic commerce fashion will effect
their traditional commerce business model. While many leading industry experts,
like Forrester Research, have tempered their e-commerce growth trend estimates
downward over the past year, we believe that companies will still need to
continue to strategically plan for the impact that e-commerce and other new
technology advancements will have on their traditional commerce business models
and their existing technology and infrastructure capabilities. Forrester
Research predicts that within three years, online commerce will reach $6.8
trillion for both business-to-business and business-to-consumer transactions.
While the majority of online transactions currently occur in the United States
and North America, in the coming years we believe that certain Asian and
European nations will experience significant growth in e-commerce transactions
as well.
Manufacturers, as buyers of materials, are also imposing new business
practices and policies on their supplier partners in order to shift the normal
supply chain costs and risk associated with inventory ownership away from their
own balance sheets. Through techniques like Vendor Managed Inventory ("VMI") or
Consigned Inventory Programs ("CIP"), manufacturers are asking their suppliers,
as a part of the supplier selection process, to provide capabilities where the
manufacturer need not own, or even possess, inventory prior to the exact moment
that unit of inventory is required as a raw material component or for shipping
to a customer. In order to be successful for all parties, business models such
as these often require a sophisticated collection of technological capabilities
that allow for complete integration and collaboration of the information
technology environments of both the buyer and supplier. For example, in order
for an inventory unit to arrive at the precise required moment in the
manufacturing facility, it is necessary for the materials requirement
procurement ("MRP") systems of the manufacturer to integrate with the CRM
systems of the supplier. When hundreds of supplier partners are involved, this
process can become quite complex and technologically challenging. Buyers and
suppliers are seeking solutions that utilize XML based protocols like Biztalk,
RosettaNet and other traditional EDI standards in order to insure an open
systems platform that promotes easier technology integration in these
collaborative solutions.
CRM TREND
There is a growing trend among companies in the worldwide marketplace to
focus on strengthening their intangible assets. Intangible assets can be broadly
defined as including those assets related to a company's brand, intellectual
property, key knowledge based personnel and detailed knowledge about its
customers. CRM is the technique of widespread data collection and relational
data base management of detailed information about an individual customer's
habits and desires and utilizing it in such a manner that simultaneously
protects the privacy of the individual, enhances the customer's experience with
the company and maximizes the lifetime business value of that customer to the
company. Through the analysis of customer behavior, companies can tailor their
businesses to meet the needs of the customer and therefore increase revenues and
improve customer service.
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To succeed in CRM, companies need an array of capabilities to support their
business. Maintaining a good customer service staff is only the beginning. In
order to retain and satisfy their customers and tailor their business to their
clients' needs, businesses must be able to:
- Capture and record all customer contacts;
- Document abandonment points and view results of each customer
interaction;
- Offer a completely integrated view of all customer activity;
- Develop an operating and technology infrastructure that can be expanded
as volumes increase;
- Offer value-added services through all customer touch-points;
- Utilize the information gathered to profile customers for tailored
marketing communications;
- Utilize information gathered to adjust offerings to customer demand and
desire;
- Compile information on individual customers to anticipate most likely
up-sell and cross-sell products;
- Compile information on the profitability of marketing to each customer
versus their overall profitability as a customer;
- Apply customer information to increase overall revenue generated;
- Address supply chain management and reconfiguration based on overall
customer information compiled; and
- Protect the privacy rights and other desires of the consumer.
Based on the need for companies to harness CRM techniques, analysts expect that
CRM solutions development will be one of the major growth areas in the economy
over the next several years. AMR Research predicts the CRM market will increase
to $37.8 billion in 2005, up from $14.1 billion in 2001.
OUTSOURCING TREND
In response to growing competitive pressures and technological innovations,
we believe many companies, both large and small, are focusing their critical
resources on the core competencies of their business and utilizing business
process outsourcing to accelerate their business plans in a cost-effective
manner and to perform non-core business functions. Outsourcing provides many key
benefits, including the ability to:
- Capitalize on skills, expertise and technology infrastructure that would
otherwise be unavailable or expensive given the scale of the business;
- Reduce capital and personnel investments and convert fixed investments to
variable costs;
- Increase flexibility to meet changing business conditions and demand for
products and services;
- Enhance customer satisfaction and gain competitive advantage;
- Improve operating performance and efficiency; and
- Rapidly enter new business markets or geographic areas.
As a result, the market for outsourcing services has experienced
significant growth. International Data Corporation expects that worldwide
spending on outsourcing services will grow to more than $151 billion in 2003.
Typically, outsourcing service providers are focused on a single function,
such as information technology, call center management, credit card processing,
warehousing or package delivery. This focus creates several challenges for
companies looking to outsource more than one of these functions, including the
need to manage multiple outsourcing service providers, share information with
service providers and integrate that information
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into their internal systems. Additionally, the delivery of these multiple
services must be transparent to the customer and enable the client to maintain
brand recognition and customer loyalty.
Furthermore, traditional commerce outsourcers are frequently providers of
domestic only services versus international solutions. As a result, companies
requiring global solutions must establish additional relationships with multiple
geographic outsourcing parties.
Another vital point for major brand name companies seeking to outsource, is
the protection of their brand. When looking for an outsourcing partner to
provide infrastructure solutions, brand name companies must find a company that
is world-class and can ensure the same quality performance and superior
experience that their customers expect from their brands. Working with an
outsourcing partner requires finding a partner that can maintain the consistency
of their brand image, which is one of the most valuable intangible assets that
recognized brand name companies possess.
THE PFSWEB SOLUTION
PFSweb serves as the "brand behind the brand" for companies seeking to
increase the efficiencies of all aspects of their supply chain.
Our value proposition is to become an extension of our clients' businesses
by delivering a superior experience to increase and enhance sales and market
growth, customer satisfaction and customer retention. We act as both a virtual
and a physical infrastructure for our clients' businesses, which helps them
enhance their traditional commerce operations and meet the operational
challenges associated with the deployment of their strategic initiatives. Our
integrated solutions enable clients to introduce new products and business
programs, and focus on their core business, products and services without making
substantial investments in fixed assets, information technology systems,
facilities and ongoing personnel. We offer complete, tailored solutions based
around a core infrastructure. Our infrastructure is seamlessly integrated with
our clients' systems thereby making us transparent to our clients' customers.
Our solutions enable our clients to quickly and efficiently implement
traditional and e-commerce business initiatives. By utilizing our services, our
clients are able to:
Quickly Capitalize on Market Opportunities. Our solutions empower clients
to rapidly implement their supply chain and e-commerce strategies and take
advantage of opportunities without lengthy integration and implementation
efforts. These solutions 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, our clients can
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 offer our clients a "world
class" level of service, including 24-hour, seven-day-a-week Web-enabled
customer care service centers and exceptional order accuracy.
Minimize Investment and Improve Operating Efficiencies. We provide our
clients with access to a wide array of services and tailored solutions that
cover a broad spectrum of supply chain infrastructure issues, eliminating 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 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 through our
Entente Suite, which is designed to interface seamlessly with their systems. We
provide our clients with vital product and customer information which can be
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immediately available to them on their own systems for use in data mining,
analyzing sales and marketing trends, monitoring inventory levels and performing
other management functions.
THE PFSWEB STRATEGY
Our objective is to grow by being an international provider of integrated
business process outsourcing solutions. As this evolution of our business model
continues, we remain focused today on the following fundamentals:
Focus on quality performance for our existing clients. By providing
superior operating results, we believe we can expand relationships with existing
clients to serve additional product categories and business segments and to
provide additional services. Our objective is to integrate ourselves to the
point that we become our clients' physical infrastructure. Based upon our
clients' needs, we will continue to introduce new services and products. We also
intend to continue our commitment to invest in state-of-the-art technology,
equipment and systems to provide new, high-quality, innovative solutions to our
existing clients and to attract new clients.
Engaging clients with founded business strategies and financial
stability. We intend to expand our business by targeting major brand name
companies with proven and founded business models that are seeking to adjust
their supply chain strategy or introduce new products or business programs into
their existing business. We believe these companies will be the leaders in the
evolving marketplace, and this focus will provide us with opportunities to grow
along with our clients' strategic initiatives. We also seek to expand our
business within large brand name retailers seeking to consolidate web and
traditional operations or attempting to increase their efficiencies in their
traditional business model through our streamlined processes.
Hiring, retaining and training high quality professionals. Our team and
their experience are crucial elements in the expansion of our business because
of the uniqueness of analyzing each individual client's business case. Hiring
and retaining high quality individuals who can design expert business solutions
for our prospective clients will allow PFSweb to continue to extend its
expertise, knowledge, and strategy to potential clients.
Inventing new technology and operational capabilities. We intend to
aggressively expand our market potential by inventing new technology and
operational capabilities that will clearly differentiate PFSweb from its
competitors. We believe that companies are looking for new efficiencies that
they can utilize to reduce costs and save time. Based upon our clients' and
prospective clients' needs we will continue to evolve and develop solutions that
can produce the most positive changes within their organizations.
Controlling overhead costs while focusing on reducing our own excess
infrastructure. We intend to continue our focus on controlling overhead costs
in order to maintain our strong financial position. Our objective is to seek new
business to absorb current excess capacity and to reduce our overhead costs as a
percent of revenue. Through the successful execution of this strategy, it is our
objective to create a strong springboard towards achieving sustainable
profitability.
To execute these strategies we may, among other things, continue to incur
significant operating and marketing expenses, invest in additional technology
infrastructure and continue to maintain certain excess capacity. The successful
balance of the execution of these strategies over the next year, we believe,
should result in the formation of a solid strategic and financial foundation for
PFSweb and provide PFSweb a sustainable and profitable business model for the
future. Further, with this foundation firmly in place, we can then expand our
overall growth more rapidly.
See "Risk Factors" for a complete discussion of risk factors related to our
ability to achieve our objectives and fulfill our business strategies.
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PFSWEB SERVICES
We offer a comprehensive and integrated set of business infrastructure
solutions that are tailored to our clients' specific needs to enable them to
quickly and efficiently implement their supply chain strategies. Our services
include:
Technology Collaboration. Specifically for e-commerce initiatives, PFSweb
has created the Entente Suite(SM), which alludes to the level of electronic
cooperation that is possible when we construct solutions with our clients using
this technology, and enables everything from order processing and inventory
reporting to total e-commerce design and implementation. The Entente Suite
comprises three key components -- EntenteDirect(SM), EntenteMessage(SM) and
EntenteWeb(SM).
EntenteDirect provides customers with a real-time, user-friendly interface
between their system and PFSweb order processing and related functions. Using
real-time or batch processes, EntenteMessage is a file delivery solution for
clients using warehousing and distribution facilities. EntenteWeb is a one-stop
shop for the entire e-commerce process, particularly for companies with unusual
needs or specific requests that can't be met by the typical e-commerce
development packages. EntenteWeb is particularly focused to enable global
commerce strategies with its extensive currency and language functionality.
The Entente Suite operates in an open systems environment and features the
use of industry-standard XML, enabling customized e-commerce solutions with
minimal changes to a client's or our ERP systems, speeding the implementation
process. Additionally, by using XML, the Entente Suite offers companies a more
robust electronic information transfer option than text file FTP or EDI.
Managed Web Hosting and Web Development. We offer a highly available and
secure managed web hosting solution that encompasses complete creation and
maintenance of client web sites. Operating with an in-house creative staff, we
customize commerce enabled client sites to their exact specifications and
requirements. As with all major brand name companies, consistency within the
brand image is vital; therefore, our design engineers create sites that
seamlessly integrate and mirror the exact brand image of our clients. Operating
on IBM enterprise systems and utilizing our state of the art Entente Suite
technology, we can maintain a robust hosting environment where client sites
reside and maintain and update all necessary infrastructure.
Specifically through the EntenteWeb package, clients can build an
e-commerce initiative with relatively low investment and in a time efficient
manner. EntenteWeb is a complete front-to-back e-commerce solution which
incorporates components ranging from the look of the user interface to specific
business purchasing, warehousing and shipping needs, enabling companies to
define in exact terms what they need their e-commerce site to do.
Order Management. Our order management solutions provide clients with
interfaces that allow for real-time information retrieval, including information
on product orders, shipment, delivery and customer history. These solutions are
seamlessly integrated with our Web-enabled customer care centers, allowing for
the processing of orders through shopping cart, phone, fax, mail, email, Web
chat, and other order receipt methods. As the information backbone for our total
supply chain solution, order management services can be used on a stand alone
basis or in conjunction with our other business infrastructure offerings,
including customer contact, billing or distribution services. In addition, for
the business-to-business market, our technology platform provides a variety of
order receipt methods that facilitate commerce within various stages of the
supply chain. Our systems provide the ability for both our clients' and their
customers to track the status of orders at any time. Our services are
transparent to our clients' customers and are seamlessly integrated with our
clients' internal systems platforms and Web sites. By synchronizing these
activities, we can capture and provide critical customer information, including:
- Statistical measurements critical to creating a quality customer
experience, containing real-time order status, order exceptions, back
order tracking, soft/hard allocation of product based on timing of online
purchase and business rules, the ratio of customer inquiries to
purchases, average order sizes and order response time;
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- Business-to-business supply chain management information critical to
evaluating inventory positioning, for the purpose of reducing inventory
turns, product flow through and end-consumer demand;
- Reverse logistics information including customer response and rationale
for the return or rotation of product;
- Detailed marketing information about what was sold and to whom it was
sold, by location and preference; and
- Web traffic reporting showing the number of visits ("hits") received,
areas visited, and products and information requested.
Customer Relationship Management. We offer a completely customized CRM
solution for clients. Our CRM solution encompasses a full-scale customer contact
management service offering, as well as a fully integrated customer analysis
program. All customer contacts are captured and customer purchases are
documented. Full-scale reporting on all customer transactions is available for
evaluation purposes. Through each of our customer touch-points, information can
be analyzed and processed for future use in business evaluation and supply chain
planning.
An important feature of evolving commerce remains the ability for the
customer to speak with a live customer service representative. Our customer care
services utilize features that integrate voice, e-mail, data and Internet chat
communications to respond to and handle customer inquiries. Our customer care
representatives answer various questions, acting as virtual representatives of
our client's organization, regarding order status, shipping, billing, returns
and product information as well as a variety of other questions. Our Web-enabled
customer care technology identifies each customer contact automatically and
routes it to the available customer care representative who is specially
certified in the client's business and products. Our web-enabled customer care
centers are designed so that our customer care representatives are capable of
handling many different clients and products in a shared environment, thereby
creating economy of scale benefits for our clients as well as highly customized
dedicated support models that provide the ultimate customer experience and brand
reinforcement. Our advanced technology also enables our representatives to
up-sell, cross-sell and inform customers of other products and sales
opportunities. The Web-enabled customer care center is fully integrated into the
data management and order processing system, allowing full visibility into
customer history and customer trends. Through this fully integrated system we
are able to provide a complete CRM solution.
International Fulfillment and Distribution Services. An integral part of
our business process outsourcing solutions is the warehousing and distribution
of inventory owned by our clients. We currently have approximately one million
square feet of warehouse space domestically and internationally to store and
process our clients' inventory. We receive client inventory in our distribution
centers, verify shipment accuracy, unpack, inspect for damage and generally
stock for sale the same day. On behalf of our clients, we pick, pack and ship
their customer orders and can provide customized packaging, inserts and
promotional literature for distribution with customer orders. Based upon our
clients' needs, we are able to take advantage of a variety of shipping and
delivery options, including next day service. In addition, an increasingly
important function that we provide for our clients is reverse supply chain
management. We offer a wide array of product return services for our clients,
including issuing return authorizations, receipt of product, crediting credit
card accounts, and disposition of returned product.
Our distribution facilities contain computerized sorting equipment, powered
material handling equipment, scanning and bar-coding systems and automated
conveyors, in-line scales and digital cameras to photograph shipment contents
for automatic accuracy checking. Our international distribution complexes
include several advanced technology enhancements, such as radio frequency
technology in product receiving processing to ensure accuracy, an automated
package routing system and a "pick to light" paperless order picking system. Our
advanced distribution systems provide us with the capability to currently
warehouse an extensive number of stock keeping units (SKUs) for our clients
ranging from high-end laser printers to cosmetic compacts. Our facilities are
flexibly configured to process business-to-business and single pick
business-to-consumer orders from the same central location.
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During the fiscal quarter ended March 31, 2001, we warehoused, managed and
fulfilled approximately $1 billion (on an annualized basis) in client
merchandise and transactions. This does not represent our revenue, but rather
the revenue of our clients for whom we provided e-business infrastructure
solutions. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
While the majority of our clients maintain ownership of their own
inventory, we have worked with third-party companies to finance client inventory
as well. PFSweb has years of experience in dealing with the issues related to
inventory ownership. We support various client third-party consigned, vendor
consigned and third-party financed inventory management programs. It is
customary in this arrangement for PFSweb to manage the entire customer
relationship. Through CIP, we utilize technology resources to time the
replenishment purchase of inventory with the simultaneous sale of product to the
end user. All interfaces are done electronically and all processes regarding the
financial transactions are automated, creating significant supply chain
advantages.
PFSweb is experienced in the complex legal, accounting and governmental
control issues that can be hurdles in the successful implementation of an off
balance sheet inventory program. Our knowledge and experience help clients
achieve supply chain benefits while reducing inventory carrying costs.
Information Management. We have the ability to communicate with and
transfer information to and from our clients through a wide variety of
technologies, including real-time data interfaces, file transferring and
electronic data interchange. Our systems are designed to capture, store and
electronically forward to our clients critical information regarding customer
inquiries and orders, product shipments, inventory levels, product returns and
other information. We maintain for our clients detailed product master files
that can be seamlessly integrated with their Web sites. Our systems are capable
of providing our clients with customer and order information for use in
analyzing sales and marketing trends and introducing new products. We also offer
customized reports or data analyses based upon specific client needs to assist
them in their budgeting and business decision process.
