1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _______ to _______
Commission File Number 000-28275
PFSWEB, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2837058
----------------------- -------------------------
(State of Incorporation) (I.R.S. Employer I.D. No.)
500 NORTH CENTRAL EXPRESSWAY, PLANO, TEXAS 75074
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 881-2900
-------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
----- ----
At August 3, 2001 there were 18,114,092 shares of registrant's common stock
outstanding.
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PFSWEB, INC. AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 2001
INDEX
<Table>
<Caption>
PART I. FINANCIAL INFORMATION PAGE NUMBER
-----------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 2001
(unaudited) and March 31, 2001.................................................... 3
Unaudited Interim Condensed Consolidated Statements of Operations
for the Three Months Ended June 30, 2001 and 2000................................. 4
Unaudited Interim Condensed Consolidated Statements of Cash Flows
for the Three Months Ended June 30, 2001 and 2000................................. 5
Notes to Unaudited Interim Condensed Consolidated Financial
Statements........................................................................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................................. 11
Item 3. Quantitative and Qualitative Disclosure about Market Risk ............................. 16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.................................... 18
Item 6. Exhibits and Reports on Form 8-K ...................................................... 18
SIGNATURES........................................................................................... 19
</Table>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PFSWEB, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<Table>
<Caption>
June 30, March 31,
2001 2001
------------ ------------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents ............................................................ $ 23,152 $ 22,266
Accounts receivable, net of allowance for doubtful accounts of $321 and $279
at June 30, 2001 and March 31, 2001, respectively ................................ 6,226 7,294
Other receivables .................................................................... 7,257 4,972
Prepaid expenses and other current assets ............................................ 3,629 3,848
------------ ------------
Total current assets ................................................... 40,264 38,380
------------ ------------
PROPERTY AND EQUIPMENT, net .............................................................. 14,688 20,253
OTHER ASSETS (including $574 of restricted cash as of June 30, 2001) ..................... 646 104
------------ ------------
Total assets ........................................................... $ 55,598 $ 58,737
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capital lease obligations ......................................... $ 499 $ 300
Trade accounts payable ............................................................... 5,746 11,051
Accrued expenses ..................................................................... 7,013 7,006
------------ ------------
Total current liabilities .............................................. 13,258 18,357
------------ ------------
CAPITAL LEASE OBLIGATIONS, less current portion .......................................... 2,401 2,139
OTHER LIABILITIES ........................................................................ 1,125 1,240
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000,000 shares authorized; none issued and
outstanding ...................................................................... -- --
Common stock, $0.001 par value; 40,000,000 shares authorized;
17,970,429 and 17,907,378 shares issued and outstanding at June 30, 2001
and March 31, 2001, respectively ................................................ 18
18
Additional paid-in capital ........................................................... 51,794 50,884
Accumulated deficit .................................................................. (11,689) (13,592)
Accumulated other comprehensive loss ................................................. (1,309) (309)
------------ ------------
Total shareholders' equity ............................................. 38,814 37,001
------------ ------------
Total liabilities and shareholders' equity ............................. $ 55,598 $ 58,737
============ ============
</Table>
The accompanying notes are an integral part of these unaudited interim condensed
consolidated financial statements.
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PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
Three Months Ended
June 30,
------------------------------
2001 2000
------------- -------------
REVENUES:
Service fee revenue ................................ $ 9,417 $ 13,370
Other revenue ...................................... 100 --
------------- -------------
Total revenues ................................. 9,517 13,370
------------- -------------
COSTS OF REVENUES:
Cost of service fee revenue ........................ 6,087 8,645
Cost of other revenue .............................. -- --
------------- -------------
Total costs of revenues ........................ 6,087 8,645
------------- -------------
Gross profit ................................... 3,430 4,725
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ........................................ 5,978 5,230
OTHER .................................................. (4,280) --
------------- -------------
Income (loss) from operations .................. 1,732 (505)
INTEREST INCOME ........................................ 171 316
------------- -------------
Income (loss) before income taxes .............. 1,903 (189)
PROVISION FOR INCOME TAXES ............................. -- 49
------------- -------------
NET INCOME (LOSS) ...................................... $ 1,903 $ (238)
============= =============
NET INCOME (LOSS) PER SHARE:
Basic and diluted ................................. $ 0.11 $ (0.01)
============= =============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic and diluted ................................. 17,970 17,870
============= =============
</Table>
The accompanying notes are an integral part of these unaudited interim condensed
consolidated financial statements.
