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 September 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 November 3, 2001 there were 18,057,109 shares of registrant's common stock
outstanding.
PFSWEB, INC. AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 2001
INDEX
<Table>
<Caption>
PART I. FINANCIAL INFORMATION PAGE NUMBER
-----------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 2001
(unaudited) and March 31, 2001.......................................... 3
Unaudited Interim Condensed Consolidated Statements of
Operations for the Three and Six Months Ended September 30,
2001 and 2000........................................................... 4
Unaudited Interim Condensed Consolidated Statements of Cash
Flows for the Six Months Ended September 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 ....................... 17
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.............................. 19
Item 6. Exhibits and Reports on Form 8-K ................................................ 19
SIGNATURES ................................................................................. 21
</Table>
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PFSWEB, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
ASSETS
September 30, March 31,
2001 2001
------------ ----------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents .............................................................. $ 14,870 $ 22,266
Accounts receivable, net of allowance for doubtful accounts of $186 and $279
at September 30, 2001 and March 31, 2001, respectively ............................. 8,310 7,294
Other receivables ...................................................................... 1,162 4,972
Prepaid expenses and other current assets .............................................. 3,440 3,848
-------- --------
Total current assets ..................................................... 27,782 38,380
-------- --------
PROPERTY AND EQUIPMENT, net ................................................................ 15,574 20,253
RELATED PARTY NOTE RECEIVABLE .............................................................. 8,800 --
OTHER ASSETS (including $2,742 of restricted cash as of September 30, 2001) ................ 4,512 104
-------- --------
Total assets ............................................................. $ 56,668 $ 58,737
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capital lease obligations ........................................... $ 908 $ 300
Trade accounts payable (including related party payables of $941 as of
September 30, 2001) .................................................................. 4,738 11,051
Accrued expenses ....................................................................... 6,058 7,006
-------- --------
Total current liabilities ................................................ 11,704 18,357
-------- --------
CAPITAL LEASE OBLIGATIONS, less current portion ............................................ 3,682 2,139
OTHER LIABILITIES .......................................................................... 2,473 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;
18,027,792 and 17,907,378 shares issued and outstanding at September 30,
2001 and March 31, 2001, respectively ............................................. 18 18
Additional paid-in capital ............................................................. 51,889 50,884
Accumulated deficit .................................................................... (12,142) (13,592)
Accumulated other comprehensive loss ................................................... (871) (309)
Treasury stock at cost, 86,300 shares at September 30, 2001 ............................ (85) --
-------- --------
Total shareholders' equity ............................................... 38,809 37,001
-------- --------
Total liabilities and shareholders' equity ............................... $ 56,668 $ 58,737
======== ========
</Table>
The accompanying notes are an integral part of these unaudited interim
condensed consolidated financial statements.
3
PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
2001 2000 2001 2000
-------- -------- -------- --------
REVENUES:
Service fee revenue .................................. $ 9,006 $ 11,263 $ 18,423 $ 24,633
Service fee revenue - related party (Note 5) ......... 283 -- 283 --
Other revenue ........................................ -- 1,700 100 1,700
-------- -------- -------- --------
Total revenues ................................... 9,289 12,963 18,806 26,333
-------- -------- -------- --------
COSTS OF REVENUES:
Cost of service fee revenue .......................... 5,680 9,458 11,767 18,103
Cost of other revenue ................................ (627) 2,411 (627) 2,411
-------- -------- -------- --------
Total costs of revenues .......................... 5,053 11,869 1,140 20,514
-------- -------- -------- --------
Gross profit ..................................... 4,236 1,094 7,666 5,819
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ............. 5,301 7,858 11,279 13,088
OTHER (Note 5) ........................................... (500) -- (4,780) --
-------- -------- -------- --------
Income (loss) from operations .................... (565) (6,764) 1,167 (7,269)
INTEREST INCOME .......................................... 112 316 283 632
-------- -------- -------- --------
Income (loss) before income taxes ................ (453) (6,448) 1,450 (6,637)
PROVISION FOR INCOME TAXES ............................... -- 17 -- 66
-------- -------- -------- --------
NET INCOME (LOSS) ........................................ $ (453) $ (6,465) $ 1,450 $ (6,703)
======== ======== ======== ========
NET INCOME (LOSS) PER SHARE:
Basic and diluted ................................... $ (0.03) $ (0.36) $ 0.08 $ (0.38)
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic and diluted ................................... 18,079 17,870 18,025 17,870
======== ======== ======== ========
</Table>
The accompanying notes are an integral part of these unaudited interim
condensed consolidated financial statements.