Billing and Collections Services. We offer secure credit and collections
services for both business-to-business and business-to-consumer business. We act
as virtual and physical financial management department for all potential client
needs.
Specifically, for business-to-consumer clients, we offer secure, real-time
credit card processing for orders made via a client Web site or through our
customer contact center. Additionally, we are able to calculate sales tax, if
applicable, for numerous taxing authorities and on a variety of products. Using
third-party leading-edge fraud protection services and risk management systems,
we can assure the highest level of security and the lowest level of risk for
client transactions.
For business-to-business clients, we offer full-service accounts receivable
management and collection capabilities, including the ability to generate
customized computer-generated invoices in our clients' names. We assist clients
in reducing accounts receivable and days sales outstanding, while minimizing
costs associated with maintaining an in-house collections staff. In addition, we
are able to offer electronic credit services in the format of EDI X12 and XML
communications direct from our clients to their vendors, suppliers and
retailers.
Professional Consulting Services. As part of the tailored solution for our
clients, we offer a full team of experts designated specifically to focus on our
clients' businesses. They play a consultative role in which they provide
evaluation, analysis and recommendations for the client's business. This team
creates customized solutions and devises plans to be implemented in order to
increase efficiencies and produce benefits for the client.
Comprised of industry experts from top-tier consulting firms and industry
market leaders, the PFSweb team of professional consultants provides client
service focus and logistics and distribution expertise. They have built
solutions for Fortune 1000 and Global 2000 market leaders in a wide range of
industries, including apparel, technology products, telecommunications,
cosmetics, housewares, high-value collectibles, sporting goods, pharmaceuticals
and several more. Focusing on the evolving infrastructure needs of major
corporations and their business initiatives, our team has a solid track record
providing consulting services in the areas of supply chain management,
distribution and fulfillment, technology interfacing, logistics and customer
support.
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CLIENTS AND MARKETING
Our target clients include brand name manufacturers looking to quickly and
efficiently implement business initiatives or introduce new products or
programs, without the burden of modifying or expanding their order processing
and distribution infrastructure. We also target retailers seeking to expand
their sales through new channels. Our services are available for a multitude of
industries and company types, including such clients as:
International Business Machines ("IBM") (multiple divisions supplying
printer and media supplies in several geographic areas), Adaptec (computer
accessories), a U.S. Federal Governmental unit, Avaya Communication
(formerly the Network Enterprise Division of Lucent Technology), Dell, (a
computer manufacturer), Emtec (a manufacturer of BASF branded data media
and audio visual products), Lancome (a cosmetics division of L'Oreal
International), Xerox (printers and printer supplies), Thomson multimedia
(RCA branded televisions and consumer electronics), Mary Kay Cosmetics
(cosmetics), Pharmacia/Upjohn (pharmaceuticals), NokiaUSA.com (cell phone
accessories), and Hewlett-Packard (printers and computer networking
equipment).
We target clients through a direct sales force, direct marketing, trade
shows and industry conferences, trade journal advertising, and our Web site. We
also pursue strategic marketing alliances with consultants and other
professional firms to generate referrals and customer leads.
Our direct sales force is comprised of dedicated sales professionals whose
compensation is tied to their ability to expand our relationships with existing
clients and attract new clients. We also employ highly trained implementation
and account managers whose responsibilities include the oversight and
supervision of client projects and maintaining high levels of client
satisfaction.
TECHNOLOGY
We maintain advanced management information systems and have automated key
business functions using on-line, real-time systems. These systems enable us to
provide our clients information concerning sales, inventory levels, customer
payments and other operations that are essential for our clients to efficiently
manage their electronic commerce and supply chain business programs. Our systems
are designed to scale rapidly in order to handle the transaction processing
demands of our clients.
We employ technology from a selected group of partners, many of which are
also our clients. For example, we deploy IBM e-servers and network printers in
appropriate models to run Web site functions as well as order management and
distribution functions. We utilize Avaya Communication for telephone switch and
call center management functions. We also employ Avaya Communication for our
Web-enabled customer care center to interact with customers via voice, e-mail or
chat. Avaya Communication technology also allows us to share Web pages between
customers and our service representatives. We have the ability to transmit and
receive voice, data and video simultaneously on a single network connection to a
customer to more effectively serve that customer for our client. Clients'
interest in using this technology stems from its ability to allow shoppers to
consult with known experts in a way that the customer chooses prior to
purchasing. Our sophisticated computer-telephony integration has been
accomplished by combining systems software from IBM and Avaya Communication
together with our own application development. We use AT&T for our private
enterprise network and long distance carrier. We use J.D. Edwards as the
software provider for the primary ERP applications that we use in our
operational areas and financial areas. We use Rapistan/Demag for our warehouse
management, automated conveyor and "pick-to-light" (inventory retrieval) systems
and Symbol Technologies/Telxon for our warehouse radio frequency applications.
Today's business models do not often support the focus and speed that
eBusiness demands, according to a recent study by Forrester Research. Many
internal infrastructures are not sufficient to support the explosive growth in
e-business, e-marketplaces, supply chain compression, distribution channel
realignment and the corresponding demand for real-time information necessary for
strategic decision-making and product fulfillment.
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To address this need, we have created the Entente Suite which is a
comprehensive software solution, with supporting services and hardware, that
enables companies with little or no e-commerce infrastructure to speed their
time to market and minimize resource investment and risk, and allows all
companies involved to improve the efficiency of their supply chain. The Entente
Suite is comprised of three distinct offerings -- EntenteDirect, EntenteMessage
and EntenteWeb -- which can stand alone or be combined for a fully customized
e-commerce solution depending on the level of direct involvement a company wants
to maintain in their e-commerce initiative.
The components of the Entente Suite provide the open platform
infrastructure that allows us to create complete e-commerce solutions with our
customers. Using the various components of the Entente Suite, we can assist our
clients in easily integrating their Web sites or ERP systems to our systems for
real-time transaction processing without regard for their hardware platform or
operating system. This high-level of systems integration allows our clients to
automatically process orders, customer data and other e-commerce information. We
can also track information sent to us by the client as it moves through our
systems in the same manner a carrier would track a package throughout the
delivery process. Our systems enable us to track, at a detailed level,
information received, transmission timing, any errors or special processing
required and information sent back to the client. The transactional and
management information contained within our systems is made available to the
client quickly and easily through the Entente Suite.
The Entente Suite operates in an open systems environment and features the
use of industry-standard XML messaging in a common message broker that supports
all Entente Suite components. Additionally, the support of XML messaging in all
client and vendor interfaces enables the creation of customized e-commerce and
fulfillment solutions with minimal changes to our client's and our client's
vendors' back office systems, speeding the implementation process. Additional
connectivity support is provided for most system interfaces using X.12 and
EDIFACT EDI, native Java and Windows interfaces, and standard text files via
FTP. Our dual system architecture offers complete redundancy and
high-availability hardware and software that virtually eliminates any risk of
site failure or disruption in information flow to or from our clients e-commerce
site or back office systems. This unique architecture also provides a very
scaleable e-marketplace platform that can easily support high-volume
requirements including seasonal variations. Additionally, because data and
information flows through a direct, centralized, connection to our client's
system, rather than several translation points, the Entente Suite offers maximum
efficiency and real-time information delivery, reducing opportunities for error.
The Entente Suite serves as a transparent interface to our back-office
productivity suite which is a customized JD Edwards order management and
fulfillment application that runs on IBM e-Servers. It is also designed to
integrate with marketplace technologies offered by major marketplace software
companies.
To enhance our service offerings, we have invested in advanced
telecommunications, computer telephony, electronic mail and messaging, automated
fax technology, barcode scanning, wireless technology, fiber optic network
communications and automated inventory management systems. We have also
developed and utilize telecommunications technology that provides for automatic
customer call recognition and customer profile recall for inbound customer
service representatives.
The primary responsibility of our systems development team of information
technology professionals is directed at implementing custom solutions for new
clients and maintaining existing client relationships. Our development team can
also produce proprietary systems infrastructure to expand our capabilities in
circumstances where we cannot purchase standard solutions from commercial
providers. We also utilize temporary resources when needed for additional
capacity.
Our information technology operations and infrastructure are built on the
premise of reliability and scalability. We maintain diesel generators and
uninterruptible power supply equipment to provide constant availability to
computer rooms, call centers and warehouses. Multiple Internet service providers
and redundant Web servers provide for a high degree of availability to Web sites
that interface with our systems. Capacity planning and upgrading is performed
regularly to allow for quick implementation of new clients and avoid
time-consuming infrastructure upgrades that could slow growth rates. We also
have a disaster recovery plan
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for our information systems and maintain a "hot site" under contract with a
major provider. Consequently, we can offer very aggressive service level
agreements to our clients that exceed industry standards.
COMPETITION
Many companies offer, on an individual basis, one or more of the same
services we do, and we face competition from many different sources depending
upon the type and range of services requested by a potential client. Our
competitors include vertical outsourcers, which are companies that offer a
single function, such as call centers, public warehouses or credit card
processors, and many of these companies have greater capabilities than we do for
the function they provide. We also compete against transportation logistics
providers who offer product management functions as an ancillary service to
their primary transportation services. In many instances, our competition is the
in-house operations of our potential clients themselves. The in-house operations
departments of potential clients often believe that they can perform the same
services we do, while others are reluctant to outsource business functions which
involve direct customer contact. We cannot be certain that we will be able to
compete successfully against these or other competitors in the future.
Although many of our competitors can offer one or more of our services, we
believe our primary competitive advantage is our ability to offer a wide array
of services that cover a broad spectrum of e-commerce transaction management
functions, including order processing and shipment, credit card payment and
customer service, thereby eliminating any need for our clients to coordinate
these services from different providers. We believe we are unique in offering
our clients a physical infrastructure for their virtual business to handle all
of their order processing, customer care service, billing, information
management and product warehousing and distribution needs.
We also compete on the basis of certain additional factors, including:
- operating performance and reliability;
- ease of implementation and integration; and
- price.
We believe that we presently compete favorably with respect to each of
these factors. However, the market for our services is becoming more competitive
and still evolving, and we may not be able to compete successfully against
current and future competitors.
EMPLOYEES
As of March 31, 2001, we had 575 full-time employees and 14 part-time
employees, of which 507 were located in the United States. We are not a party to
any collective bargaining agreements, and we have never suffered an interruption
of business as a result of a labor dispute. We consider our relationship with
our employees to be good.
Our success in recruiting, hiring and training large numbers of skilled
employees and obtaining large numbers of hourly employees during peak periods
for distribution and call center operations is critical to our ability to
provide high quality distribution and support services. Call center
representatives and distribution personnel receive feedback on their performance
on a regular basis and, as appropriate, are recognized for superior performance
or given additional training. Generally, our clients provide specific product
training for our customer service representatives and, in certain instances,
on-site client personnel to provide specific technical support. To maintain good
employee relations and to minimize employee turnover, we offer competitive pay,
hire primarily full-time employees who are eligible to receive a full range of
employee benefits, and provide employees with clear, visible career paths.
REGULATION
Our business may be affected by current and future governmental regulation.
For example, the Internet Tax Freedom Act bars state and local governments from
imposing taxes on Internet access or that would
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subject buyers and sellers of electronic commerce to taxation in multiple
states. This act is in effect through October 2001. If legislation to extend
this act or similar legislation is not enacted, Internet access and sales across
the Internet may be subject to additional taxation by state and local
governments, thereby discouraging purchases over the Internet and adversely
affecting the market for our services.
SPIN-OFF OF PFSWEB FROM DAISYTEK
History
The PFSweb business unit was formed in 1991 as a subsidiary of Daisytek
named "Working Capital of America" whose purpose was to provide inventory
management, direct shipping to end-users, and accounts receivable collections
for Daisytek customers and other third parties. Until 1996, this business unit
was comprised of operations both at Working Capital of America and at Daisytek.
As the business gradually developed, this business unit recognized an
opportunity to expand its business and capitalize on Daisytek's strengths in
customer service, order management, product fulfillment and distribution, and
provide these services on an outsourcing basis. Since 1996, the operations of
this business unit have been primarily focused in PFS. PFSweb was formed in 1999
to be a holding company for PFS and to facilitate the Offering and spin-off from
Daisytek. In December 1999, we completed the Offering and entered into various
agreements with Daisytek relating to the spin-off. Under these agreements, the
spin-off was conditioned upon, among other things, the receipt of a ruling by
the Internal Revenue Service ("IRS") that, among certain other tax consequences
of the transaction, the spin-off qualify as a tax-free distribution for U.S.
federal income tax purposes and not result in the recognition of taxable gain or
loss for U.S. federal income tax purposes to Daisytek or its shareholders (the
"IRS Ruling"). On June 8, 2000, Daisytek received the IRS Ruling and the
Daisytek board of directors approved the spin-off and authorized the
distribution of 14,305,000 shares of PFSweb common stock to the holders of
Daisytek common stock. The distribution was made at the close of business on
July 6, 2000 to Daisytek stockholders of record as of June 19, 2000.
PFSweb's Relationship With Daisytek
At the time of the Offering, PFSweb and Daisytek entered into various
agreements providing for the separation of their respective business operations.
These agreements govern various interim and ongoing relationships between the
companies, including the transaction management services that PFSweb provides
for Daisytek, the transitional services that Daisytek provides to PFSweb and a
tax indemnification and allocation agreement which governs the allocation of tax
liabilities and sets forth provisions with respect to other tax matters.
All of the agreements between PFSweb and Daisytek were made in the context
of a parent-subsidiary relationship and were negotiated in the overall context
of the spin-off. Although we generally believe that the terms of these
agreements are consistent with fair market values, there can be no assurance
that the prices charged to or by each company under these agreements are not
higher or lower than the prices that may be charged by, or to, unaffiliated
third parties for similar services.
Master Separation Agreement
The Master Separation Agreement sets forth the agreements between PFSweb
and Daisytek with respect to the principal corporate transactions required to
effect the transfers of assets and assumptions of liabilities necessary to
separate the PFSweb business unit from Daisytek and certain other agreements
governing this relationship thereafter.
Transfer of Assets and Liabilities. Following completion of the Offering,
Daisytek transferred to PFSweb all of the fixed assets in Daisytek's Memphis
distribution facility as well as certain assets associated with providing
information technology services and the stock of several subsidiaries of
Daisytek representing the business operations of PFSweb, and PFSweb transferred
to Daisytek approximately $5 million in cash and assumed approximately $0.3
million of capital lease obligations, as well as the operating lease obligations
related to these assets. PFSweb also repaid to Daisytek, from the net proceeds
of the Offering, the aggregate
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sum of approximately $27 million, representing the outstanding balance of
PFSweb's intercompany payable to Daisytek.
Indemnification. PFSweb agreed to indemnify Daisytek against any losses,
claims, damages or liabilities arising from the liabilities transferred to
PFSweb and the conduct of the PFSweb business after the completion of the
Offering. Daisytek agreed to retain, and indemnify PFSweb against, any losses,
claims, damages or liabilities arising from the conduct of the PFSweb business
prior to the completion of the Offering.
Initial Public Offering and Distribution Agreement
General. PFSweb and Daisytek entered into an Initial Public Offering and
Distribution Agreement which governs their respective rights and duties with
respect to the Offering and the spin-off, and sets forth certain covenants to
which they will be bound for various periods following the Offering and the
spin-off.
Preservation of the Tax-free Status of the Spin-off. Daisytek has received
a private letter ruling from the Internal Revenue Service to the effect that the
spin-off qualify as a tax-free distribution under Section 355 of the Internal
Revenue Code to Daisytek and its stockholders. In connection with obtaining such
ruling, certain representations and warranties were made regarding Daisytek,
PFSweb and their respective businesses. PFSweb has also agreed to certain
covenants that are intended to preserve the tax-free status of the spin-off.
These covenants include:
Certain Acquisition Transactions. Until two years after the completion of
the spin-off, PFSweb has agreed not to enter into or permit any transaction or
series of transactions that would result in a person or persons acquiring or
having the right to acquire shares of its capital stock that would comprise 50%
or more of either the value of all outstanding shares of its capital stock or
the total combined voting power of its outstanding voting stock.
Continuation of Active Trade or Business. Until two years after the
completion of the spin-off, PFSweb has agreed to continue to conduct its active
trade or business (within the meaning of Section 355 of the Code) as it was
conducted immediately prior to the completion of the spin-off. During such time,
PFSweb has agreed not to:
- liquidate, dispose of or otherwise discontinue the conduct of any
substantial portion of its active trade or business; or
- dispose of any business or assets that would cause it to be operated in a
manner inconsistent in any material respect with the business purposes
for the spin-off as described in the representations made in connection
with Daisytek's request for the IRS Ruling.
Continuity of Business. Until two years after the completion of the
spin-off, PFSweb has agreed that it will not voluntarily dissolve or liquidate;
and, except in the ordinary course of business, neither it nor any of its direct
or indirect subsidiaries will sell, transfer, or otherwise dispose of or agree
to dispose of assets (including any shares of capital stock of its subsidiaries)
that, in the aggregate, constitute more than 60% of its assets.
Intracompany Debt. Until two years after the completion of the spin-off,
PFSweb will not be able to have any indebtedness to Daisytek, other than
payables arising in the ordinary course of business.
These covenants will not prohibit PFSweb from implementing or complying
with any transaction permitted by an IRS ruling or a tax opinion.
Other Covenants Regarding Tax Treatment of the Transactions. Daisytek
intends the transfer of assets and liabilities from Daisytek to PFSweb as
provided by the master separation agreement (the "Contribution") to qualify as a
reorganization under Section 368(a)(1)(D) of the Code (a "D Reorganization").
Until two years after the completion of the spin-off, PFSweb has agreed not to
take, or permit any of our subsidiaries to take, any actions or enter into any
transaction or series of transactions that would be reasonably likely to
jeopardize the tax-free status of the spin-off or the qualification of the
Contribution as a D Reorganization, including any action or transaction that
would be reasonably likely to be inconsistent with any representation
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made in connection with Daisytek's request for the IRS Ruling. PFSweb has also
agreed to take any reasonable actions necessary for the Contribution and the
spin-off to qualify as a D Reorganization.