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PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
Three Months Ended
June 30,
2001 2000
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ......................................................... $ 1,903 $ (238)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization ........................................... 1,480 1,380
Non-cash compensation expense ........................................... 696 16
Provision for doubtful accounts ......................................... 47 175
Gain on sale of distribution facility ................................... (4,976) --
Changes in operating assets and liabilities:
Accounts and other receivables ...................................... 1,104 (2,057)
Prepaid expenses and other current assets ........................... (2,306) (639)
Accounts payable and accrued expenses ............................... (4,972) (1,540)
--------------- ---------------
Net cash used in operating activities .......................... (7,024) (2,903)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ........................................ (829) (1,387)
Change in other assets ..................................................... (574) 1,675
Proceeds from sale of distribution facility, net ........................... 9,437 --
--------------- ---------------
Net cash provided by investing activities ...................... 8,034 288
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in long-term debt ................................................. (131) (58)
Net proceeds from issuance of common stock ................................. 39 --
--------------- ---------------
Net cash used in financing activities .......................... (92) (58)
--------------- ---------------
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS .......................... (32) (110)
--------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........................... 886 (2,783)
CASH AND CASH EQUIVALENTS, beginning of period ................................. 22,266 24,896
--------------- ---------------
CASH AND CASH EQUIVALENTS, end of period ....................................... $ 23,152 $ 22,113
=============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION
Fixed assets acquired under capital leases .............................. $ 592 $ --
=============== ===============
</Table>
The accompanying notes are an integral part of these unaudited interim condensed
consolidated financial statements.
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PFSWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. OVERVIEW AND BASIS OF PRESENTATION:
In June 1999, Daisytek International Corporation ("Daisytek") created a
separate wholly-owned subsidiary named PFSweb, Inc. (the "Company" or "PFSweb"),
a Delaware corporation, to become a holding company for certain of Daisytek's
wholly-owned subsidiaries ("PFS") in contemplation of an initial public offering
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.
The unaudited interim condensed consolidated financial statements as of
June 30, 2001, and for the three months ended June 30, 2001 and 2000, have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC") and are unaudited. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to the rules and regulations promulgated
by the SEC. 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 prior to the Spin-off, 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.
In the opinion of management and subject to the foregoing, the unaudited
interim condensed consolidated financial statements of the Company include all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of the Company's financial position as of June 30, 2001, its
results of operations and its results of cash flows for the three months ended
June 30, 2001 and 2000. Results of the Company's operations for interim periods
may not be indicative of results for the full fiscal year.
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PFSWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. RECENTLY ISSUED ACCOUNTING PRINCIPLES
In September 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
a replacement of FASB Statement No. 125." This statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities and is effective after March 31, 2001. The
Company adopted SFAS 140 in the quarter ended June 30, 2001. The adoption of
SFAS 140 did not have a material impact on the Company's consolidated financial
statements and related disclosures.
In June, 2001, the FASB issued SFAS No.'s 141 and 142, "Business
Combinations" and "Goodwill and Other Intangibles." SFAS 141 requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method. SFAS 142 requires that ratable amortization of goodwill be
replaced with periodic fair-value based tests of the goodwill's impairment, and
that intangible assets other than goodwill be amortized over their useful lives.
Additionally, under the provision of the new accounting standard, an acquired
intangible asset should be separately recognized if the benefit of the
intangible asset is obtained through contractual other legal rights, or if the
intangible asset can be sold, transferred, licensed, rented, or exchanged,
regardless of the acquirer's intent to do so. SFAS 141 is effective for all
business combinations initiated after June 30, 2001 and for all business
combinations accounted for by the purchase method for which the date of
acquisition is after June 30, 2001. The provisions of SFAS 142 will be effective
for fiscal years beginning after December 15, 2001. The Company believes that
the adoption of SFAS 141 and SFAS 142 will not have a material impact on the
Company's consolidated financial statements and related disclosures.
3. COMPREHENSIVE INCOME (LOSS) (IN THOUSANDS):
<Table>
<Caption>
Three Months Ended
June 30,
2001 2000
------------- -------------
Net income (loss) ............................ $ 1,903 $ (238)
Other comprehensive income:
Foreign currency translation
adjustment ........................... (1,000) (107)
------------- -------------
Comprehensive income (loss) .................. $ 903 $ (345)
============= =============
</Table>
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. As a result, 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.