4
PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
Six Months Ended
September 30,
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................................ $ 1,450 $ (6,703)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization ................................................. 2,748 3,550
Non-cash compensation expense ................................................. 696 37
Provision for doubtful accounts ............................................... (51) 2,448
Gain on sale of distribution facility ......................................... (5,476) --
Changes in operating assets and liabilities:
Accounts receivable ....................................................... (872) (4,261)
Prepaid expenses and other current assets ................................. 3,364 (1,257)
Accounts payable and accrued expenses ..................................... (5,869) 2,985
-------- --------
Net cash used in operating activities ................................ (4,010) (3,201)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .............................................. (784) (2,626)
Change in other assets ........................................................... (2,742) 3,417
Equity investment in affiliate ................................................... (750) --
Loans to related party ........................................................... (8,800) --
Proceeds from sale of distribution facility, net ................................. 9,937 --
-------- --------
Net cash provided by (used in) investing activities .................. (3,139) 791
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt ....................................................... (320) (137)
Purchases of treasury stock ..................................................... (85) --
Net proceeds from issuance of common stock ....................................... 134 --
-------- --------
Net cash used in financing activities ................................ (271) (137)
-------- --------
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS ................................ 24 (131)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS ............................................ (7,396) (2,678)
CASH AND CASH EQUIVALENTS, beginning of period ....................................... 22,266 24,896
-------- --------
CASH AND CASH EQUIVALENTS, end of period ............................................. $ 14,870 $ 22,218
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Fixed assets acquired under capital leases .................................... $ 2,472 $ --
======== ========
</Table>
The accompanying notes are an integral part of these unaudited interim
condensed consolidated financial statements.
5
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. OVERVIEW AND BASIS OF PRESENTATION:
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
September 30, 2001, and for the three and six months ended September 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. 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 September 30, 2001, its results of operations for the
three and six months ended September 30, 2001 and 2000 and its results of cash
flows for the six months ended September 30, 2001 and 2000. Results of the
Company's operations for interim periods may not be indicative of results for
the full fiscal year.
Certain prior period data has been reclassified to conform to the current
period presentation. These reclassifications had no effect on previously
reported net income, shareholders' equity or cash flows.
2. RECENTLY ISSUED ACCOUNTING PRINCIPLES:
In 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 annual 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 adoption of SFAS 141 as of July 1,
6
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2001 did not have a material impact on the Company's financial statements and
related disclosures. The provisions of SFAS 142 will be effective for fiscal
years beginning after December 15, 2001. The Company believes that the adoption
SFAS 142 will not have a material impact on the Company's consolidated financial
statements and related disclosures.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which addresses the accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The Company is currently assessing the impact
on the consolidated financial statements and will adopt the provisions of this
standard by the first quarter of 2003.
In October, 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which establishes a universal
accounting model based on the framework established in SFAS 121 for the
long-lived assets to be disposed of by sale. The Company is currently assessing
the impact on the consolidated financial statements and will adopt the
provisions by the first quarter of 2002.
3. COMPREHENSIVE LOSS (IN THOUSANDS):
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ----------------
2001 2000 2001 2000
------- ------- ------- -------
Net income (loss) ......................... $ (453) $(6,465) $ 1,450 $(6,703)
Comprehensive income adjustments:
Foreign currency translation
adjustment ........................ 438 (14) (562) (121)
------- ------- ------- -------
Comprehensive income (loss) ............... $ (15) $(6,479) $ 888 $(6,824)
======= ======= ======= =======
</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 and six months ended September 30, 2001 and 2000,
all outstanding options to purchase common shares were anti-dilutive and have
been excluded from the weighted diluted average share computation. There are no
other potentially dilutive securities outstanding.
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. Management estimates that incremental costs associated with PFSweb
operating as a stand-alone publicly traded company would have been approximately
zero for the three and six months ended September 30, 2001 and $0.2 million for
the three and six months ended September 30, 2000.
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
7
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
services agreement and a master separation agreement. In addition, as part of
the Spin-off process, Daisytek remained an obligor and guarantor for certain of
the Company's facility and equipment leases.
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. As of September 30, 2001, proceeds of $10.6 million
(excluding $0.3 million of remaining deferred proceeds), were received for
assets with an approximately $4.5 million net book value with a resulting $5.5
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 is providing Daisytek with certain
transitional and information technology services for which the Company is
receiving monthly service fees, subject to satisfaction of certain performance
criteria.
Service fee revenues charged to Daisytek (i) under the IBM contracts,
entered into during the quarter ended September 30, 1999, and terminated in the
quarter ended September 30, 2001, (ii) under terms of the transaction management
services agreement with Daisytek, which was terminated in the quarter ended June
30, 2001, (iii) for certain subcontracted service, and (iv) pursuant to the six
month transition services agreement entered into during the quarter ended June
30, 2001, were $3.0 and $8.7 million for the three and six months ended
September 30, 2001 and $5.5 million and $13.1 million for the three and six
months ended September 30, 2000, respectively.