Cooperation on Tax Matters. PFSweb and Daisytek have agreed to various
procedures with respect to the tax-related covenants described above, and PFSweb
is required to notify Daisytek if it desires to take any action prohibited by
these covenants. Upon such notification, if Daisytek determines that such action
might jeopardize the tax-free status of the spin-off or the qualification of the
Contribution as a D Reorganization, Daisytek will either use all commercially
reasonable efforts to obtain a private letter ruling from the IRS or a tax
opinion that would permit PFSweb to take the desired action or provide all
reasonable cooperation to PFSweb in connection with PFSweb obtaining such an IRS
ruling or tax opinion. In either case, Daisytek has agreed to bear the
reasonable costs and expenses of obtaining the IRS ruling or tax opinion, unless
it is determined that PFSweb's proposed action will jeopardize the tax-free
status of the spin-off or the qualification of the Contribution as a D
Reorganization, in which event PFSweb will be responsible for such costs and
expenses.
Indemnification for Tax Liabilities. PFSweb has generally agreed to
indemnify Daisytek and its affiliates against any and all tax-related losses
incurred by Daisytek in connection with any proposed tax assessment or tax
controversy with respect to the spin-off or the Contribution to the extent
caused by any breach by it of any of its representations, warranties or
covenants. If PFSweb causes the spin-off to not qualify as a tax-free
distribution, Daisytek would incur federal income tax (which currently would be
imposed at a 35% rate) and possibly state income taxes on the gain inherent in
the shares distributed, which would be based upon the market value of the shares
of PFSweb at the time of the spin-off. This indemnification does not apply to
actions that Daisytek permits PFSweb to take as a result of a determination
under the tax-related covenants as described above. Similarly, Daisytek has
agreed to indemnify PFSweb and its affiliates against any and all tax-related
losses incurred by it in connection with any proposed tax assessment or tax
controversy with respect to the spin-off or the Contribution to the extent
caused by any breach by Daisytek of any of its representations, warranties or
covenants.
Other Indemnification. PFSweb has generally agreed to indemnify Daisytek
and its affiliates against all liabilities arising out of any material untrue
statements and omissions in PFSweb's prospectus and the registration statement
of which it is a part and in any and all registration statements, information
statements and/or other documents filed with the SEC in connection with the
spin-off or otherwise. However, PFSweb's indemnification of Daisytek does not
apply to information relating to Daisytek. Daisytek has agreed to indemnify
PFSweb for this information.
Expenses. In general, PFSweb agreed to pay substantially all costs and
expenses relating to the Offering, including the underwriting discounts and
commissions, and Daisytek agreed to pay substantially all costs and expenses
relating to the spin-off.
Tax Matters
Daisytek and PFSweb have entered into a tax indemnification and allocation
agreement to govern the allocation of tax liabilities and to set forth
agreements with respect to certain other tax matters.
Under the Code, PFSweb ceased to be a member of the Daisytek consolidated
group upon the completion of the spin-off.
Daisytek generally will pay all taxes attributable to PFSweb and its
subsidiaries for tax periods or portions thereof ending on or before the
effective date of the Offering, except to the extent of any accruals thereof on
the books and records of PFSweb or its subsidiaries for such taxes under
generally accepted accounting principles. Thereafter, for tax periods or
portions thereof during which PFSweb was a member of the Daisytek consolidated,
combined or unitary group, PFSweb was apportioned its share of the group's
income tax liability based on its taxable income determined separately from
Daisytek's taxable income, and PFSweb paid its calculated taxes to Daisytek,
which will then file a consolidated, combined or unitary return with the
appropriate tax authorities. There may be certain U.S. state or local
jurisdictions in which PFSweb will file separate income tax returns, not
combined or consolidated with Daisytek, for such tax periods. In that
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circumstance, PFSweb would file a tax return with the appropriate tax
authorities, and pay all taxes directly to the tax authority. PFSweb will be
compensated for tax benefits generated by it before tax deconsolidation and used
by the Daisytek consolidated group. PFSweb will prepare and file all tax
returns, and pay all income taxes due with respect to all tax returns required
to be filed by it for all tax periods after it ceased to be a member of the
Daisytek consolidated, combined or unitary group.
Daisytek is responsible for most U.S. tax adjustments related to PFSweb for
all periods or portions thereof ending on or before the effective date of the
Offering. In addition, PFSweb and Daisytek have agreed to cooperate in any tax
audits, litigation or appeals that involve, directly or indirectly, periods
prior to the time that PFSweb ceased to be a member of the Daisytek consolidated
group. PFSweb and Daisytek have agreed to indemnify each other for tax
liabilities resulting from the failure to cooperate in such audits, litigation
or appeals, and for any tax liability resulting from the failure to maintain
adequate records.
Notwithstanding the tax allocation agreement, for all periods in which
Daisytek owned 80% or more of PFSweb's capital stock, PFSweb will be included in
Daisytek's consolidated group for federal income tax purposes. If Daisytek or
other members of the consolidated group fail to make any federal income tax
payments, PFSweb will be liable for the shortfall since each member of a
consolidated group is liable for the group's entire tax obligation.
Under the tax indemnification and allocation agreement, Daisytek has agreed
to indemnify PFSweb against any taxes resulting from the failure of the spin-off
to qualify for tax-free treatment, except that PFSweb will be liable for, and
will indemnify Daisytek against, any taxes resulting from the failure of the
spin-off to qualify for tax-free treatment if it is the result of PFSweb
engaging in a "Prohibited Action" or the occurrence of a "Disqualifying Event."
Neither PFSweb nor Daisytek have the option to rescind the spin-off if a tax
liability results.
A "Prohibited Action" is defined as:
- if PFSweb takes any action which is inconsistent with the tax treatment
of the spin-off as contemplated in the IRS Ruling; or
- if, prior to the spin-off, PFSweb issued shares of stock or took any
other action that would result in it not being controlled by Daisytek
within the meaning of Section 368(c) of the Code.
A "Disqualifying Event" includes any event involving the direct or indirect
acquisition of the shares of PFSweb's capital stock after the spin-off which has
the effect of disqualifying the spin-off from tax-free treatment, whether or not
the event is the result of our direct action or within PFSweb's control.
Transaction Management Services Agreement
PFSweb and Daisytek entered into a transaction management services
agreement which sets forth the transaction management services that PFSweb
provides for Daisytek. Under this agreement, PFSweb provided a wide range of
transaction management services, including information management, order
fulfillment and distribution, product warehousing, inbound call center services,
product return administration and other services.
As described in "Sale of Assets to Daisytek," effective May 2001, Daisytek
and PFSweb terminated the transaction management services agreement. This
termination did not affect the existing arrangements with IBM. See "Historical
Financial Presentation."
As part of the restructuring of PFSweb's arrangements with IBM, PFSweb has
also entered into transaction management agreements with Daisytek to provide
transaction management services, on a worldwide basis, in connection with
Daisytek's distribution of various IBM products. Under these agreements, PFSweb
receives service fees based upon a variable percent of Daisytek's gross profit
arising from its IBM product sales. These agreements are coterminous with
PFSweb's IBM agreements which, have scheduled expiration dates through September
2001, although IBM may terminate these agreements at any time. Daisytek has
indicated that it does not intend to continue distributing IBM product under
these agreements
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after their scheduled expiration date. We are currently discussing with IBM the
continuation of these arrangements and have received a letter of intent from IBM
to extend such agreements with PFS for two years subject to obtaining
satisfactory financing. There can be no assurance that these discussions will be
successful or that our arrangements with IBM will continue or, if they continue,
any of the terms thereof. It is possible that new arrangements with IBM may
involve cash commitments by the Company, new third party financing, a joint
venture with a new master distributor or direct ownership by the Company of the
IBM products. We believe that through one of these financing arrangements, we
will be able to continue to earn revenues in the future associated with selling
or providing services related to IBM product.
Transition Services Agreement
Upon completion of the Offering, Daisytek and PFSweb entered into a
transition services agreement. Under this agreement, Daisytek provided PFSweb
with various services relating to employee payroll and benefits, use of
facilities, and other administrative services. Daisytek provided PFSweb with
these services until the completion of the spin-off (the "Transition Period"),
except that, with respect to any particular service, PFSweb may, upon notice to
Daisytek, either terminate the Transition Period as of an earlier date or extend
the Transition Period for up to one year from the completion of the Offering.
The agreement required PFSweb to use all commercially reasonable efforts to
obtain these transition services from a source other than Daisytek prior to the
conclusion of the Transition Period. If, however, PFSweb cannot obtain any
transition service from a source other than Daisytek and the transition service
was necessary for PFSweb to continue to operate its business, then, PFSweb may
require Daisytek to continue to provide the transition service for an additional
period not to exceed six months.
Generally, PFSweb paid Daisytek for these transition services an amount
equal to the cost historically allocated by Daisytek to PFSweb's business,
adjusted to reflect any changes in the nature, cost or level of the services so
provided. If PFSweb required Daisytek to provide it with any transition service
after the expiration of the Transition Period, PFSweb paid Daisytek the fair
market value of these services.
Daisytek is no longer providing services to PFSweb under this transition
services agreement.
Substitute Stock Options
In connection with the completion of the spin-off, all outstanding Daisytek
stock options were replaced with substitute stock options as described below:
Options held by Daisytek employees who were transferred to PFSweb were
replaced (at the option holder's election) with either options to acquire shares
of PFSweb common stock or options to acquire shares of both Daisytek common
stock and PFSweb common stock (which may be exercised separately) (the
"Unstapled Options"). Options held by Daisytek employees who remained with
Daisytek were replaced (at the option holder's election) with either options to
acquire shares of Daisytek common stock or Unstapled Options.
In general, the adjustments to the outstanding Daisytek options were
established pursuant to a formula designed to ensure that: (1) the aggregate
"intrinsic value" (i.e. the difference between the exercise price of the option
and the market price of the common stock underlying the option) of the
substitute options did not exceed the aggregate intrinsic value of the
outstanding Daisytek stock option which was replaced by such substitute option
immediately prior to the spin-off, and (2) the ratio of the exercise price of
each option to the market value of the underlying stock immediately before and
after the spin-off was preserved.
Substantially all of the other terms and conditions of each substitute
stock option, including the time or times when, and the manner in which, each
option will be exercisable, the duration of the exercise period, the permitted
method of exercise, settlement and payment, the rules that will apply in the
event of the termination of employment of the employee, the events, if any, that
may give rise to an employee's right to accelerate the vesting or the time or
exercise thereof and the vesting provisions, are the same as those of the
replaced Daisytek stock option, except that option holders who are employed by
one company will be permitted to
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exercise, and will be subject to all of the terms and provisions of, options to
acquire shares in the other company as if such holder was an employee of such
other company.
No adjustment or replacement was made to outstanding PFSweb stock options
as a result of the spin-off.
Sale of Assets to Daisytek
In May 2001, we sold to Daisytek certain of our assets used to provide
transaction management services to Daisytek and its subsidiaries for a purchase
price of $11 million ($10 million of which was paid at closing and $1 million is
payable over a six month period subject to certain potential offsets). As part
of this transaction, Daisytek and PFSweb terminated the transaction management
services agreement described above. As part of this transaction, we and Daisytek
entered into a six-month (subject to optional renewals) transition services
agreement under which we agreed to provide Daisytek with certain information
technology transition services for a monthly service fee, subject to
satisfaction of certain performance criteria.
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RISK FACTORS
Our business, financial condition and operating results could be adversely
affected by any of the following factors, in which event the trading price of
our common stock could decline, and you could lose part or all of your
investment. The risks and uncertainties described below are not the only ones
that we face. Additional risks and uncertainties not presently known to us, or
that we currently think are immaterial, may also impair our business operations.
RISKS RELATED TO OUR BUSINESS
Our financial information for periods prior to fiscal 2001 may not be
representative of our results as a separate company.
The financial information for periods prior to fiscal 2001 included in this
Form 10-K may not reflect what our results of operations, financial position and
cash flows would have been had we been a separate, stand-alone entity during the
periods presented or what our results of operations, financial position and cash
flows will be in the future. This is because:
- we made certain adjustments and allocations since Daisytek did not
account for us as, and we were not operated as, a single stand-alone
business for the periods presented; and
- the information does not reflect many significant changes that occurred
in our funding and operations as a result of our new agreements with IBM
and our separation from Daisytek.
We cannot assure you that the adjustments and allocations we made in
preparing our historical consolidated financial statements appropriately reflect
our operations during such periods as if we had, in fact, operated as a
stand-alone entity or what the actual effect of our separation from Daisytek
would have been. Accordingly, we cannot assure you that our historical results
of operations are indicative of our future operating or financial performance.
Our revenue is dependent upon our clients' business and product sales; all of
our client agreements are terminable by the client at will.
Our revenue is primarily transaction based and will fluctuate with the
volume of transactions or level of sales of the products by our clients for
which we provide transaction management services. If we are unable to retain
existing clients or attract new clients or if we dedicate significant resources
to clients whose business does not generate substantial transactions or whose
products do not generate substantial customer sales, our business may be
materially adversely affected. In addition, generally all of our agreements with
our clients are terminable by the client at will. Therefore, we cannot assure
you that any of our clients will continue to use our services for any period of
time.
In particular, after giving effect to the termination of our transaction
management services agreement with Daisytek, it is estimated that approximately
21% of our revenue will be derived from our existing arrangements with IBM and
Daisytek. Under these arrangements, Daisytek acts as a distributor of various
IBM products. These arrangements have various scheduled expiration dates through
September 2001 and are otherwise generally terminable at will. Daisytek has
indicated that it does not intend to continue to distribute these products under
these arrangements after their scheduled expiration dates. We are currently
discussing with IBM the continuation of these arrangements and have received a
letter of intent from IBM to extend such agreements with PFS for two years
subject to obtaining satisfactory financing. There can be no assurance that
these discussions will be successful or that our arrangements with IBM will
continue or, if they continue, any of the terms thereof. It is possible that new
arrangements with IBM may involve cash commitments by the Company, new third
party financing, a joint venture with a new master distributor or direct
ownership by the Company of the IBM products. We believe that through one of
these financing arrangements, we will be able to continue to earn revenues in
the future associated with selling or providing services related to IBM product.
In addition, for an interim period, it is estimated that 13% of our revenue will
be derived from a
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transition services agreement with Daisytek under which our fees are subject to
potential offsets arising from performance criteria and other factors.
We anticipate incurring significant expenses in the foreseeable future, which
may reduce our profitability.
In order to reach our business growth objectives, we expect to incur
significant operating and marketing expenses, as well as capital expenditures,
during the next several years. In order to offset these expenses, we will need
to generate significant additional revenue. If our revenue grows more slowly
than we anticipate or if our operating and marketing expenses exceed our
expectations, we may not generate sufficient revenue to be profitable or be able
to sustain or increase profitability on a quarterly or an annual basis in the
future.
Our systems may not accommodate significant growth in our number of clients.
Our success depends on our ability to handle a large number of transactions
for many different clients in various product categories. We expect that the
volume of transactions will increase significantly as we expand our operations.
If this occurs, additional stress will be placed upon the network hardware and
software that manages our operations. We cannot assure you of our ability to
efficiently manage a large number of transactions. If we are not able to
maintain an appropriate level of operating performance, we may develop a
negative reputation and our business would be materially adversely affected.
Because we must always have sufficient capacity, we may enter into
disadvantageous contracts.
We expect that the number of transactions and products that we handle will
continue to grow in the future. In order to ensure that we are able to handle
such additional transactions and products, we may be required to locate and
obtain additional facilities, including warehouse space, and acquire additional
systems and equipment. If we overestimate the facilities and systems capacity
that we require, we may be obligated to pay for more capacity than we actually
use, resulting in our incurring costs without corresponding revenue. Conversely,
if we underestimate our capacity needs, we may be unable to provide the
necessary services for our clients or may be required to obtain additional
capacity through more expensive means. The occurrence of either of these
situations could significantly reduce our operating margins and adversely affect
our business.
We face competition from many sources that could adversely affect our
business.
Many companies offer, on an individual basis, one or more of the same
services we do, and we face competition from many different sources depending
upon the type and range of services requested by a potential client. Our
competitors include vertical outsourcers, which are companies that offer a
single function, such as call centers, public warehouses or credit card
processors, and many of these companies have greater capabilities than we do for
the function they provide. We also compete against transportation logistics
providers who offer product management functions as an ancillary service to
their primary transportation services. In many instances, our competition is the
in-house operations of our potential clients themselves. The in-house operations
departments of potential clients often believe that they can perform the same
services we do, while others are reluctant to outsource business functions which
involve direct customer contact. We cannot be certain that we will be able to
compete successfully against these or other competitors in the future.
Our sales and implementation cycles are highly variable and may cause our
operating results to vary widely.
The sales cycle for our services is variable, typically ranging between a
few weeks to several months from initial contact with the potential client to
the signing of a contract. Occasionally sales require substantially more time.
Delays in executing client contracts may affect our revenue and cause our
operating results to vary widely. We believe that a potential client's decision
to purchase our services is discretionary, involves a significant commitment of
its resources and is influenced by intense internal and external pricing and
operating comparisons. To successfully sell our services, we generally must
educate our potential clients regarding the use and benefit of our services,
which can require significant time and resources. Consequently, the period
between initial contact and the purchase of our services is often long and
subject to delays associated with the
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lengthy approval and competitive evaluation processes that typically accompany
significant operational decisions. Additionally, the time required to implement
our systems and integrate a new client can range from several weeks to many
months. Delays in integrating new clients may affect our revenue and cause our
operating results to vary widely.
We are dependent on our key personnel, and we need to hire and retain skilled
personnel to sustain our business.