4. NET INCOME (LOSS) PER COMMON SHARE AND COMMON SHARE EQUIVALENT:
Basic and diluted net income (loss) per common share attributable to PFSweb
common stock were determined based on dividing the income (loss) available to
common stockholders by the weighted-average number of common shares outstanding.
During the three months ended June 30, 2001 and 2000, outstanding options to
purchase common shares were anti-dilutive and have been excluded from the
weighted diluted average share computation.
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PFSWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. TRANSACTIONS WITH DAISYTEK AND OTHER RELATED PARTIES:
For periods prior to the Spin-off, the Company's costs and expenses include
allocations from Daisytek for certain general administrative services including
information technology, financial, treasury, legal, insurance and other
corporate functions as well as certain costs of operations including facility
charges.
These allocations have been estimated on bases that Daisytek and the Company
consider to be a reasonable reflection of the utilization of services provided
or the benefit received by the Company. The methods used for allocation of
expenses from Daisytek were either (i) percentage of revenue, shipped orders, or
number of employees or (ii) management's best estimate. However, these
allocations of costs and expenses do not necessarily indicate the costs and
expenses that would have been or will be incurred by the Company on a
stand-alone basis. Management estimates that incremental selling, general and
administrative expenses associated with PFSweb operating as a stand-alone
publicly traded company, including executive management, overhead and public
company costs, insurance and risk management costs, and other costs would have
been approximately zero and $0.2 million for the three months ended June 30,
2001 and 2000, respectively.
In conjunction with the successful completion of the Offering, PFSweb
entered into agreements with Daisytek, including a tax sharing agreement, a
transaction management services agreement, a transition services agreement and a
master separation agreement. In addition, on a going forward basis, Daisytek
will continue to be an obligator and guarantor for certain of the Company's
facility and equipment leases.
In addition, included in the financial statements are service fee revenues
and cost of service fee revenue which have been reflected by PFSweb for certain
services subcontracted to PFSweb by Daisytek under Daisytek's contractual
agreements.
Service fee revenues charged to Daisytek under (i) the 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 $5.7 and $7.5 million for the three months ended
June 30, 2001 and 2000.
On May 25, 2001, the Company completed the sale of a distribution facility
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 $10.1 million (excluding $0.8 million of
remaining 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 $0.6 million. Concurrently with the closing of the 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.
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.
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PFSWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
6. STOCK OPTIONS
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.
7. SUBSEQUENT EVENTS
On August 13, 2001, the Company announced that its Board of Directors had
authorized the repurchase of up to two million shares of the Company's common
stock.
In August 2001 and in conjunction with Daisytek's intention to transition
the IBM business, the Company entered into a corporate structure with a
third-party that established an affiliated company to replace Daisytek and
provide the financing associated with this business. In support of this
initiative, the Company made an equity investment of $0.75 million, for a 49%
non-voting interest in this affiliate, and anticipates making an additional $5
million to $9 million subordinated debt infusion in the future. This affiliated
entity has commenced negotiating financing for up to $60 million of inventory
and accounts receivable and intends to enter into a transaction management
services agreement with PFSweb.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our results of operations and
financial condition should be read in conjunction with the unaudited interim
condensed consolidated financial statements and related notes appearing
elsewhere in this Form 10-Q.
FORWARD-LOOKING INFORMATION
We have made forward-looking statements in this Report on Form 10-Q. These
statements are subject to risks and uncertainties, and there can be no guarantee
that these statements will prove to be correct. Forward-looking statements
include assumptions as to how we may perform in the future. When we use words
like "seek," "strive," "believe," "expect," "anticipate," "predict,"
"potential," "continue," "will," "may," "could," "intend," "plan," "target" and
"estimate" or similar expressions, we are making forward-looking statements. You
should understand that the following important factors, in addition to those set
forth above or elsewhere in this Report on Form 10-Q could cause our results to
differ materially from those expressed in our forward-looking statements. These
factors include:
o Our ability to retain and expand relationships with existing clients
and attract new clients;
o our reliance on the fees generated by the transaction volume or product
sales of our clients;
o our reliance on our clients' projections or transaction volume or
product sales;
o our ability to finalize pending contracts;
o the impact of strategic alliances and acquisitions;
o trends in the market for our services;
o trends in e-commerce;
o whether we can continue and manage growth;
o changes in the trend toward outsourcing;
o increased competition;
o effects of changes in profit margins;
o the unknown effects of possible system failures and rapid changes in
technology;
o trends in government regulation both foreign and domestic;
o foreign currency risks and other risks of operating in foreign
countries;
o our dependency on key personnel;
o our ability to raise additional capital;
o the continued listing of our common stock on the NASDAQ; and
o our relationship with and separation from Daisytek, our former parent
corporation.