On May 29, 2001, the Company repriced and vested certain options held by
Daisytek officers, directors and employees and non-employees which resulted in a
non-cash charge of approximately $0.7 million.
The Company, Business Supplies Distributors, a Daisytek subsidiary
("BSD"), Daisytek and IBM were parties to various Master Distributor Agreements
which had various scheduled expiration dates through September 2001. Under these
agreements, BSD acted as a master distributor of various IBM products, Daisytek
provided financing and credit support to BSD and the Company provided
transaction management and fulfillment services to BSD. On June 8, 2001,
Daisytek notified the Company and IBM that it did not intend to renew these
agreements upon their scheduled expiration dates. In August 2001, the Company
and Inventory Financing Partners, LLC ("IFP") formed Business Supplies
Distributors Holdings, LLC ("Holdings"), and Holdings formed a wholly-owned
subsidiary, BSD Acquisition Corp. ("Supplies Distributors"), and Supplies
Distributors, the Company and IBM entered into Master Distributor Agreements to
replace the prior agreements. Under these agreements, Supplies Distributors acts
as a master distributor of various IBM products and, pursuant to a transaction
management services agreement between the Company and Supplies Distributors, the
Company provides transaction management and fulfillment services to Supplies
Distributors. The Company made an equity investment of $0.75 million in Holdings
for a 49% voting interest, and IFP made an equity investment of $0.25 million in
Holdings for a 51% voting interest. As of September 30, 2001, certain officers
and directors of the Company owned, individually, a 9.8% non-voting interest,
and, collectively, a 49% non-voting interest, in IFP. In addition to its equity
investment in Holdings, the Company has also provided Supplies Distributors with
a subordinated loan which, as of September 30, 2001, had an outstanding balance
of $8.8 million and accrued interest at an effective rate of approximately 10%.
On September 26, 2001, Supplies Distributors purchased all of the stock of
BSD for a purchase price of $923,000 and certain inventory purchase discount
rights. On September 27, 2001, Supplies Distributors entered into short-term
credit facilities with IBM Credit Corporation and IBM Belgium Financial Services
S.A. for the purpose of financing its distribution of IBM products. The
facilities include $40 million for the U.S. operations and 20 million Euros
(approximately $18 million) for the European operations. The Company has
provided a collateralized guaranty to secure the repayment of these credit
facilities. As of
8
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2001, the outstanding balance of the credit facilities guaranteed by
PFSweb was approximately $37 million.
Supplies Distributors' credit facilities with IBM Credit Corporation and IBM
Belgium Financial Services S.A. expire in January 2002. The Company believes
that Supplies Distributors should be able to renew its credit facilities with
IBM Credit Corporation and IBM Belgium Financial Services S.A., prior to or at
expiration, under longer terms. However, IBM Credit Corporation and IBM Belgium
Financial Services S.A. have expressed a desire to reduce the overall amounts
being provided to Supplies Distributors and therefore, the Company and Supplies
Distributors are currently seeking to obtain additional asset based financing
for portions of the IBM business. Although the Company currently anticipates
Supplies Distributors retaining its financing from IBM Credit Corporation and
IBM Belgium Financial Services S.A. for a portion of the IBM business, the
Company can provide no assurance with respect to Supplies Distributors' ability
to renew its credit facilities with IBM Credit Corporation and IBM Belgium
Financial Services S.A. at their expiration, increase its borrowing capacity, or
obtain financing from additional lenders. Either the Company or Supplies
Distributors will have to obtain financing to maintain the IBM business
arrangements. After giving effect to the termination of our agreement with
Daisytek, approximately 15% to 20% of our revenue will be derived from our
arrangements with Supplies Distributors applicable to the IBM business.
Pursuant to the terms of the Company's transaction management services
agreement with Supplies Distributors, the Company earned service fees, which are
reported as service fee revenue - related party in the accompanying condensed
consolidated financial statements, of approximately $0.3 million for the three
and six months ended September 30, 2001. For the three and six months ended
September 30, 2001, PFSweb fees earned applicable to the IBM business, including
related party revenue, were $2.0 million and $3.9 million, respectively. For the
three and six months ended September 30, 2000, prior to becoming a related
party, service fees earned by PFSweb from BSD, associated with the same business
endeavor, were $0.4 million and $2.2 million, respectively. Service fee revenue
earned from the IBM business for the three and six months ended September 30,
2000 were reduced by $1.3 million foreign currency transaction losses applicable
to the devaluation of the Euro that were required under the terms of the
arrangements between the Company and BSD to be included in the service fee
calculation.