Our performance is highly dependent on the continued services of our
executive officers and other key personnel, the loss of any of whom could
materially adversely affect our business. In addition, we need to attract and
retain other highly-skilled technical and managerial personnel for whom there is
intense competition. We cannot assure you that we will be able to attract and
retain the personnel necessary for the continuing growth of our business. Our
inability to attract and retain qualified technical and managerial personnel
would materially adversely affect our ability to maintain and grow our business.
We are subject to risks associated with our international operations.
A significant component of our business strategy is to continue to operate
and expand internationally. We currently operate a 150,000 square foot
distribution center in Liege, Belgium. We cannot assure you that we will be
successful in expanding into additional international markets. In addition to
the uncertainty regarding our ability to generate revenue from foreign
operations and expand our international presence, there are risks inherent in
doing business internationally, including:
- changing regulatory requirements;
- legal uncertainty regarding foreign laws, tariffs and other trade
barriers;
- political instability;
- potentially adverse tax consequences;
- foreign currency fluctuations; and
- cultural differences.
Any one or more of these factors may materially adversely affect our
business in a number of ways, such as increased costs, operational difficulties
and reductions in revenue.
We are uncertain about our need for and the availability of additional funds
beyond the funds raised in the Offering.
Our future capital needs are difficult to predict. We may require
additional capital in order to take advantage of unanticipated opportunities,
including strategic alliances and acquisitions, or to respond to changing
business conditions and unanticipated competitive pressures. Additionally, funds
from operations may be less than anticipated. Should these circumstances arise,
we may need to raise additional funds either by borrowing money or issuing
additional equity. We cannot assure you that we will be able to raise such funds
on favorable terms or at all. We currently do not have any credit facility in
place under which we can borrow funds when needed. If we are unable to obtain
additional funds, we may be unable to take advantage of new opportunities or
take other actions that otherwise might be important to our business.
We may engage in future strategic alliances or acquisitions that could dilute
our existing stockholders, cause us to incur significant expenses or harm our
business.
We may review strategic alliance or acquisition opportunities that would
complement our current business or enhance our technological capabilities.
Integrating any newly acquired businesses, technologies or services may be
expensive and time-consuming. To finance any acquisitions, it may be necessary
for us to raise additional funds through public or private financings.
Additional funds may not be available on terms that are favorable to us and, in
the case of equity financings, may result in dilution to our stockholders. In
addition, we
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have limited ability to issue capital stock during the two-year period following
the spin-off. We may not be able to operate any acquired businesses profitably
or otherwise implement our growth strategy successfully. If we are unable to
integrate any newly acquired entities or technologies effectively, our operating
results could suffer. Future acquisitions by us could also result in incremental
expenses and the incurrence of debt and contingent liabilities, or amortization
of expenses related to goodwill and other intangibles, any of which could harm
our operating results.
Our business could be adversely affected by a systems or equipment failure,
whether our own or of our clients.
Our operations are dependent upon our ability to protect our distribution
facilities, customer service centers, computer and telecommunications equipment
and software systems against damage and failures. Damage or failures could
result from fire, power loss, equipment malfunctions, system failures, natural
disasters and other causes. Although we believe we have sufficient property and
business interruption insurance, if our business is interrupted either from
accidents or the intentional acts of others, our business could be materially
adversely affected. In addition, in the event of widespread damage or failures
at our facilities, our short-term disaster recovery and contingency plans and
insurance coverage may not be sufficient.
Our clients' businesses may also be harmed from any system or equipment
failures we experience. In that event, our relationship with these clients may
be adversely affected, we may lose these clients, our ability to attract new
clients may be adversely affected and we could be exposed to liability.
Interruptions could also result from the intentional acts of others, like
"hackers." If our systems are penetrated by computer hackers, or if computer
viruses infect our systems, our computers could fail or proprietary information
could be misappropriated.
If our clients suffer similar interruptions in their operations, for any of
the reasons discussed above or for others, our business could also be adversely
affected. Many of our clients' computer systems interface with our own. If they
suffer interruptions in their systems, the link to our systems could be severed
and sales of their products could be slowed or stopped.
A breach of our e-commerce security measures could reduce demand for our
services.
A requirement of the continued growth of e-commerce is the secure
transmission of confidential information over public networks. A party who is
able to circumvent our security measures could misappropriate proprietary
information or interrupt our operations. Any compromise or elimination of our
security could reduce demand for our services.
We may be required to expend significant capital and other resources to
protect against security breaches or to address any problem they may cause.
Because our activities involve the storage and transmission of proprietary
information, such as credit card numbers, security breaches could damage our
reputation and expose us to litigation and possible liability. Our security
measures may not prevent security breaches, and failure to prevent security
breaches may disrupt our operations.
RISKS RELATED TO DAISYTEK
For an interim period, we depend on Daisytek for a significant portion of our
revenue.
As part of the asset sale to Daisytek described above, we will be providing
information technology transition services for Daisytek under a six-month
agreement (with optional renewal periods). During this period, the fees
generated under this agreement are estimated to be approximately 13% of our
revenue. Our fees under this agreement are subject to certain offsets and
satisfaction of certain performance criteria.
We have potential liability to Daisytek for tax indemnification obligations.
Under the terms of our tax indemnification and allocation agreement with
Daisytek, we will indemnify Daisytek for any tax liability it suffers arising
out of our actions, or certain actions to which we are a party that
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may exist, before or after the spin-off that would cause the spin-off to lose
its qualification as a tax-free distribution for federal income tax purposes.
These actions include any event involving the acquisition of the shares of our
capital stock after the spin-off which has the effect of disqualifying the
spin-off from tax-free treatment, whether or not the event is the result of our
direct action or within our control. If we cause the spin-off to not qualify as
a tax-free distribution, Daisytek would incur federal income tax (which
currently would be imposed at a 35% rate), and possibly state income taxes on
the gain inherent in the shares distributed, which would be based upon the
market value of the PFSweb shares at the time of the spin-off. In the event that
we are required to indemnify Daisytek in respect of this liability, it would
have a material adverse effect on our cash flow and business operations.
We have potential liability for Daisytek's tax obligations.
For all periods in which Daisytek owned 80% or more of our capital stock,
we are included in Daisytek's consolidated group for federal income tax
purposes. If Daisytek or other members of the consolidated group fail to make
any federal income tax payments, we would be liable for the shortfall since each
member of a consolidated group is liable for the group's entire tax obligation.
We have limited ability to issue common stock after the spin-off.
In order for the spin-off to be tax-free to Daisytek and Daisytek's
stockholders, we agreed to certain limitations upon our issuance of capital
stock during the two-year period after the spin-off, such as issuing an
additional amount of our capital stock in a single transaction or series of
transactions related to the spin-off which, when combined with the common stock
issued in the offering, could cause a 50% or greater change in the vote or value
of our outstanding capital stock. These restrictions may impede our ability to
complete transactions using our capital stock or to attract qualified persons to
become officers or directors.
RISKS RELATED TO OUR INDUSTRY
If the trend toward outsourcing does not continue, our business will be
adversely affected.
Our business could be materially adversely affected if the trend toward
outsourcing declines or reverses, or if corporations bring previously outsourced
functions back in-house. Particularly during general economic downturns,
businesses may bring in-house previously outsourced functions in order to avoid
or delay layoffs.
Our market is subject to rapid technological change and to compete we must
continually enhance our systems to comply with evolving standards.
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our services and the underlying
network infrastructure. If we are unable to adapt to changing market conditions,
client requirements or emerging industry standards, our business could be
adversely affected. The Internet and e-commerce are characterized by rapid
technological change, changes in user requirements and preferences, frequent new
product and service introductions embodying new technologies and the emergence
of new industry standards and practices that could render our technology and
systems obsolete. Our success will depend, in part, on our ability to both
internally develop and license leading technologies to enhance our existing
services and develop new services. We must continue to address the increasingly
sophisticated and varied needs of our clients and respond to technological
advances and emerging industry standards and practices on a cost-effective and
timely basis. The development of proprietary technology involves significant
technical and business risks. We may fail to develop new technologies
effectively or to adapt our proprietary technology and systems to client
requirements or emerging industry standards.
RISKS RELATED TO OUR STOCK
Our common stock is subject to possible delisting from Nasdaq.
The closing price of our common stock on the Nasdaq National Market on June
25, 2001 was $0.94. In the event the price of our common stock is below $1.00
for 30 consecutive trading days, we are subject to a
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delisting determination from Nasdaq. In such event, we would expect to list our
common stock on the OTC Bulletin Board or another quotation system or exchange
on which our shares would qualify. The delisting of our common stock could have
a material adverse effect on the market price of, and the efficiency of the
trading market for, our common stock.
Our certificate of incorporation, our bylaws, our shareholder rights plan and
Delaware law make it difficult for a third party to acquire us, despite the
possible benefit to our stockholders.
Provisions of our certificate of incorporation, our bylaws, our shareholder
rights plan and Delaware law could make it more difficult for a third party to
acquire us, even if doing so would be beneficial to our stockholders. For
example, our certificate of incorporation provides for a classified board of
directors, meaning that only approximately one-third of our directors will be
subject to re-election at each annual stockholder meeting. Our certificate of
incorporation also permits our Board of Directors to issue one or more series of
preferred stock which may have rights and preferences superior to those of the
common stock. The ability to issue preferred stock could have the effect of
delaying or preventing a third party from acquiring us. We have also adopted a
shareholder rights plan. These provisions could discourage takeover attempts and
could materially adversely affect the price of our stock.
ITEM 2. PROPERTIES
Our PFSweb business is headquartered in a central office facility located
in Plano, Texas, a Dallas suburb.
In the U.S., after giving effect to the sale of assets to Daisytek, we
operate an approximately eight hundred thousand square foot central distribution
complex in Memphis, Tennessee. This complex is located approximately four miles
from the Memphis International Airport, where both Federal Express and United
Parcel Service operate large hub facilities.
We also operate a 150,000 square foot distribution center in Liege,
Belgium, which has many of the same advanced distribution systems and equipment
as in our Memphis complex. We also maintain a warehouse and customer care center
in Toronto, Canada under a short-term arrangement expiring in September 2001. We
currently expect to relocate this facility to another location in Toronto. We
operate customer service centers in Memphis, Tennessee; Plano, Texas; Toronto,
Canada; and Liege, Belgium. Our call center technology permits the automatic
routing of calls to available customer service representatives in several of our
call centers.
All of our facilities are leased and the material lease agreements contain
one or more renewal options.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed and trades on the Nasdaq Stock Market under the
symbol "PFSW." The following table sets forth for the period indicated the high
and low sale price for the common stock as reported by the Nasdaq National
Market:
PRICE
----------------
HIGH LOW
----- -----
Fiscal Year 2000
Third Quarter............................................. $52 11/16 $31 5/8
Fourth Quarter............................................ $40 3/8 $12
Fiscal Year 2001
First Quarter............................................. $17 1/8 $ 3 7/8
Second Quarter............................................ $ 5 $ 1 59/64
Third Quarter............................................. $ 2 11/16 $ 17/32
Fourth Quarter............................................ $ 1 19/32 $ 21/32
As of June 15, 2001, there were approximately 7,500 shareholders of which
111 were record holders of the common stock.
We have never declared or paid cash dividends on our common stock and do
not anticipate the payment of cash dividends on our common stock in the
foreseeable future. We currently intend to retain all earnings to finance the
further development of our business. The payment of any future cash dividends
will be at the discretion of our Board of Directors and will depend upon, among
other things, future earnings, operations, capital requirements, the general
financial condition of the Company and general business conditions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
HISTORICAL PRESENTATION
The selected consolidated historical statement of operations data for each
of the fiscal years ended March 31, 1999, 2000 and 2001, and the selected
consolidated balance sheet data as of March 31, 2000 and 2001 have been derived
from our audited consolidated financial statements, and should be read in
conjunction with those statements and notes, which are included in this Form
10-K. The selected consolidated statement of operations data for the fiscal
years ended March 31, 1997 and 1998 and the selected consolidated balance sheet
data as of March 31, 1997, 1998 and 1999 have been derived from our audited
consolidated financial statements, and should be read in conjunction with those
statements, which are not included in this Form 10-K. The financial information
for periods prior to fiscal 2001 herein may not necessarily reflect our results
of operations, financial position and cash flows in the future or what our
results of operations, financial position and cash flows would have been had we
been a separate, stand-alone entity during the periods presented. The selected
consolidated financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and notes thereto which are included
elsewhere in this Form 10-K.
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HISTORICAL SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEARS ENDED MARCH 31,
------------------------------------------------
1997 1998 1999 2000 2001
------- ------- ------- ------- --------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Product revenue........................... $16,543 $45,804 $93,702 $55,778 $ --
Service fee revenue....................... 1,034 3,539 7,547 30,829 48,258
Other revenue............................. -- -- -- -- 2,097
------- ------- ------- ------- --------
Total revenues.................... 17,577 49,343 101,249 86,607 50,355
------- ------- ------- ------- --------
Costs of revenues:
Cost of product revenue................... 15,768 43,392 88,335 52,639 --
Cost of service fee revenue............... 596 2,208 5,323 23,475 34,261
Cost of other revenue..................... -- -- -- -- 2,470
------- ------- ------- ------- --------
Total costs of revenues........... 16,364 45,600 93,658 76,114 36,731
------- ------- ------- ------- --------
Gross profit................................ 1,213 3,743 7,591 10,493 13,624
Percent of revenues......................... 6.9% 7.6% 7.5% 12.1% 27.1%
Selling, general and administrative
expenses.................................. 1,074 3,705 6,711 17,764 25,446
------- ------- ------- ------- --------
Income (loss) from operations............... 139 38 880 (7,271) (11,822)
Interest expense (income), net.............. 77 143 374 459 (1,091)
------- ------- ------- ------- --------
Income (loss) before income taxes........... 62 (105) 506 (7,730) (10,731)
Income tax expense (benefit)................ 38 (30) 214 (1,791) 25
------- ------- ------- ------- --------
Net income (loss)........................... $ 24 $ (75) $ 292 $(5,939) (10,756)
======= ======= ======= ======= ========
PER SHARE DATA:
Net income (loss) per share:
Basic and diluted(a)...................... $ 0.00 $ (0.01) $ (0.02) $ (0.38) $ (0.60)
======= ======= ======= ======= ========
Weighted average number of shares
outstanding:
Basic and diluted(a)...................... 14,305 14,305 14,305 15,479 17,879
- ---------------
(a) Prior to the Offering, which was consummated in fiscal 2000, basic and
diluted net income (loss) per share was determined based on net income
(loss) divided by the 14,305,000 shares outstanding. There were no
potentially dilutive securities outstanding prior to the Offering. For
fiscal 2000 and 2001, outstanding options to purchase common shares of
PFSweb were anti-dilutive and have been excluded from the weighted average
share computation.
AS OF MARCH 31,
---------------------------------------------
1997 1998 1999 2000 2001
------ ------ ------- ------- -------
CONSOLIDATED BALANCE SHEET DATA:
Working capital................................ $5,757 $1,344 $14,636 $27,974 $20,023
Total assets................................... 15,614 20,911 69,057 60,405 58,737
Long-term obligations.......................... 5,851 1,827 29,029 2,407 3,379
Shareholders' equity (deficit)................. (8) (155) 581 47,650 37,001
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ITEM 7. 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 consolidated
financial statements and related notes thereto appearing elsewhere in this Form
10-K.
FORWARD-LOOKING INFORMATION
We have made forward-looking statements in this Report on Form 10-K. These
statements are subject to risks and uncertainties, and there can be no guarantee
that these statements will prove to be correct. Forward-looking statements
include assumptions as to how we may perform in the future. When we use words
like "seek," "strive," "believe," "expect," "anticipate," "predict,"
"potential," "continue," "will," "may," "could," "intend," "plan," "target" and
"estimate" or similar expressions, we are making forward-looking statements. You
should understand that the following important factors, in addition to those set
forth above or elsewhere in this Report on Form 10-K could cause our results to
differ materially from those expressed in our forward-looking statements. These
factors include:
- Our ability to retain and expand relationships with existing clients and
attract new clients;
- our reliance on the fees generated by the transaction volume or product
sales of our clients;
- our reliance on our clients' projections or transaction volume or product
sales;
- the impact of strategic alliances and acquisitions;
- 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 both foreign and domestic;
- foreign currency risks and other risks of operating in foreign countries;
- our dependency on key personnel;
- our ability to raise additional capital;
- the continued listing of our common stock on the NASDAQ; and
- our relationship with and separation from Daisytek, our former parent
corporation.
We have based these statements on our current expectations about future
events. Although we believe that the expectations reflected in our
forward-looking statements are reasonable, we cannot guarantee you that these
expectations actually will be achieved. In addition, some forward-looking
statements are based upon assumptions as to future events that may not prove to
be accurate. Therefore, actual outcomes and results may differ materially from
what is expected or forecasted in such forward-looking statements. We undertake
no obligation to update publicly any forward-looking statement for any reason,
even if new information becomes available or other events occur in the future.
There may be additional risks that we do not currently view as material or that
are not presently known. In evaluating these statements, you should consider
various factors, including the risks set forth in the section entitled "Risk
Factors" beginning on page 21.
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OVERVIEW
We are an international outsourcing provider of integrated business process
outsourcing 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,
technology collaboration, order management, managed web hosting and web
development, customer relationship management, billing and collection services,
information management and international fulfillment and distribution services.
We offer our services as an integrated solution, which enables our clients to
outsource their complete infrastructure needs to a single source and to focus on
their core competencies. Our distribution services are conducted at 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 technology manufacturing, computer
products, printers, cosmetics, fragile goods, high security collectibles,
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:
- prior to September 30, 1999, cost of product revenue, which consisted of
the price of product sold and net freight costs;
- 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 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, for the periods prior to fiscal 2001,
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 periods prior to
fiscal 2001 may not provide a meaningful comparison to our current and future
financial performance 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 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 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.
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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 periods prior to fiscal 2001 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 have been 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
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 on December 2, 1999, we
entered into a new transaction management services agreement with Daisytek.