10
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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.
OVERVIEW
We are an international provider of integrated business process outsourcing
solutions to major brand name companies seeking to maximize their supply chain
efficiencies and to extend their 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.
Our expenses are comprised of (i) 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 (ii) 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.
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RESULTS OF OPERATIONS
<Table>
<Caption>
Three Months Ended
June 30,
-----------------------------
2001 2000
------------ ------------
Service fee revenue .................................... 98.9% 100.0%
Other revenue .......................................... 1.1 --
------------ ------------
Total revenues .................................. 100.0 100.0
Cost of service fee revenue (as % of service fee
revenue) ........................................... 64.6 64.7
Cost of other revenue (as % of other revenue) .......... -- --
------------ ------------
Total costs of revenues ......................... 64.0 64.7
------------ ------------
Gross profit ........................................... 36.0 35.3
Selling, general and administrative expenses ........... 62.8 39.1
Other .................................................. (45.0) --
------------ ------------
Income (loss) from operations .......................... 18.2 (3.8)
Interest income ........................................ 1.8 2.4
------------ ------------
Income (loss) before income taxes ...................... 20.0 (1.4)
Provision for income taxes ............................. -- 0.4
------------ ------------
Net income (loss) ...................................... 20.0% (1.8)%
============ ============
</Table>
RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000
Service Fee Revenue. Service fee revenue was $9.4 million for the three
months ended June 30, 2001 as compared to $13.4 million for the three months
ended June 30, 2000, a decrease of $4.0 million or 29.6%. The decrease in
service fee revenues over prior periods was due to the impact of certain
contract terminations effected during fiscal 2001 and the reduction in fees
earned from Daisytek and other existing clients, offset by the impact of new
service contract relationships. The reduction in revenue attributed to the
termination of lower margin producing contracts was $3.2 million. In conjunction
with the sale of a distribution facility to Daisytek (discussed below in
"Liquidity and Capital Resources"), we terminated certain of our transaction
management services agreements entered into between us and Daisytek and a
Daisytek subsidiary. Concurrently with the closing of the facility sale, we
entered into a six-month transition services agreement to provide Daisytek with
certain transitional and information services. The net impact of the changes in
our services provided to Daisytek was a reduction in revenue of $1.9 million.
The increase in revenue from new client contract relationships of $1.6 million
was partially offset by a decrease in revenue from existing contracts of $0.5
million that we attribute to the recent slowdown in the U.S. economy.
Other Revenue. Other revenue of $0.1 million for the three months ended
June 30, 2001 represents the fees charged to a client in conjunction with the
early termination of its contract.
Cost of Service Fee Revenue. Cost of service fee revenue was $6.1 million
for the three months ended June 30, 2001, as compared to $8.6 million during the
three months ended June 30, 2000, a decrease of $2.5 million or 29.6%. The
resulting service fee gross profit was $3.3, million or 35.4% of service fee
revenue, during the three months ended June 30, 2001 as compared to $4.7
million, or 35.3% of service fee revenue for the three months ended June 30,
2000. The reduction in gross profit is primarily a result of the decrease in
service fee revenue. By leveraging our existing infrastructure and by reducing
the direct operating costs associated with the terminated contracts, such as
personnel costs, warehousing and distribution costs, depreciation and other
expenses, we were able to maintain a comparable gross profit margin.
Selling, General and Administrative Expenses. SG&A expenses were $6.0
million for the three months ended June 30, 2001, or 62.8% of revenues, as
compared to $5.2 million, or 39.1% of revenues, for the three months ended June
30, 2000. SG&A expenses increased over the prior year due to an increase in
stand alone public company expenses, consisting primarily of taxes and
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insurance, incremental professional fees for audit and tax services associated
with the change in our fiscal year end and increases in personnel compensation
and sales and marketing costs.
Other. Other primarily reflects the sale of a distribution facility used by
PFSweb to provide outsourcing services to Daisytek. Cash proceeds of $10.1
million (excluding $0.8 million of remaining deferred proceeds), net of
approximately $0.6 million of closing costs, were received for assets with an
approximately $4.5 million net book value with a resulting $5.0 million gain.
The net gain of approximately $5 million was offset by a $0.7 million non-cash
charge associated with the Company's offer to modify certain stock options held
by employees of our former parent company Daisytek.