Under this agreement, we received 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 the twelve months ended March 31, 2001, but for only four
months in the fiscal year ended March 31, 2000.
Additionally, upon completion of the Offering, Daisytek transferred to us
fixed assets and other assets which are being 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.
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RESULTS OF OPERATIONS
The following table sets forth certain historical financial information
from our audited consolidated statements of operations expressed as a percent of
revenues.
FISCAL YEARS ENDED MARCH 31,
----------------------------
1999 2000 2001
------ ------ ------
Product revenue............................................. 92.5% 64.4% --%
Service fee revenue....................................... 7.5 35.6 95.8
Other revenue............................................. -- -- 4.2
----- ----- -----
Total revenues.................................... 100.0 100.0 100.0
----- ----- -----
Cost of product revenue (as % of product revenue)......... 94.3 94.4 --
Cost of service fee revenue (as % of service fee
revenue)............................................... 70.5 76.1 71.0
Cost of other revenue (as % of other revenue)............. -- -- 117.8
----- ----- -----
Total costs of revenues........................... 92.5 87.9 72.9
----- ----- -----
Gross profit.............................................. 7.5 12.1 27.1
Selling, general and administrative expenses.............. 6.6 20.5 50.5
----- ----- -----
Income (loss) from operations............................. 0.9 (8.4) (23.4)
Interest expense (income), net............................ 0.4 0.5 (2.0)
----- ----- -----
Income (loss) before income taxes......................... 0.5 (8.9) (21.4)
Income tax expense (benefit).............................. 0.2 (2.0) --
----- ----- -----
Net income (loss)......................................... 0.3% (6.9)% (21.4)%
===== ===== =====
FISCAL YEAR ENDED MARCH 31, 2001 COMPARED TO FISCAL YEAR ENDED MARCH 31, 2000
We believe our historical financial statements for the periods prior to
fiscal 2001 may not provide a meaningful comparison to our current and future
financial performance for the reasons described above.
Product Revenue. Product revenue was zero for fiscal 2001 as compared to
$55.8 million for fiscal 2000. 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 new agreements, the
activities performed under these contracts since that date were accounted for as
service fee revenue as opposed to product revenue.
Service Fee Revenue. Service fee revenue was $48.3 million for fiscal 2001
as compared to $30.8 million during fiscal 2000, an increase of $17.5 million or
56.5%. 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, our 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 increased $13.3 million and new
service contract relationships added $4.2 million for fiscal 2001. Service fee
revenue for fiscal 2001 also includes approximately $0.5 million of previously
deferred revenue associated with terminated contracts. For fiscal 2001, service
fee revenue totaling $27.6 million 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
fiscal 2001 we effected certain contract terminations with service fee revenues
of approximately $8 million and have experienced a longer implementation cycle
associated with new larger contracts. As a result of the contract terminations
and the asset sale to Daisytek (discussed below in "Liquidity and Capital
Resources"), our service fee revenue performance is expected to be lower for the
next several quarters.
Other Revenue. Other revenue of $2.1 million for fiscal 2001 represents
the fees charged to clients in conjunction with the early termination of certain
contracts.
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Cost of Product Revenue. Cost of product revenue was zero for fiscal 2001,
as compared to $52.6 million during fiscal 2000. Cost of product revenue as a
percent of product revenue was zero during fiscal 2001 and 94.4% during fiscal
2000. The resulting gross profit margin was 5.6% for fiscal 2000.
Cost of Service Fee Revenue. Cost of service fee revenue was $34.3 million
for fiscal 2001, as compared to $23.5 million during fiscal 2000, an increase of
$10.8 million or 45.9%. The resulting service fee gross profit was $14.0 million
or 29.0% of service fee revenue, during fiscal 2001 as compared to $7.4 million,
or 23.9% of service fee revenue during fiscal 2000. The increase in gross profit
margin for fiscal 2001 resulted primarily from the further expansion of existing
contracts and new service contract relationships, including our 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. The gross profit margin also increased because cost of
service fee revenue for fiscal 2000 included incremental costs related to a
large number of new client implementations during that year. Fiscal 2001 gross
profit increases were offset by approximately $0.5 million of previously
deferred costs associated with terminated contracts. In addition, certain excess
infrastructure costs, incremental operating costs related to terminated
contracts and costs associated with improving service quality had a negative
impact on fiscal 2001 gross margin. As a percentage of total revenues, the gross
profit margin for fiscal 2001 of 27.1% increased when compared to the 12.1%
gross profit margin for fiscal 2000 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.
Cost of Other Revenue. Cost of other revenue for fiscal 2001 includes
costs from certain terminated contracts and are primarily comprised of
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 $1.6 million of
certain uncollectible amounts receivable from, and liabilities applicable to,
clients who have terminated contracts.
Selling, General and Administrative Expenses. SG&A expenses were $25.4
million for fiscal 2001, or 50.5% of revenues, as compared to $17.8 million, or
20.5% of revenues, for fiscal 2000. 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 were higher in fiscal
2001 than in fiscal 2000. SG&A expenses increased as a result of costs incurred
to support the higher sales volumes under both new and existing contracts,
certain excess infrastructure costs, incremental investments in resources and
technology to support our continued growth and public company costs.
Interest Expense (Income), Net. Interest income was $1.1 million for
fiscal 2001 as compared to interest expense of $0.5 million for fiscal 2000. The
weighted average interest rate was 6.7% during fiscal 2000. Our intercompany
payable to Daisytek, on which we incurred interest expense during fiscal 2000,
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, 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 fiscal 2001, we recorded income tax expense 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 the pre-tax losses. To the extent we have
future losses in Europe, it will continue to negatively impact our income tax
expense (benefit). During fiscal 2001, we recorded an income tax benefit of $0.1
million related to our ability to utilize our net operating losses to offset
future taxes related to deferred tax liabilities. However, 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 tax asset as of March 31, 2001. For fiscal 2000,
although we did not benefit our European losses, as a result of the inclusion of
our
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U.S. operations in Daisytek's consolidated return prior to the spin-off, our
income tax benefit as a percentage of pre-tax loss was 23.2%.
FISCAL YEAR ENDED MARCH 31, 2000 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1999
Product Revenue. Product revenue was $55.8 million for fiscal 2000 as
compared to $93.7 million for fiscal 1999. 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.
Service Fee Revenue. Service fee revenue was $30.8 million for fiscal 2000
as compared to $7.5 million during fiscal 1999, an increase of $23.3 million or
308.5%. 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 $1.3 million and new service contract relationships added $22.0
million for fiscal 2000. For fiscal 2000, new service fee revenue totaling $11.6
million is for 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 $52.6 million for
fiscal 2000, as compared to $88.3 million during fiscal 1999, a decrease of
$35.7 million, or 40.4%. Cost of product revenue as a percent of product revenue
was 94.4% during fiscal 2000, and 94.3% during fiscal 1999. The resulting gross
profit margin was 5.6% and 5.7% for fiscal 2000 and 1999, respectively.
Cost of Service Fee Revenue. Cost of service fee revenue was $23.5 million
for fiscal 2000, as compared to $5.3 million during fiscal 1999, an increase of
$18.2 million or 343.4%. The resulting service fee gross profit margin was 23.9%
during fiscal 2000, and 29.5% during fiscal 1999. During fiscal 2000, cost of
service fee revenue increased related to a large number of new client
implementations.
Gross Profit. Gross profit was $10.5 million, or 12.1% of revenues, for
fiscal 2000, as compared to $7.6 million, or 7.5% of revenues, for fiscal 1999.
The increase in total gross profit 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. The increase in gross profit as a
percentage of revenues resulted from 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 distribution agreements.
Selling, General and Administrative Expenses. SG&A expenses were $17.8
million for fiscal 2000, or 20.5% of revenues, as compared to $6.7 million, or
6.6% of revenues, for fiscal 1999. 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 were higher in fiscal
2000 than in fiscal 1999. 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 fiscal 2000.
Interest Expense, Net. Interest expense was $0.5 million for fiscal 2000
as compared to $0.4 million for fiscal 1999. 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. The weighted average interest rate was 6.7% during fiscal 2000 and
1999. In December 1999, we used a portion of the funds from the Offering to
repay our intercompany payable balance to Daisytek and purchase certain assets
from Daisytek.
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Income Taxes. Our income tax benefit as a percentage of pre-tax loss was
23.2% for fiscal 2000 as compared to an income tax provision as a percentage of
pre-tax income of 42.3% for fiscal 1999. We were included in Daisytek's
consolidated tax return for all periods through the date of the spin-off from
Daisytek. As part of the tax sharing agreement entered into with Daisytek, we
were reimbursed for any income tax benefit derived from our inclusion in the
consolidated return. However, any loss generated by us in Europe is not included
in the Daisytek consolidated return and may not be utilized at a consolidated
level. Accordingly, in fiscal 2000, we recorded a benefit for the pre-tax loss
generated in the U.S., however, because of our limited operating history in
Europe, it was uncertain whether it is "more likely than not" that we would 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. Additionally, since we
ceased to be included in Daisytek's consolidated return upon completion of the
spin-off and we had not established a sufficient history of earnings, on a
stand-alone basis, a valuation allowance was provided for the net deferred
income tax asset as of March 31, 2000. For fiscal 1999, the income tax
percentage was impacted by the differences between our U.S. and foreign
subsidiaries, which are taxed at different rates.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 2001, we utilized our capital resources, which consisted
primarily of the remaining proceeds of the Offering, to fund operations and
capital expenditures. As a result, working capital decreased to $20.0 million at
March 31, 2001 from $28.0 million at March 31, 2000. Prior to fiscal 2001, 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. We may seek our own credit facility in order to provide
additional financing in the future, in addition to our current cash position of
over $22 million. We currently believe that our cash position will satisfy our
known operating cash needs and our working capital and capital expenditure
requirements for the next twelve months. Our cash position was further increased
as a result of an asset sale, described below, subsequent to March 31, 2001.
Net cash used in financing activities was $0.2 million in fiscal 2001,
representing payments on our capital lease obligations partially offset by the
proceeds from issuance of common stock. Net cash provided by financing
activities was $24.0 million for fiscal 2000. In December 1999, we successfully
completed our Offering and sold 3,565,000 shares of common stock, including the
underwriters over-allotment, at $17 per share. Net proceeds from the offering
aggregated approximately $53.0 million. Proceeds were used to repay an
intercompany payable to Daisytek of approximately $27 million 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, and we received the stock of several subsidiaries of Daisytek
representing the business operations of PFSweb. Net cash provided by financing
activities was $27.7 million for fiscal 1999. During fiscal 1999, 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.
Net cash used in operating activities was $0.2 million for fiscal 2001, and
primarily reflected an increase in accounts payable and accrued expenses of $7.9
million and a decrease in prepaid expenses and other current assets of $5.7
million and accounts receivable of $0.6 million. The increase in accounts
payable is primarily attributable to $7.2 million of VAT collections that are
due one of our clients. The increase in other current assets primarily relates
to receivables associated with our European operations including a $1.1 million
note receivable from a terminated client, a $1.6 million receivable related to
an asset based governmental grant and VAT receivables of $2.3 million. Cash
flows provided by operating activities totaled $10.6 million for fiscal 2000 and
primarily reflected a reduction in accounts payable and accrued expenses of
$25.0 million, accounts receivable of $8.3 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. Net cash used in operating activities was $12.3 million for fiscal
1999. Working capital requirements increased in fiscal 1999 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 revenue growth,
as well as the new European contracts, resulted in significant increases in IBM
contract related accounts receivable, inventory and accounts payable.
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Cash used in investing activities for fiscal 2001 totaled $2.1 million.
Capital expenditures were $5.5 million for fiscal 2001. Partially offsetting
these capital expenditures was the full repayment of other receivables. Cash
used in investing activities was $10.2 million for fiscal 2000. During fiscal
2000, our capital expenditures totaled $21.2 million and 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
other receivables. Cash used in investing activities for fiscal 1999 totaled
$14.9 million, and was primarily 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 financed certain of the client's inventory. Capital expenditures
were $2.7 million for fiscal 1999. 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
the upcoming twelve months will be approximately $4 to $7 million. Some of these
expenditures may be financed through operating or capital leases.
On May 25, 2001, the Company completed the sale of certain assets to
Daisytek pursuant to an Asset Purchase Agreement (the "Purchase Agreement").
Under the Purchase Agreement, the Company transferred and sold to Daisytek
certain distribution and fulfillment assets, including equipment and fixtures,
that were previously used by the Company to provide outsourcing services to
Daisytek. Daisytek also assumed certain related equipment leases and a warehouse
lease and hired certain employees who were associated with the warehouse
facility. The consideration payable under the Purchase Agreement of $11.0
million ($10 million of which was paid at closing on May 25, 2001 and $1 million
of which is payable over six months, subject to certain potential offsets)
included a release by the Company and Daisytek of certain transaction management
services agreements previously entered into between the Company and Daisytek and
a Daisytek subsidiary. Proceeds of $10 million (excluding the $1 million
deferred proceeds) were received for assets with an approximately $4.5 million
net book value with a resulting $5.0 million gain, after closing costs of $0.5
million. Concurrently with the closing of the asset sale, the Company and
Daisytek also entered into a six-month transition services agreement under which
the Company will provide Daisytek with certain transitional and information
technology services for which the Company will receive monthly service fees,
subject to satisfaction of certain performance criteria.
After giving effect to the termination of our agreement with Daisytek,
approximately 21% of our revenue will be derived from our existing arrangements
with IBM. Under these arrangements, Daisytek acts as a distributor of various
IBM products. These arrangements have various scheduled expiration dates through
September 2001 and are otherwise generally terminable at will. Daisytek has
indicated that it does not intend to continue to distribute these products under
these arrangements after their scheduled expiration date. We are currently
discussing with IBM the continuation of these arrangements and have received a
letter of intent from IBM to extend such agreements with PFS for two years
subject to obtaining satisfactory financing. There can be no assurance that
these discussions will be successful or that our arrangements with IBM will
continue or, if they continue, any of the terms thereof. It is possible that new
arrangements with IBM may involve cash commitments by the Company, new third
party financing, a joint venture with a new master distributor or direct
ownership by the Company of the IBM products. We believe that through one of
these financing arrangements, we will be able to continue to earn revenues in
the future associated with selling or providing services related to IBM product.
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. 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 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.
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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.
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 transferred to Daisytek the
IBM-related customer accounts receivables, inventory and accounts payable. We do
not currently own any product inventory.
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
will 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
Management believes 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, as amended, 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. The adoption of SFAS No. 133 as of April 1, 2001 did
not have a material impact on our financial position or consolidated financial
statements.
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ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to various market risks including interest rates on its
financial instruments and foreign exchange rates.
Interest Rate Risk
The carrying value of our financial instruments, which include cash and
cash equivalents, accounts receivable, note receivable, accounts payable and a
capital lease obligation, approximate their fair values based on short terms to
maturity or current market prices and rates. The impact of a 100 basis point
change in interest rates would not have a material impact on the Company's
results of operations or financial position.
Foreign Exchange Risk
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. Through fiscal 2000, we did not enter into any such
contracts on our own. At March 31, 2001, the Company had one foreign currency
hedge with a notional amount of 8 million Euros in place that expired in April
2001. The settlement of this hedge did not have a material impact on the
Company's financial position or consolidated financial statements.
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.
Effective April 1, 2001, in response to a change to the Euro for
transaction activity previously conducted in the U.S. dollar by the Company's
largest European client, the Company adopted the Euro as its functional currency
for its European operations.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
PAGE
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Independent Auditors' Report................................ 40
Report of Independent Public Accountants.................... 41
Consolidated Balance Sheets as of March 31, 2000 and 2001... 42
Consolidated Statements of Operations for the Fiscal Years
Ended March 31, 1999, 2000 and 2001....................... 43
Consolidated Statements of Shareholders' Equity for the
Fiscal Years Ended March 31, 1999, 2000 and 2001.......... 44
Consolidated Statements of Cash Flows for the Fiscal Years
Ended March 31, 1999, 2000 and 2001....................... 45
Notes to Consolidated Financial Statements.................. 46
Schedule II -- Valuation and Qualifying Accounts............ 66
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Shareholders of PFSweb, Inc.:
We have audited the accompanying consolidated balance sheet of PFSweb, Inc.
and subsidiaries as of March 31, 2001, and the related consolidated statements
of operations, shareholders' equity, and cash flows for the year then ended. In
connection with our audits of the consolidated financial statements, we also
have audited the accompanying financial statement schedule as of and for the
year ended March 31, 2001. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of PFSweb, Inc.
and subsidiaries as of March 31, 2001, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the related financial statement schedule as of and for the year ended
March 31, 2001, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG LLP
Dallas, Texas
May 3, 2001, except for Notes 7 and 11
to which the date is as of June 28, 2001
40
41
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of PFSweb, Inc.:
We have audited the accompanying consolidated balance sheet of PFSweb, Inc.
(a Delaware corporation) and subsidiaries (see Note 1) as of March 31, 2000, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the two years in the period ended March 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PFSweb, Inc. and
subsidiaries as of March 31, 2000, and the results of their operations and their
cash flows for each of the two years in the period ended March 31, 2000, in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Dallas, Texas,
May 4, 2000
41
42
PFSWEB, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31,
------------------
2000 2001
------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $24,896 $ 22,266
Accounts receivable, net of allowance for doubtful
accounts of $690 and $279 at March 31, 2000 and 2001,
respectively........................................... 8,892 7,294
Other receivables......................................... 3,482 4,972
Prepaid expenses and other current assets................. 1,052 3,848
------- --------
Total current assets.............................. 38,322 38,380
------- --------
PROPERTY AND EQUIPMENT, net................................. 21,555 20,253
OTHER ASSETS................................................ 528 104
------- --------
Total assets...................................... $60,405 $ 58,737
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capital lease obligations.............. $ 274 $ 300
Trade accounts payable.................................... 6,549 11,051
Accrued expenses.......................................... 3,525 7,006
------- --------
Total current liabilities......................... 10,348 18,357
------- --------
CAPITAL LEASE OBLIGATIONS, less current portion............. 2,407 2,139
------- --------
OTHER LIABILITIES........................................... -- 1,240
------- --------
COMMITMENTS AND CONTINGENCIES (Notes 5 and 7)
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000,000 shares
authorized; none issued and outstanding at March 31,
2000 and 2001.......................................... -- --
Common stock, $0.001 par value; 40,000,000 shares
authorized; 17,870,000 and 17,907,378 shares issued and
outstanding at March 31, 2000 and 2001, respectively... 18 18
Additional paid-in capital................................ 50,673 50,884
Accumulated deficit....................................... (2,836) (13,592)
Accumulated other comprehensive loss...................... (205) (309)
------- --------
Total shareholders' equity........................ 47,650 37,001
------- --------
Total liabilities and shareholders' equity........ $60,405 $ 58,737
======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
42
43
PFSWEB, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEARS ENDED MARCH 31,
-----------------------------
1999 2000 2001
-------- ------- --------
REVENUES (Note 5):
Product revenue........................................... $ 93,702 $55,778 $ --
Service fee revenue....................................... 7,547 30,829 48,258
Other revenue............................................. -- -- 2,097
-------- ------- --------
Total revenues.................................... 101,249 86,607 50,355
-------- ------- --------
COSTS OF REVENUES:
Cost of product revenue................................... 88,335 52,639 --
Cost of service fee revenue............................... 5,323 23,475 34,261
Cost of other revenue..................................... -- -- 2,470
-------- ------- --------
Total costs of revenues........................... 93,658 76,114 36,731
-------- ------- --------
Gross profit...................................... 7,591 10,493 13,624
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 6,711 17,764 25,446
-------- ------- --------
Income (loss) from operations.......................... 880 (7,271) (11,822)
INTEREST EXPENSE (INCOME), net.............................. 374 459 (1,091)
-------- ------- --------
Income (loss) before income taxes...................... 506 (7,730) (10,731)
INCOME TAX EXPENSE (BENEFIT)................................ 214 (1,791) 25
-------- ------- --------
NET INCOME (LOSS)........................................... $ 292 $(5,939) $(10,756)
======== ======= ========
NET INCOME (LOSS) PER SHARE:
Basic and diluted......................................... $ 0.02 $ (0.38) $ (0.60)
======== ======= ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic and diluted......................................... 14,305 15,479 17,879
======== ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
43
44
PFSWEB, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
COMMON STOCK ADDITIONAL DAISYTEK'S OTHER TOTAL
--------------------- PAID-IN ACCUMULATED NET EQUITY COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT INVESTMENT LOSS EQUITY
---------- -------- ---------- ----------- ---------- ------------- -------------
Balance, March 31, 1998...... -- $ -- $ -- $ -- $ (100) $ (55) $ (155)
Net income................... -- -- -- -- 292 -- 292
Contributed capital.......... -- -- -- -- 520 -- 520
Other comprehensive loss --
foreign currency
translation adjustment..... -- -- -- -- -- (76) (76)
---------- -------- -------- -------- -------- -------- --------
Comprehensive income.........
Balance, March 31, 1999...... -- -- -- -- 712 (131) 581
Net loss prior to initial
public offering............ -- -- -- -- (3,103) -- (3,103)
Contribution of Daisytek's
net equity investment...... -- -- (2,391) -- 2,391 -- --
Net loss subsequent to
initial public offering.... -- -- -- (2,836) -- -- (2,836)
Issuance of common stock to
Daisytek................... 14,305,000 14 6 -- -- -- 20
Initial public offering, net
of issuance costs.......... 3,565,000 4 53,010 -- -- -- 53,014
Stock based compensation
expense.................... -- -- 48 -- -- -- 48
Other comprehensive loss --
foreign currency
translation adjustment..... -- -- -- -- -- (74) (74)
---------- -------- -------- -------- -------- -------- --------
Comprehensive loss...........
Balance, March 31, 2000...... 17,870,000 $ 18 $ 50,673 $ (2,836) $ -- $ (205) $ 47,650
Net loss..................... -- -- -- (10,756) -- -- (10,756)
Reduction in costs of initial
public offering............ -- -- 148 -- -- -- 148
Stock based compensation
expense.................... -- -- 38 -- -- -- 38
Employee stock purchase
plan....................... 37,378 -- 25 -- -- -- 25
Other comprehensive loss --
foreign currency
translation adjustment..... -- -- -- -- -- (104) (104)
---------- -------- -------- -------- -------- -------- --------
Comprehensive loss...........
Balance, March 31, 2001...... 17,907,378 $ 18 $ 50,884 $(13,592) $ -- $ (309) $ 37,001
========== ======== ======== ======== ======== ======== ========
COMPREHENSIVE
INCOME
(LOSS)
-------------
Balance, March 31, 1998......
Net income................... $ 292
Contributed capital..........
Other comprehensive loss --
foreign currency
translation adjustment..... (76)
--------
Comprehensive income......... $ 216
========
Balance, March 31, 1999......
Net loss prior to initial
public offering............ $ (3,103)
Contribution of Daisytek's
net equity investment......
Net loss subsequent to
initial public offering.... (2,836)
Issuance of common stock to
Daisytek...................
Initial public offering, net
of issuance costs..........
Stock based compensation
expense....................
Other comprehensive loss --
foreign currency
translation adjustment..... (74)
--------
Comprehensive loss........... $ (6,013)
========
Balance, March 31, 2000......
Net loss..................... $(10,756)
Reduction in costs of initial
public offering............
Stock based compensation
expense....................
Employee stock purchase
plan.......................
Other comprehensive loss --
foreign currency
translation adjustment..... (104)
--------
Comprehensive loss........... $(10,860)
========
Balance, March 31, 2001......
The accompanying notes are an integral part of these consolidated financial
statements.
44
45
PFSWEB, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FISCAL YEARS ENDED MARCH 31,
------------------------------
1999 2000 2001
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 292 $ (5,939) $(10,756)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 275 2,373 6,658
Provision for doubtful accounts........................ 344 458 2,203
Deferred income taxes.................................. (192) 453 109
Non-cash compensation expense.......................... -- 48 38
Changes in operating assets and liabilities:
Accounts receivables................................. (13,615) 8,324 (607)
Inventories, net..................................... (18,630) 29,856 --
Prepaid expenses and other current assets............ (1,001) (55) (5,693)
Accounts payable and accrued expenses................ 20,231 (24,954) 7,871
-------- -------- --------
Net cash provided by (used in) operating activities.... (12,296) 10,564 (177)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (2,658) (18,521) (5,542)
(Increase) decrease in other receivables.................. (12,264) 8,358 3,417
-------- -------- --------
Net cash used in investing activities.................. (14,922) (10,163) (2,125)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution...................................... 520 -- --
Issuance of common stock to Daisytek...................... -- 20 --
Net proceeds from initial public offering of common
stock.................................................. -- 53,014 --
Net proceeds from issuance of common stock................ -- -- 25
Repayment on capital lease obligations.................... -- (15) (242)
Increase (decrease) in payable to Daisytek................ 27,202 (29,029) --
-------- -------- --------
Net cash provided by (used in) financing activities.... 27,722 23,990 (217)
-------- -------- --------
EFFECT OF EXCHANGE RATES ON CASH............................ (30) (82) (111)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH............................. 474 24,309 (2,630)
CASH AND CASH EQUIVALENTS, beginning of period.............. 113 587 24,896
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of period.................... $ 587 $ 24,896 $ 22,266
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Fixed assets acquired under capital leases................ $ -- $ 2,696 $ --
======== ======== ========
Governmental grant receivable for capital expenditures
(Note 2)............................................... $ -- $ -- $ 1,564
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
45
46
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO 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
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 (the "Offering"). Net proceeds from the Offering
aggregated approximately $53.0 million and were used to repay the Company's
payable to Daisytek 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 (see Note 5). Simultaneous with the
completion of the Offering, Daisytek contributed to PFSweb all the assets,
liabilities and equity comprising PFS.
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 (the
"Spin-off") occurred at the close of business on July 6, 2000, to Daisytek
shareholders of record as of June 19, 2000.
PFSweb is an international provider of integrated business process
outsourcing services to major brand name companies seeking to maximize their
supply chain efficiencies and to extend their traditional and e-commerce
initiatives in the United States, Canada, and Europe. The Company offers such
services as professional consulting, technology collaboration, managed hosting
and creative web development, order management, web-enabled customer contact
centers, customer relationship management, billing and collection services,
information management, and international distribution services.
For all periods prior to the Spin-off, the accompanying consolidated
financial statements are presented on a carve-out basis and reflect the
consolidated historical results of operations, financial position and cash flows
of the Company. For all periods presented, certain expenses reflected in the
consolidated financial statements include an allocation of certain Daisytek
corporate expenses and infrastructure costs (see Note 5). 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, shareholders' equity 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.
2. SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
Prior to the Offering, the financial position, results of operations and
cash flows 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. All intercompany accounts and transactions have been eliminated in
consolidation.
46
47
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses. Actual results could differ from those estimates. The
allocation of certain expenses (see Notes 1 and 5) in these consolidated
financial statements also required management estimates and assumptions.
Revenue and Cost Recognition
For fiscal 1999 and 2000, the Company recognized product revenue upon
shipment of product to customers and provided for estimated returns and
allowances and recognized cost of product revenue upon shipment of product to
customers.
The Company's service fee revenues primarily relate to its (1) distribution
services and (2) order management/customer care services.
Distribution services relate primarily to inventory management, product
receiving, warehousing and fulfillment (i.e., picking, packing and shipping).
Revenue for these activities are either (i) earned on a per transaction basis or
(ii) earned at the time of product fulfillment which occurs at the completion of
the distribution services.
Order management/customer care services relate primarily to taking customer
orders for our client's products via various channels such as telephone
call-center, electronic or facsimile. These services also entail addressing
customer questions related to orders, as well as cross-selling/up-selling
activities. Revenue is recognized as the services are rendered. Fees charged to
the client are on a per transaction basis based on either (i) a pre-determined
fee per order or fee per telephone minutes incurred, or (ii) are included in the
product fulfillment service fees which are recognized on product shipment. The
Company's cost of service fee revenue, representing the cost to provide the
services described above, is recognized as incurred. Cost of service fee revenue
also includes costs associated with technology collaboration and ongoing
technology support which consist of creative website development and
maintenance, web hosting, technology interfacing, and other ongoing programming
activities. These activities are primarily performed to support the distribution
and order management/customer cares services and are recognized as incurred.
The Company also performs billing services and information management
services for its clients. Billing services and information management services
are typically not billed separately to clients because the activities are
continually performed, and the costs are insignificant and are generally covered
by other fees described above. Therefore, any revenue attributable to these
services is included in the distribution or order management fees which are
recognized as services are performed. The service fee revenue associated with
these activities are currently not significant and are incidental to the
above-mentioned services.
Other revenue of $2.1 million for fiscal 2001 represents the fees charged
to clients in conjunction with the early termination of certain contracts. Cost
of other revenue for fiscal 2001 includes 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 $1.6 million of certain uncollectible amounts
receivable from, and liabilities applicable to, clients who have terminated
contracts.
The Company primarily performs its services under two to three year
contracts that can be terminated by either party. In conjunction with these
long-term contracts the Company generally receives start-up fees to cover its
implementation costs, including certain technology infrastructure and
development costs. The Company defers the fees received, and the related costs,
and amortizes them over the life of the contract. The amortization of deferred
revenue is included as a component of service fee revenue. The amortization of
47
48
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
deferred implementation costs is included as a cost of service fee revenue. To
the extent implementation costs exceed the fees received, excess costs are
recognized as incurred with the remaining deferred revenues and costs being
amortized over the life of the contract. At March 31, 2001, the Company had $2.3
million of deferred revenues included in current liabilities.
Certain contracts involve third-party vendors who provide services such as
package delivery. The costs incurred by the Company related to such third-party
services are reimbursed at cost by its clients and are not reflected in revenue
or expense.
Concentration of Business and Credit Risk
All of the Company's product revenue for fiscal 1999 and 2000 was generated
by sales of product purchased under master distributor agreements with one
supplier. Product and service fee revenue to Daisytek accounted for
approximately 13%, 22% and 55% of the Company's total revenues for fiscal 1999,
2000 and 2001, respectively. No other client accounted for 10% or more of the
Company's revenue during such periods. As of March 31, 2000, four customers
accounted for over 75% of trade accounts receivable on an aggregate basis. As of
March 31, 2001, Daisytek and one other customer accounted for approximately 55%
of accounts receivable.
Reclassifications
Certain prior year data have been reclassified to conform to the current
period presentation. These reclassifications had no effect on previously
reported net income, shareholders' equity or net cash flows.
Cash and Cash Equivalents
Cash equivalents are defined as short-term highly liquid investments with
original maturities of three months or less.
Accounts Receivable
Accounts receivable include outstanding trade accounts receivable as well
as certain unbilled amounts owed to PFSweb by clients in accordance with
contracts. The amount of unbilled receivables at March 31, 2000 and 2001 was
approximately $0.2 million and zero, respectively.
Other Receivables and Liabilities
During fiscal 1999, the Company entered into a contractual agreement
whereby the Company financed certain inventory owned by a client of the Company.
As of March 31, 2000, other receivables included approximately $3.4 million
related to this receivable. During fiscal 2001, this client repaid the
outstanding balance. Under terms of the agreement, the Company charged the
client an asset management fee, a portion of which resulted in interest income.
Although the Company no longer finances this client's inventory, the Company
continues to earn service fees related to services provided to this client.
As of March 31, 2001, other receivables includes the following items
applicable to the Company's European operations (in thousands):
MARCH 31,
2001
---------
Note...................................................... $1,132
Value added tax........................................... 2,276
Governmental grant........................................ 1,564
------
$4,972
======
48
49
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The note receivable amount represents the remaining balance of a $1.7
million contract termination fee. As amended, the principal balance, bearing
interest at prime rate plus two percent is due in periodic payments through June
29, 2001. Value Added Tax ("VAT") receivables represent amounts due from
European governments for refundable VAT payments made in the ordinary course of
business. The governmental grant relates to investments made by the Company in
fixed assets in its Belgium operation. The Company received approximately $1.3
million associated with this grant in April 2001 and expects the remaining
balance to be paid within the next twelve months.
At establishment, the total grant of approximately $1.6 million was
deferred and is being recognized as a reduction to depreciation expense over the
same period over which the costs of the related fixed assets are being
depreciated. A deferred credit included in other liabilities in the accompanying
consolidated financial statements represents the long-term unrecognized portion
of the grant. For fiscal 2001, approximately $0.2 million was recognized as a
reduction of depreciation expense. 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. Realization of
the entire gain requires the Company to maintain a certain minimum workforce
through December 2004. The Company's management believes that the likelihood of
a refund of this grant is remote.
Inventories
During the quarter ended September 30, 1999, the Company transferred to
Daisytek all of its inventory (see Notes 1 and 5) and as of March 31, 2000 and
2001, the Company did not own any inventory.
Property and Equipment
The components of property and equipment as of March 31, 2000 and 2001 are
as follows (in thousands):
FISCAL YEAR ENDED
MARCH 31,
----------------- DEPRECIABLE
2000 2001 LIFE
------- ------- -----------
Furniture and fixtures................................. $11,933 $13,882 5-9 years
Computer equipment..................................... 3,725 4,714 3-7 years
Leasehold improvements................................. 3,472 3,554 2-9 years
Capitalized software costs............................. 4,772 6,201 2-3 years
Other.................................................. 356 251 3-7 years
------- -------
24,258 28,602
Less-accumulated depreciation and amortization....... (2,703) (8,349)
------- -------
Property and equipment, net.................. $21,555 $20,253
======= =======
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the respective assets
which range from three to nine years. Leasehold improvements are amortized over
the shorter of the useful life of the related asset or the remaining lease term.
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Fair value would be
determined using appraisals, discounted cash flow analysis or similar valuation
techniques. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
49
50
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Foreign Currency Translation and Transactions
For the Company's Canadian operations, the local currency is the functional
currency. All assets and liabilities are translated at exchange rates in effect
at the end of the period, and income and expense items are translated at the
average exchange rates for the period. Translation adjustments are reported as a
separate component of shareholders' equity.
For the Company's European operations, the U.S. dollar was the functional
currency. Monetary assets and liabilities are translated at the rates of
exchange on the balance sheet date and certain assets (notably property and
equipment) are translated at historical rates. Income and expense items are
translated at average rates of exchange for the period except for those items of
expense, which relate to assets, which are translated at historical rates. The
gains and losses from translation related to this subsidiary are included in net
income.
Gains and losses from foreign currency transactions are included in net
income.
Effective April 1, 2001, in response to a change to the Euro for
transaction activity previously conducted in the U.S. dollar by the Company's
largest European client, the Company adopted the Euro as its functional currency
for its European operations.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Fair Value of Financial Instruments
The carrying value of our financial instruments, which include cash and
cash equivalents, accounts receivable, note receivable, accounts payable and a
capital lease obligation, approximate their fair values based on short terms to
maturity or current market prices and rates.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity (net assets)
of a business enterprise during a period from transactions and other events and
circumstances from non-owner sources. Comprehensive income (loss) consists of
net income (loss) and foreign currency translation adjustments.
Net Income (Loss) Per Common Share
Prior to the Offering, which was consummated in fiscal 2000, basic and
diluted net income (loss) per share attributable to PFSweb was determined based
on net income (loss) divided by the 14,305,000 shares of PFSweb, Inc. (see Note
1) outstanding. There were no potentially dilutive securities outstanding during
the periods presented prior to the Offering. For fiscal 2000 and 2001
outstanding options to purchase common shares of PFSweb were anti-dilutive and
have been excluded from the weighted average share computation. There are no
other potentially dilutive securities outstanding.