Interest Income. Interest income was $0.2 million for the three months
ended June 30, 2001 as compared to interest income of $0.3 million for the three
months ended June 30, 2000. The reduction in interest income is primarily
attributable to lower interest rates.
Income Taxes. For the three months ended June 30, 2001, we did not record
any taxes associated with our net income due to previously recorded losses.
Additionally, since we have not established a sufficient history of earnings for
our U.S. and European operations, a valuation allowance has been provided for
our net deferred tax assets as of June 30, 2001, which are primarily related to
our net operating loss carryforwards. Although we had a pre-tax loss for the
three months ended June 30, 2000, we recorded an income tax provision associated
with a pre-tax income from our Canadian operations. For the three months ended
June 30, 2000 certain deferred tax assets were realized, which offset the taxes
associated with our pre-tax income generated in the U.S. We did not record an
income tax benefit for our European pre-tax losses.
LIQUIDITY AND CAPITAL RESOURCES
On May 25, 2001, the Company completed the sale of a distribution facility
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 $10.1 million (excluding $0.8 million of
remaining 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 $0.6 million. Concurrently with the closing of the 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 20% of our revenue will be derived from our existing arrangements
related to IBM products. Under these arrangements, Daisytek acted as a
distributor of various IBM products. In the quarter ended June 30, 2001 Daisytek
indicated that it did not intend to continue to distribute these products under
these arrangements after their scheduled expiration date. Concurrently, we
received a letter of intent from IBM to extend such agreements with PFS for two
years subject to obtaining satisfactory financing. In conjunction with
Daisytek's intention to transition the IBM business, we entered into a corporate
structure with a third-party that established an affiliated company to replace
Daisytek and provide the financing associated with this business. In support of
this initiative, we made an equity investment of $0.75 million, for a 49%
non-voting interest in this affiliate, and anticipate making an additional $5
million to $9 million subordinated debt infusion in the future. This affiliated
entity has commenced negotiating financing for up to $60 million of inventory
and accounts receivable and intends to enter into a transaction management
services agreement with us.
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During the three months ended June 30, 2001, our working capital increased,
primarily due to the proceeds from the sale of a distribution facility, to $27.0
million at June 30, 2001 from $20.0 million at March 31, 2001. In order to
provide additional financing in the future, in addition to our current cash
position of over $23 million, we plan to evaluate alternatives including
establishing our own credit facility or entering into asset based lending
programs. In conjunction with these alternatives we may be required to provide
certain letters of credit to secure these arrangements. We currently believe
that our cash position will satisfy our known operating cash needs, our working
capital and capital expenditure requirements and our financing alternatives,
including our recently announced share repurchase program, for the next twelve
months.
Net cash used in financing activities was $0.1 million for the three months
ended June 30, 2001, representing payments on our capital lease obligations
offset by the proceeds from the issuance of common stock. Net cash used in
financing activities was $0.1 million for the three months ended June 30, 2000,
representing payments on our capital lease obligations.
Net cash used in operating activities was $7.0 million for the three months
ended June 30, 2001, and primarily reflected an increase in prepaid expenses and
other current assets of $2.3 million and a decrease in accounts receivable of
$1.1 million and accounts payable and accrued expenses of $5.0 million. The
decrease in accounts payable is primarily attributable to a reduction of
payables that was due to one of our clients. The increase in other current
assets primarily relates to VAT receivables associated with our European
operations which are expected to be collected in the September 2001 quarter. Net
cash used in operating activities totaled $2.9 million for the three months
ended June 30, 2000 and primarily reflected a reduction in accounts payable and
accrued expenses of $1.5 million and an increase in prepaid expenses and
accounts and other receivables of $2.7 million.
Net cash provided by investing activities for the three months ended June
30, 2001 totaled $8.0 million. The net proceeds from the sale of one of our
distribution facilities for $9.4 million were offset by capital expenditures of
$0.8 million and the establishment of a restricted cash balance of $0.6 million.
Net cash provided by investing activities was $0.3 million for the three months
ended June 30, 2000. During the three months ended June 30, 2000, our capital
expenditures totaled $1.4 million, which was offset by the full collection of
other receivables. 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.
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. We currently estimate that the revenue needed to leverage our
infrastructure and reach profitability is $13 million to $14 million per
quarter. 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. 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.
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
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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 September 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
a replacement of FASB Statement No. 125." This statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities and is effective after March 31, 2001. The
Company adopted SFAS 140 in the quarter ended June 30, 2001. The adoption of
SFAS 140 did not have a material impact on the Company's consolidated financial
statements and related disclosures.