Cash Paid During Year
The Company made payments for interest of approximately $16,000, $3,514,000
and $194,000 and income taxes of approximately $269,000, $6,000 and $164,000
during fiscal 1999, 2000 and 2001, respectively
50
51
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(see Notes 5 and 6). The Company's income tax receivable and intercompany
accrued interest are included in the payable to Daisytek as of March 31, 2000.
3. CAPITAL LEASE OBLIGATIONS:
During fiscal 2000, the Company entered into certain non-cancelable capital
lease agreements primarily involving warehouse equipment. The Company's property
held under capital leases, included in furniture and fixtures, amounted to
approximately $2.7 million and $2.3 million, net of accumulated amortization of
approximately $23,000 and $396,000 at March 31, 2000 and 2001, respectively.
The following is a schedule of future minimum lease payments under the
capital leases together with the present value of the net minimum lease payments
as of March 31, 2001 (in thousands):
Fiscal year ended March 31, 2002........................... $ 506
2003....................................................... 506
2004....................................................... 493
2005....................................................... 425
2006....................................................... 425
Thereafter................................................. 920
------
Total minimum lease payments............................... $3,275
Less: Amount representing interest......................... (836)
------
Present value of net minimum lease payments................ 2,439
Less: Current portion...................................... (300)
------
Long-term capital lease obligations........................ $2,139
======
4. STOCK AND STOCK OPTIONS:
Preferred Stock Purchase Rights
On June 8, 2000 the Company's Board of Directors declared a dividend
distribution of one preferred stock purchase right (a "Right") for each share of
the Company's common stock outstanding on July 6, 2000. Each Right entitles the
registered shareholders to purchase from the Company one one-thousandth of a
share of preferred stock at an exercise price of $67, subject to adjustment. The
Rights are not currently exercisable, but would become exercisable if certain
events occurred relating to a person or group acquiring or attempting to acquire
15 percent or more of the Company's outstanding shares of common stock. The
Rights expire on July 6, 2010, unless redeemed or exchanged by the Company
earlier.
Employee Stock Purchase Plan
On September 15, 2000, PFSweb shareholders adopted the PFSweb Employee
Stock Purchase Plan (the "Stock Purchase Plan") which is qualified under Section
423 of the Internal Revenue Code of 1986, to provide employees of PFSweb an
opportunity to acquire a proprietary interest in the Company. The Stock Purchase
Plan provides for acquisition of PFSweb common stock at a 15% discount to the
market value. The Stock Purchase Plan permits each U.S. employee who has
completed ninety days of service to elect to participate in the plan. Eligible
employees may elect to contribute up to 10 percent of their compensation with
after-tax dollars up to a maximum annual contribution of $21,250. The Company
has reserved 250,000 shares of its common stock under the Stock Purchase Plan.
The Stock Purchase Plan became effective for eligible employees in September
2000. As of March 31, 2001, 37,378 shares had been issued under the Stock
Purchase Plan.
51
52
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Option Plans
PFSweb has authorized 6,000,000 shares of common stock for issuance under
two 1999 stock option plans and 35,000 shares for issuance under a stock option
agreement (the "PFSweb Plans"). The PFSweb Plans 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. The Company
recorded stock based compensation expense of $48,000 and $38,000 in fiscal 2000
and 2001, respectively, in connection with stock options to purchase an
aggregate of 60,000 shares issued under the PFSweb Plans to an outside
consultant. At March 31, 2001 there is no unamortized stock based compensation
expense. As of March 31, 2001 there were 3,675,650 shares available for future
options.
The following table summarizes stock option activity under the PFSweb
Plans:
WEIGHTED AVERAGE
SHARES PRICE PER SHARE EXERCISE PRICE
--------- --------------- ----------------
Outstanding, March 31, 1999.................. -- $ -- $ --
Granted.................................... 1,425,000 $10.45 - $17.00 $10.69
Exercised.................................. -- $ -- $ --
Canceled................................... (63,500) $10.45 - $13.00 $10.77
---------
Outstanding, March 31, 2000.................. 1,361,500 $10.45 - $17.00 $10.69
Granted.................................... 1,238,700 $ 1.16 - $11.75 $ 2.01
Exercised.................................. -- $ -- $ --
Canceled................................... (240,850) $ 1.44 - $17.00 $ 6.73
---------
Outstanding, March 31, 2001.................. 2,359,350 $ 1.16 - $17.00 $ 6.54
=========
PFSweb Plan options granted prior to the Spin-off vest one-third on the
anniversary of the date of grant and one-twelfth each quarter thereafter. PFSweb
Plan options granted after the Spin-off vest one-twelfth each quarter. As of
March 31, 2000 and 2001, zero and 963,520 options were exercisable. The weighted
average fair value of options granted during fiscal 2000 and 2001 were $5.50 and
$1.67, respectively. The weighted average remaining contractual life of
outstanding options is 8.8 years.
The following table summarizes information concerning currently outstanding
and exercisable PFSweb stock options issued under the PFSweb Plans to PFSweb
officers, directors and employees as of March 31, 2001:
OPTIONS OUTSTANDING
- ---------------------------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ----------------------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF OUTSTANDING AS OF REMAINING AVERAGE EXERCISABLE AS OF AVERAGE
EXERCISE PRICES MARCH 31, 2001 CONTRACTUAL LIFE EXERCISE PRICE MARCH 31, 2001 EXERCISE PRICE
- --------------- ----------------- ---------------- -------------- ----------------- --------------
$ 1.16 - $ 2.69 1,118,100 9.4 $ 1.94 260,481 $ 1.95
$10.45 - $17.00 1,241,250 8.3 $10.69 703,039 $10.63
Prior to the Offering and Spin-off transaction described in Note 1, certain
of the Company's employees were granted Daisytek stock options under Daisytek's
stock option compensation plans (the "Daisytek Plans"). The stock options
generally vest over a three to five-year period from the date of grant and
expire 10 years after the date of grant.
52
53
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the completion of the Spin-off, all outstanding Daisytek
stock options were replaced with substitute stock options as described below:
Options held by PFSweb employees were replaced (at the option holder's
election made prior to the Spin-off) with either options to acquire shares of
PFSweb common stock or options to acquire shares of both Daisytek common stock
and PFSweb common stock (which may be exercised separately) (the "Unstapled
Options"). Options held by Daisytek employees were replaced (at the option
holder's election made prior to the Spin-off) with either options to acquire
shares of Daisytek common stock or Unstapled Options.
In general, the adjustments to the outstanding Daisytek options were
established pursuant to a formula designed to ensure that: (1) the aggregate
"intrinsic value" (i.e. the difference between the exercise price of the option
and the market price of the common stock underlying the option) of the
substitute options did not exceed the aggregate intrinsic value of the
outstanding Daisytek stock options which were replaced by such substitute
options immediately prior to the Spin-off, and (2) the ratio of the exercise
price of the options to the market value of the underlying stock immediately
before and after the Spin-off was preserved.
Substantially all of the other terms and conditions of each substitute
stock option, including the time or times when, and the manner in which, each
option is exercisable, the duration of the exercise period, the permitted method
of exercise, settlement and payment, the rules that will apply in the event of
the termination of employment of the employee, the events, if any, that may give
rise to an employee's right to accelerate the vesting or the time or exercise
thereof and the vesting provisions, are the same as those of the replaced
Daisytek stock option, except that option holders who are employed by one
company will be permitted to exercise, and will be subject to all of the terms
and provisions of, options to acquire shares in the other company as if such
holder was an employee of such other company.
As a result of the Spin-off on July 6, 2000, 3,479,697 non-plan PFSweb
stock options (the "PFSweb Non-plan") were issued to PFSweb and Daisytek
officers, directors and employees. As of March 31, 2001, 3,396,845 PFSweb
Non-plan options were outstanding, of which 2,693,641 were held by PFSweb
officers, directors and employees and 703,204 were held by Daisytek officers,
directors and employees.
The following table summarizes stock option activity under the PFSweb
Non-plan:
WEIGHTED AVERAGE
SHARES PRICE PER SHARE EXERCISE PRICE
--------- --------------- ----------------
Outstanding, March 31, 2000.................. -- $ -- $ --
Granted.................................... 3,479,697 $4.22 - $10.58 $7.26
Exercised.................................. -- $ -- $ --
Canceled................................... (82,852) $4.51 - $10.58 $7.91
---------
Outstanding, March 31, 2001.................. 3,396,845 $4.22 - $10.58 $7.25
=========
The weighted average fair values of options granted during fiscal 2001, was
$5.95. As of March 31, 2001, 1,895,773 of options outstanding were exercisable.
The weighted average exercise price of exercisable options outstanding at March
31, 2001 was $7.12. The remaining options will become exercisable over the next
two years based on vesting percentages. The weighted average remaining
contractual life of outstanding PFSweb Non-Plan options is 7.4 years.
53
54
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information concerning PFSweb Non-plan
options outstanding and exercisable as of March 31, 2001:
OPTIONS OUTSTANDING
- ---------------------------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ----------------------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF OUTSTANDING AS OF REMAINING AVERAGE EXERCISABLE AS OF AVERAGE
EXERCISE PRICES MARCH 31, 2001 CONTRACTUAL LIFE EXERCISE PRICE MARCH 31, 2001 EXERCISE PRICE
- --------------- ----------------- ---------------- -------------- ----------------- --------------
$4.22 - $ 5.95 2,334,755 7.4 $ 5.85 1,366,794 $ 5.87
$6.18 - $10.37 96,180 7.8 $ 7.71 46,024 $ 8.11
$10.58 965,910 7.2 $10.58 482,955 $10.58
The Company has adopted the disclosure-only provisions of SFAS 123,
"Accounting for Stock-Based Compensation." In accordance with the provisions of
SFAS 123, the Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for the PFSweb Plans and Non-plan and the Daisytek Plans and
accordingly, does not recognize compensation expense for its stock option plans
because the Company and Daisytek typically do not issue options at exercise
prices below the market value at the date of grant. Had compensation expense for
the PFSweb Plans and Non-plan and the Daisytek Plans applicable to the Company's
employees been determined based upon the fair value at the grant date for awards
consistent with the methodology prescribed by SFAS 123, the Company's
consolidated pretax income would have decreased by approximately $2,531,000 and
$5,352,000 and $3,766,000 in fiscal 1999, 2000, and 2001, respectively, and
would have resulted in a net loss per share of ($0.16), ($0.73) and ($0.81) in
fiscal 1999, 2000, and 2001, respectively. These pro forma effects may not be
representative of expense in future periods since the estimated fair value of
stock options on the date of grant is amortized to expense over the vesting
period. Additional options may be granted in future years. Options issued under
the Daisytek Plans prior to April 1, 1995, were excluded from the computation.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used for
grants of PFSweb options to PFSweb officers, directors, and employees under the
PFSweb Plans:
FISCAL YEARS ENDED MARCH 31,
----------------------------------
2000 2001
--------------- ----------------
Expected dividend yield......................... -- --
Expected stock price volatility................. 45.00% - 84.23% 98.37% - 128.38%
Risk - free interest rate....................... 5.5% - 6.2% 5.8% - 6.3%
Expected life of options (years)................ 6 5
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used for
grants of PFSweb options to PFSweb and Daisytek officers, directors, and
employees under the PFSweb Non-Plans during fiscal 2001: no dividends; expected
volatility of 112.08%, risk-free interest rate of 6.1%, and expected life of 5
years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used for
grants of Daisytek options to PFSweb officers, directors and employees under the
Daisytek Plans during fiscal 1999: no dividends; expected volatility ranging
between 41.42% and 47.92%; risk-free interest rate ranging between 4.6% and
5.5%; and expected life of 6 years. The following assumptions were used for
grants of Daisytek options to PFSweb employees under the Daisytek Plans during
fiscal 2000: no dividends; expected volatility between 49.37% and 50.02%;
risk-free interest rate ranging between 5.7% and 6.0%; and expected life of 6
years. No options were granted to PFSweb officers, directors or employees under
the Daisytek Plans during fiscal 2001.
54
55
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. TRANSACTIONS WITH DAISYTEK AND OTHER RELATED PARTIES:
Prior to the Offering, monies advanced by Daisytek were used to fund the
Company's operations, working capital requirements and certain investment
activities. Interest expense charged by Daisytek was based on its weighted
average interest rates of 6.7% for fiscal 1999 and 2000 and approximated $1.0
million and $1.7 million, respectively.
During fiscal 2000, PFSweb used a portion of the proceeds from the Offering
to repay its payable to Daisytek. Following the completion of the Offering,
Daisytek is prohibited from advancing funds to PFSweb, except in the normal
course of business, and PFSweb will be restricted from borrowing from Daisytek
following the Spin-off. As of March 31, 2000, the payable to Daisytek reflected
payables incurred in the normal course of business.
As of March 31, 2001, the Company had payables to Daisytek of approximately
$7.2 million and receivables from Daisytek of $3.1 million.
The Company's product revenue from sales to Daisytek was $12.4 million,
$7.2 million and zero in fiscal 1999, 2000 and 2001, respectively.
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 $2.0
million for fiscal 1999 and 2000, and $0.2 million for fiscal 2001.
During the quarter ended September 30, 1999, and in connection with the
restructuring of certain IBM master distribution agreements under which both
Daisytek and PFSweb are parties, 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. In addition, on a going forward basis, Daisytek
will continue to be an obligor and guarantor for certain of the Company's
facility and equipment leases.
Included in the consolidated financial statements are service fee revenues
and cost of service fee revenues 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 $12.1 million and $27.6 million for fiscal 2000 and
2001, respectively. Service fee revenues applicable to the subcontracted service
were $0.8 million in fiscal 1999.
55
56
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In May 1999, the Company entered into an agreement to provide services to a
certain company. During fiscal 2000, an executive officer and a director of
PFSweb both served on the Board of Directors of this company. During fiscal 2001
an executive officer of PFSweb served on the Board of Directors of this company.
PFSweb no longer provides services to this company. Service fee revenue earned
from this company was approximately $1.8 million and $2.0 million for fiscal
2000 and 2001, respectively, and other revenue was $1.7 million for fiscal 2001.
PFS had previously guaranteed an unsecured revolving line of credit with
commercial banks of Daisytek (the "Facility"). In December 1999, PFS was
released from its guarantee.
A non-employee director of PFSweb was a Managing Director of Hambrecht and
Quist LLP, one of the lead managing underwriters on the Offering.
6. INCOME TAXES:
Prior to the Spin-off, the Company's operations were included in
consolidated income tax returns filed by Daisytek. The provision for income
taxes reflected in the consolidated statements of operations and the deferred
tax assets reflected in the consolidated balance sheets have been prepared as
computed on a separate return basis. The current income tax liability or
receivable for fiscal 1999 and 2000 have been included in the payable to
Daisytek. Effective with the completion of the Spin-off, PFSweb ceased to be
included in Daisytek's consolidated tax return.
A reconciliation of the difference between the expected income tax expense
at the U.S. federal statutory corporate tax rate of 34%, and the Company's
effective tax rate is as follows (in thousands):
FISCAL YEARS ENDED
MARCH 31,
------------------------
1999 2000 2001
---- ------- -------
Income tax expense (benefit) computed at statutory rate.... $172 $(2,628) $(3,649)
Impact of foreign taxation at different rate............... 16 (24) (28)
State income taxes, net of federal tax impact.............. 21 51 --
Expenses not deductible for tax purposes................... 11 84 9
Net operating loss carryback............................... -- (171) --
Change in valuation reserve................................ -- 915 3,382
Other...................................................... (6) (18) 311
---- ------- -------
Provision (benefit) for income taxes............. $214 $(1,791) $ 25
==== ======= =======
The consolidated income (loss) before income taxes, by domestic and foreign
entities, is as follows (in thousands):
FISCAL YEARS ENDED
MARCH 31,
-------------------------
1999 2000 2001
---- ------- --------
Domestic.................................................. $(45) $(5,331) $ (6,188)
Foreign................................................... 551 (2,399) (4,543)
---- ------- --------
Total........................................... $506 $(7,730) $(10,731)
==== ======= ========
56
57
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Current and deferred income tax expense (benefit) is summarized as follows
(in thousands):
FISCAL YEARS ENDED
MARCH 31,
-----------------------
1999 2000 2001
----- ------- -----
Current
Domestic................................................. $ 268 $(2,150) $ 57
State.................................................... 33 77 --
Foreign.................................................. 105 (171) 77
----- ------- -----
Total current.................................... 406 (2,244) 134
Deferred
Domestic................................................. (175) 453 (109)
State.................................................... (17) -- --
----- ------- -----
Total deferred................................... (192) 453 (109)
----- ------- -----
Total............................................ $ 214 $(1,791) $ 25
===== ======= =====
The components of the deferred tax asset (liability) are as follows (in
thousands):
MARCH 31,
---------------
2000 2001
------ ------
Deferred tax asset:
Allowance for doubtful accounts........................... $ 241 $ 95
Net operating loss carryforwards.......................... 670 4,454
Other..................................................... 120 30
------ ------
1,031 4,579
Less -- Valuation reserve................................. 915 4,297
------ ------
Total deferred tax asset.......................... 116 282
------ ------
Deferred tax liability:
Property and equipment.................................... (116) (470)
------ ------
Total deferred liability.......................... (116) (470)
------ ------
Deferred tax liability, net................................. $ -- $ (188)
====== ======
Management believes a sufficient history of earnings has not been
established by PFSweb, on a stand-alone basis to support the more likely than
not realization of deferred tax assets in excess of existing taxable temporary
differences. A valuation allowance has been provided for the net deferred income
tax asset as of March 31, 2000 and 2001. At March 31, 2001, net operating loss
carryforwards relate to taxable losses of the Company's Europe subsidiary
totaling approximately $6.6 million and the Company's U.S. subsidiary, totaling
approximately $6.5 million that expire in 2016.
7. COMMITMENTS AND CONTINGENCIES:
The Company leases facilities, warehouse, office, transportation and other
equipment under operating leases expiring in various years through fiscal 2009.
In most cases, management expects that, in the normal course of business, leases
will be renewed or replaced by other leases. Minimum future annual rental
payments
57
58
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
under non-cancelable operating leases having original terms in excess of one
year are as follows (in thousands):
Fiscal year ended March 31,
2002...................................................... $ 7,354
2003...................................................... 6,287
2004...................................................... 6,093
2005...................................................... 2,297
2006...................................................... 1,618
Thereafter................................................ 3,647
-------
Total........................................... $27,296
=======
After giving effect to the lease assumption by Daisytek discussed in Note
11, fiscal 2002 lease commitments and total lease commitments (and leases
guaranteed by Daisytek) decreased by approximately $1.4 million and $5.0
million, respectively.
The Company has entered into an asset purchase agreement to purchase
certain assets totaling approximately $8.8 million in 2001. The purchase
agreement allows the Company to forfeit a portion or all of certain prepayments
and deposits, which as of March 31, 2001 totaled $1 million, in lieu of
liquidated damages if the Company elects not to exercise its purchase rights.
Total rental expense under operating leases approximated $0.8 million, $3.7
million and $7.7 million for fiscal 1999, 2000 and 2001, respectively.
For all periods prior to the spin-off Daisytek owned 80% of more of our
capital stock, we are included in Daisytek's consolidated group for federal
income tax purposes. If Daisytek or other members of the consolidated group fail
to make any federal income tax payments, we would be liable for the shortfall
since each member of a consolidated group is liable for the group's entire tax
obligation.
Subsequent to March 31, 2001, the Company exercised its option to renew a
lease for an additional five year term beginning in March 2002. Annual payments
under this lease, subject to adjustment, approximate $0.9 million.
8. SEGMENT AND GEOGRAPHIC INFORMATION:
The Company is organized as a single operating segment which is an
international provider of integrated business process outsourcing solutions.
Geographic areas in which the Company operates include the United States, Europe
(primarily Belgium), and Canada.
58
59
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is geographic information by area. Transfers between
geographic areas were immaterial. Revenues are attributed based on the Company's
domicile.
YEAR ENDED OR AT MARCH 31,
----------------------------
1999 2000 2001
-------- ------- -------
Revenues:
United States........................................ $ 85,746 $64,455 $43,352
Europe............................................... 10,456 18,357 5,863
Canada............................................... 5,047 3,795 1,140
-------- ------- -------
$101,249 $86,607 $50,355
======== ======= =======
Long-lived assets:
United States........................................ $ 14,449 $14,465 $13,775
Europe............................................... 373 7,358 6,448
Canada............................................... 152 260 134
-------- ------- -------
$ 14,974 $22,083 $20,357
======== ======= =======
9. EMPLOYEE SAVINGS PLAN
The Company has a defined contribution employee savings plan under Section
401(k) of the Internal Revenue Code. Substantially all full-time and part-time
U.S. employees are eligible to participate in the plan. The Company, at is
discretion, may match employee contributions to the plan and also make an
additional matching contribution in the form of profit sharing in recognition of
the Company performance. During fiscal year 2001, the Company matched 10% of
employee contributions totaling approximately $41,000.
10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
Unaudited quarterly results of operations for fiscal 2000 and 2001 were as
follows (amounts in thousands except per share data):
FISCAL 2000
-----------------------------------------
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
-------- -------- -------- --------
Total revenue.................................. $35,811 $26,971 $10,868 $12,957
Gross profit................................... 2,787 2,458 1,096 4,152
Net loss....................................... (198) (575) (4,777) (389)
Basic and diluted loss per share............... (0.01) (0.04) (0.31) (0.02)
Shares used in computation of basic and diluted
loss per share:.............................. 14,305 14,350 15,447 17,870
FISCAL 2001 AS REPORTED
-----------------------------------------
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
-------- -------- -------- --------
Total revenue.................................. $13,370 $12,563 $12,884 $11,638
Total cost of revenues......................... 8,645 10,169 8,567 7,650
Gross profit................................... 4,725 2,394 4,317 3,988
Selling, general and administrative expenses... 5,230 9,158 6,456 6,402
Loss from operations........................... (505) (6,764) (2,139) (2,414)
Net loss....................................... (238) (6,465) (1,861) (2,192)
Basic and diluted loss per share............... (0.01) (0.36) (0.10) (0.12)
Shares used in computation of basic and diluted
loss per share:.............................. 17,870 17,870 17,870 17,907
59
60
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FISCAL 2001 AS RESTATED
-----------------------------------------
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
-------- -------- -------- --------
Total revenue(1)............................... $13,370 $12,963 $12,384 $11,638
Total cost of revenues(1)...................... 8,645 11,869 8,567 7,650
Gross profit(1)................................ 4,725 1,094 3,817 3,988
Selling, general and administrative
expenses(1).................................. 5,230 7,858 5,956 6,402
Loss from operations........................... (505) (6,764) (2,139) (2,414)
Net loss....................................... (238) (6,465) (1,861) (2,192)
Basic and diluted loss per share............... (0.01) (0.36) (0.10) (0.12)
Shares used in computation of basic and diluted
loss per share:.............................. 17,870 17,870 17,870 17,907
- ---------------
(1) Represents an increase in revenue in the second quarter of $1.7 million for
contract termination fees previously recorded as a reduction of cost of
service fee revenue and a $1.3 million and $0.5 million reduction of
previously recorded service fee revenues and selling, general and
administrative expenses in the second quarter and the third quarter,
respectively.
The seasonality of the Company's business is dependent upon the seasonality
of its clients' business and their sale of products. Management believes that
with the Company's current client mix, the Company's business activity is
expected to be slightly more significant in the quarter ended December 31.
11. SUBSEQUENT EVENTS:
Subsequent to March 31, 2001, the Company elected to change its fiscal year
end date from March 31 to December 31.
On April 30, 2001, the Company filed a Tender Offer Statement on Schedule
TO (the "Schedule TO") relating to the Company's offer to exchange certain
options to purchase shares of its common stock held by certain PFSweb officers,
directors and employees for new options to purchase shares of its common stock
at a per share price equal to the fair market value of one share of its common
stock on the date of issuance, currently expected to be December 3, 2001, upon
the terms and subject to the conditions in the Offer to Exchange (the "Offer")
dated April 30, 2001. On May 29, 2001 the Offer expired and the Company accepted
for exchange options to purchase 3,753,044 shares of common stock, 2,663,544 of
which were PFSweb Non-plan options and 1,089,500 were PFSweb Plan options. On
May 29, 2001, the Company also repriced and fully vested 105,000 options issued
under the PFSweb Plans and 698,860 PFSweb Non-plan options held by Daisytek
officers, directors and employees and non-employees which resulted in a non-cash
charge of approximately $0.7 million.
On May 25, 2001, the Company completed the sale of certain assets to
Daisytek pursuant to an Asset Purchase Agreement (the "Purchase Agreement").
Under the Purchase Agreement, the Company transferred and sold to Daisytek
certain distribution and fulfillment assets, including equipment and fixtures,
that were previously used by the Company to provide outsourcing services to
Daisytek. Daisytek also assumed certain related equipment leases and a warehouse
lease and hired certain employees who were associated with the warehouse
facility. The consideration payable under the Purchase Agreement of $11.0
million ($10 million of which was paid at closing on May 25, 2001 and $1 million
of which is payable over six months, subject to certain potential offsets)
included a release by the Company and Daisytek of certain transaction management
services agreements previously entered into between the Company and Daisytek and
a Daisytek subsidiary. Proceeds of $10 million (excluding the $1 million
deferred proceeds), were received for assets with an approximately $4.5 million
net book value with a resulting $5.0 million gain, after closing costs of $0.5
million. Concurrently with the closing of the asset sale, the Company and
Daisytek also entered into a six-month transition services agreement under which
the Company will provide Daisytek with certain
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61
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
transitional and information technology services for which the Company will
receive monthly service fees, subject to satisfaction of certain performance
criteria.
Pro forma revenues and pro forma loss from operations for fiscal 2001,
assuming the transaction had occurred in April, 2000, would have been $29.5
million and ($18.9) million, respectively. These pro forma adjustments do not
consider certain infrastructure costs, such as operating costs associated with
the information technology function, salaries of certain management and
personnel, telephone and lease costs, and depreciation expense which supported
this business but that will continue in the future. Because these ongoing costs
were not considered, the pro forma adjustments to the loss from operations are
not indicative of the overall margin earned under these transaction management
services agreements. These pro forma results do not give effect to any fees to
be earned by PFSweb for services to be provided by Daisytek under a six-month
transition services agreement.
The Company, Daisytek and IBM are parties to various Master Distributor
Agreements which have various scheduled expirations dates through September 2001
and are otherwise generally terminable at will. On June 8, 2001, Daisytek
notified the Company and IBM that it does not intend to renew these agreements
upon their scheduled expiration dates. Services provided under these agreements
by the Company represented approximately 13.5% of the Company's total revenues
in fiscal 2001. The Company is currently discussing with IBM the continuation of
these arrangements and has received a letter of intent from IBM to extend such
agreements with PFS for two years subject to obtaining satisfactory financing.
There can be no assurance that these discussions will be successful or that the
Company's arrangements with IBM will continue or, if they continue, any of the
terms thereof. It is possible that new arrangements with IBM may involve cash
commitments by the Company, new third party financing, a joint venture with a
new master distributor or direct ownership by the Company of the IBM products.
The Company believes that through one of these financing arrangements, it will
be able to continue to earn revenues in the future associated with selling or
providing services related to IBM product.
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62
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On February 26, 2001, PFSweb, Inc. and Arthur Andersen LLP terminated their
client-auditor relationship. The reports of Arthur Andersen LLP on the
consolidated financial statements for the past two years contained no adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles. The Audit Committee of the
Board of Directors of the Company approved the decision to change independent
accountants. In connection with its audits for the two most recent fiscal years
and through February 26, 2001, there were no disagreements with Arthur Andersen
LLP on any matter of accounting principles or practices, consolidated financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of Arthur Andersen LLP, would have caused them
to make reference thereto in their report on the consolidated financial
statements for such years. During the two most recent fiscal years and through
February 26, 2001, there were no reportable events (as defined in Regulation S-K
Item 304(a)(1)(v)). The Company requested that Arthur Andersen LLP furnish it
with a letter addressed to the Securities and Exchange Commission stating
whether or not it agrees with the above statements. A copy of such letter, dated
March 2, 2001, was received. The Company appointed KPMG LLP as its new
independent accountants as of February 26, 2001.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the information to be set forth in the section
entitled "Election of Directors" in the definitive proxy statement involving the
election of directors in connection with the Annual Meeting of Stockholders of
the Company to be held in September 2001 (the "Proxy Statement") which section
is incorporated herein by reference. The Proxy Statement (or an amendment to
this Form 10-K containing the relevant information) will be filed with the
Securities and Exchange Commission not later than 120 days after the last day of
the Company's fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
Information required by Part III, Item 11, will be included in the section
entitled "Election of Directors" of the Company's Proxy Statement relating to
the Company's annual meeting of stockholders to be held in 2000, and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by Part III, Item 12, will be included in the Sections
entitled "Election of Directors" and "Security Ownership of Certain Beneficial
Owners and Management" of the Company's Proxy Statement relating to the
Company's annual meeting of stockholders to be held in September 2001, and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
Information regarding certain of the Company's relationships and related
transactions will be included in the section entitled "Certain Relationship and
Related Transactions" of the Company's Proxy Statement relating to the Company's
annual meeting of stockholders to be held in September 2001, and is incorporated
herein by reference.
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63
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
Independent Auditors' Report
Report of Independent Public Accountants
Consolidated Balance Sheets as of March 31, 2000 and 2001
Consolidated Statements of Operations for the Fiscal Years Ended March 31,
1999, 2000 and 2001
Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended
March 31, 1999, 2000 and 2001
Consolidated Statements of Cash Flows for the Fiscal Years Ended March 31,
1999, 2000 and 2001
Notes to Consolidated Financial Statements
2. Financial Statements Schedules
Report of Independent Public Accountants
Schedule II -- Valuation and Qualifying Accounts
All other schedules are omitted because the required information is not
present in amounts sufficient to require submission of the schedule or because
the information required is included in the financial statements or notes
thereto.
3. Exhibits
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
------- -----------------------
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
10.1* -- Non-Employee Director Stock Option and Retainer Plan
10.2* -- Employee Stock Option Plan
10.3* -- Employee Annual Incentive Plan
10.4* -- Industrial Lease Agreement between Shelby Drive
Corporation and Priority Fulfillment Services, Inc.
10.5* -- Lease Contract between Transports Weerts and Priority
Fulfillment Services Europe B.V.
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64
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
------- -----------------------
10.6** -- Asset Purchase Agreement by and among PFSweb, Inc.,
Priority Fulfillment Services, Inc., Daisytek, Inc. and
Daisytek International Corporation
10.7** -- Transition Services Agreement by and between PFSweb, Inc.
and Daisytek International Corporation
10.8** -- Form of Change of Control Agreement between the Company
and each of its executive officers
21** -- Subsidiaries of the Registrant
23.1** -- Consent of KPMG LLP
23.2** -- Consent of Arthur Andersen LLP
- ---------------
* Incorporated by reference from PFSweb, Inc. Registration Statement on Form
S-1 (Commission File No. 333-87657).
** Filed herewith.
(b) Reports on Form 8-K:
Form 8-K filed on March 2, 2001 reporting Item 4, Changes in Registrant's
Certifying Accountant, that on February 26, 2001, PFSweb, Inc. and Arthur
Andersen LLP terminated their client-auditor relationship. The reports of Arthur
Andersen LLP on the consolidated financial statements for the past two years
contained no adverse opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principles. The Audit
Committee of the Board of Directors of the Company approved the decision to
change independent accountants. In connection with its audits for the two most
recent fiscal years and through February 26, 2001, there have been no
disagreements with Arthur Andersen LLP on any matter of accounting principles or
practices, consolidated financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of Arthur
Andersen LLP, would have caused them to make reference thereto in their report
on the consolidated financial statements for such years. During the two most
recent fiscal years and through February 26, 2001, there have been no reportable
events (as defined in Regulation S-K Item 304(a)(1)(v)).
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65
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Shareholders of PFSweb, Inc.:
We have audited, in accordance with auditing standards generally accepted
in the United States, the consolidated financial statements of PFSweb, Inc. (a
Delaware corporation) and subsidiaries (see Note 1) as of March 31, 2000, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the two years in the period ended March 31, 2000 included in
this report on Form 10-K and have issued our report thereon dated May 4, 2000.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. Schedule II of this report
on Form 10-K is the responsibility of the company's management and is presented
for the purposes of complying with the Securities and Exchange Commission's
rules and is not part of the basic consolidated financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic consolidated financial statements and, in our opinion, fairly states
in all material respects, the financial data required to be set forth therein in
relation to the basic consolidated financial statements as of March 31, 2000 and
for the two years then ended taken as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas
May 4, 2000
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66
SCHEDULE II
PFSWEB, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED MARCH 31, 2001
(AMOUNTS IN THOUSANDS)
ADDITIONS
-----------------------
BALANCE AT CHARGES TO CHARGES TO BALANCE AT
BEGINNING COST AND OTHER END OF
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
---------- ---------- ---------- ---------- ----------
Fiscal Year Ended March 31, 1999:
Allowance for doubtful accounts........ $318 344 -- (27) $ 635
Fiscal Year Ended March 31, 2000:
Allowance for doubtful accounts........ $635 458 -- (403) $ 690
Income tax valuation allowance......... $ -- 915 -- -- $ 915
Fiscal Year Ended March 31, 2001:
Allowance for doubtful accounts........ $690 2,203 -- (2,614) $ 279
Income tax valuation allowance......... $915 3,382 -- -- $4,297
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67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
By: /s/ THOMAS J. MADDEN
----------------------------------
Thomas J. Madden,
Executive Vice President
and Chief Financial and Accounting
Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ MARK C. LAYTON Chairman of the Board, President June 29, 2001
- ----------------------------------------------------- and Chief Executive Officer
Mark C. Layton (Principal Executive Officer)
/s/ THOMAS J. MADDEN Executive Vice President and June 29, 2001
- ----------------------------------------------------- Chief Financial and Accounting
Thomas J. Madden Officer (Principal Financial
and Accounting Officer)
/s/ CHRISTOPHER YATES Director June 29, 2001
- -----------------------------------------------------
Christopher Yates
/s/ DR. NEIL JACOBS Director June 29, 2001
- -----------------------------------------------------
Dr. Neil Jacobs
/s/ TIMOTHY M. MURRAY Director June 29, 2001
- -----------------------------------------------------
Timothy M. Murray
/s/ JAMES F. REILLY Director June 29, 2001
- -----------------------------------------------------
James F. Reilly
/s/ DAVID I. BEATSON Director June 29, 2001
- -----------------------------------------------------
David I. Beatson
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68
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
------- -----------------------
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
10.1* -- Non-Employee Director Stock Option and Retainer Plan
10.2* -- Employee Stock Option Plan
10.3* -- Employee Annual Incentive Plan
10.4* -- Industrial Lease Agreement between Shelby Drive
Corporation and Priority Fulfillment Services, Inc.
10.5* -- Lease Contract between Transports Weerts and Priority
Fulfillment Services Europe B.V.
10.6** -- Asset Purchase Agreement by and among PFSweb, Inc.,
Priority Fulfillment Services, Inc., Daisytek, Inc. and
Daisytek International Corporation
10.7** -- Transition Services Agreement by and between PFSweb, Inc.
and Daisytek International Corporation
10.8** -- Form of Change in Control Agreement between the Company
and each of its executive officers
21** -- Subsidiaries of the Registrant
23.1** -- Consent of KPMG LLP
23.2** -- Consent of Arthur Andersen LLP
- ---------------
* Incorporated by reference from PFSweb, Inc. Registration Statement on Form
S-1 (Commission File No. 333-87657).
** Filed herewith.