In July, 2001, the FASB issued SFAS No.'s 141 and 142, "Business
Combinations" and "Goodwill and Other Intangibles." SFAS 141 requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method. SFAS 142 requires that ratable amortization of goodwill be
replaced with periodic fair-value based tests of the goodwill's impairment, and
that intangible assets other than goodwill be amortized over their useful lives.
Additionally, under the provision of the new accounting standard, an acquired
intangible asset should be separately recognized if the benefit of the
intangible asset is obtained through contractual other legal rights, or if the
intangible asset can be sold, transferred, licensed, rented, or exchanged,
regardless of the acquirer's intent to do so. SFAS 141 is effective for all
business combinations initiated after June 30, 2001 and for all business
combinations accounted for by the purchase method for which the date of
acquisition is after June 30, 2001. The provisions of SFAS 142 will be effective
for fiscal years beginning after December 15, 2001. The Company believes that
the adoption of SFAS 141 and SFAS 142 will not have a material impact on the
Company's consolidated financial statements and related disclosures.
ITEM 3. 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
capital lease obligations, 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
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. We may, from time to time, employ a small number of
derivative financial instruments to manage our exposure to fluctuations in
foreign currency rate risk. To hedge our net investment and long-term
intercompany payable balance we might enter into forward currency exchange
contracts. We do not hold or issue derivative financial instruments for trading
purposes or enter into foreign currency transactions for speculative purposes.
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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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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
3.1* Amended and Restated Certificate of Incorporation
3.2* Amended and Restated Bylaws
10.1** Asset Purchase Agreement by and among PFSweb, Inc.,
Priority Fulfillment Services, Inc., Daisytek, Inc.
and Daisytek International Corporation
10.2** Transition Services Agreement by and between PFSweb,
Inc. and Daisytek International Corporation
10.3*** Offer to Exchange dated April 30, 2001
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* Incorporated by reference from PFSweb, Inc. Registration Statement on
Form S-1 (Commission File No. 333-87657).
** Incorporated by reference from PFSweb, Inc. Form 10-K for the fiscal
year ended March 31, 2001.
*** Incorporated by reference from PFSweb, Inc. Schedule TO filed on April
30, 2001.
b) Reports on Form 8-K:
Form 8-K filed on April 13, 2001 reporting Item 5, Other
Events, that on April 10, 2001, PFSweb, Inc. (the "Company")
received a letter from The Nasdaq Stock Market indicating that
the Company no longer complies with the $1.00 minimum bid
price requirement for continued listing set forth in
Marketplace Rule 4450(a)(5), and that the Company's common
stock is, therefore, subject to delisting from The Nasdaq
National Market. The Company announced that it had requested a
hearing from Nasdaq to appeal the Nasdaq Staff determination.
Form 8-K filed on April 30, 2001 reporting Item 5, Other
Events, that on April 30, 2001, PFSweb, Inc. (the "Company")
received a letter from The Nasdaq Stock Market indicating that
the Company complies with the $1.00 minimum bid price
requirement for continued listing set forth in Marketplace
Rule 4450(a)(5), and that the delisting notice previously
received from The Nasdaq National Market was rescinded.
Form 8-K filed on June 11, 2001 reporting Item 2, Acquisition
and Disposition of Assets, that on May 25, 2001, PFSweb, Inc.
(the "Company") completed the sale of certain assets to
Daisytek International Corporation ("Daisytek") pursuant to an
Asset Purchase Agreement (the "Purchase Agreement").
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 2001
PFSweb, Inc.
By: /s/ Thomas J. Madden
-----------------------------------------
Thomas J. Madden
Chief Financial Officer,
Chief Accounting Officer,
Executive Vice President
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INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
3.1* Amended and Restated Certificate of Incorporation
3.2* Amended and Restated Bylaws
10.1** Asset Purchase Agreement by and among PFSweb, Inc., Priority
Fulfillment Services, Inc., Daisytek, Inc. and Daisytek
International Corporation
10.2** Transition Services Agreement by and between PFSweb, Inc. and
Daisytek International Corporation
10.3*** Offer to Exchange dated April 30, 2001
</Table>
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* Incorporated by reference from PFSweb, Inc. Registration Statement on
Form S-1 (Commission File No. 333-87657).
** Incorporated by reference from PFSweb, Inc. Form 10-K for the fiscal
year ended March 31, 2001.
*** Incorporated by reference from PFSweb, Inc. Schedule TO filed on April
30, 2001.