6. INVESTMENT IN UNCONSOLIDATED AFFILIATE
The Company records its interest in Holdings' net income, which is
allocated and distributed to the owners pursuant to the terms of Holdings'
operating agreement, under the modified equity method, which results in the
Company recording its allocated earnings of Holdings or 100% of Holdings'
losses. The Company recorded no equity in earnings for the three and six months
ended September 30, 2001.
Summarized unaudited financial information for Holdings as of September 30,
2001 is as follows (in thousands):
<Table>
Current assets............................................... $51,529
Total assets................................................. $52,468
Current credit facility payable (guaranteed by PFSweb) ...... $20,747
Current liabilities.......................................... $42,507
Subordinated debt due to PFSweb.............................. $ 8,800
Shareholders' equity......................................... $ 1,161
</Table>
Summarized unaudited operating information for Holdings for the three and
six months ended September 30, 2001 is as follows (in thousands):
<Table>
Net revenues................................................. $18,294
Cost of goods sold........................................... $17,105
Income before taxes.......................................... $ 214
Net income................................................... $ 152
</Table>
9
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. OTHER EVENTS
The Company has elected to change its fiscal year from March 31 to December
31.
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. As of September 30, 2001, the Company had purchased 86,300 shares of
common stock.
On November 1, 2001, pursuant to the terms of a release agreement, the
Company and a vendor terminated an approximately $8.8 million asset purchase
agreement and the Company received a full refund of its $1 million prepayment
and deposit.
10
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 and our Form 10-K for the
year ended March 31, 2001 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 our ability, or that of our affiliates, to obtain working capital financing;
o the continued listing of our common stock on the NASDAQ; and
o our relationship with and separation from Daisytek, our former parent
corporation.
11
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 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.
12
RESULTS OF OPERATIONS
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ----------------
2001 2000 2001 2000
----- ----- ----- -----
Service fee revenue (including related party
revenue) ........................................... 100.0% 86.9% 99.5% 93.5%
Other revenue ........................................ 0.0 13.1 0.5 6.5
----- ----- ----- -----
Total revenues ................................ 100.0 100.0 100.0 100.0
Cost of service fee revenue (as % of service
fee revenue) ....................................... 61.1 84.0 62.9 73.5
Cost of other revenue (as % of total
revenues) .......................................... (6.7) 18.6 (3.3) 9.2
----- ----- ----- -----
Total costs of revenues ....................... 54.4 91.6 59.2 77.9
----- ----- ----- -----
Gross profit ......................................... 45.6 8.4 40.8 22.1
Selling, general and administrative expenses ......... 57.1 60.6 60.0 49.7
Other ................................................ (5.4) 0.0 (25.4) 0.0
----- ----- ----- -----
Income (loss) from operations ........................ (6.1) (52.2) 6.2 (27.6)
Interest income ...................................... 1.2 2.4 1.5 2.4
----- ----- ----- -----
Income (loss) before income taxes .................... (4.9) (49.8) 7.7 (25.2)
Provision for income taxes .......................... 0.0 0.1 0.0 0.3
----- ----- ----- -----
Net income (loss) .................................... (4.9)% (49.9)% 7.7% (25.5)%
===== ===== ===== =====
</Table>
RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2001 AND 2000
Service Fee Revenue (including related party service fee revenue). Service fee
revenue was $9.3 million for the three months ended September 30, 2001 as
compared to $11.3 million for the three months ended September 30, 2000, a
decrease of $2.0 million or 17.5%. Service fee revenue was $18.7 million for the
six months ended September 30, 2001, as compared to $24.6 million during the six
months ended September 30, 2000, a decrease of $5.9 million or 24.1%. 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, offset by the impact of new service contract
relationships and other existing client relationships. The reduction in revenue
attributed to the termination of lower margin producing contracts was $3.1
million and $6.6 million for the three and six months ended September 30, 2001,
respectively. In conjunction with the sale of a distribution facility to
Daisytek in May 2001 (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 $2.5 million and $4.3 million for the three and six
months ended September 30, 2001, respectively. For the three and six months
ended September 30, 2001, the increase in revenue attributed to new client
contract relationships was $3.3 million and $4.0 million, respectively. For the
three and six months ended September 30, 2001, the increase in revenue from
existing contracts was $0.3 million and $1.0 million, respectively. We believe
this increase was negatively impacted by the recent slowdown in the U.S.
economy.
Pursuant to the terms of the Company's transaction management services
agreement with Supplies Distributors, the Company earned service fees, which are
reported as service fee revenue - related party in the accompanying condensed
consolidated financial statements, of approximately $0.3 million for the three
and six months ended September 30, 2001. For the three and six months ended
September 30, 2001, PFSweb fees earned applicable to the IBM business, including
related party revenue, were $2.0 million and $3.9 million, respectively. For the
three and six months ended September 30, 2000, prior to becoming a related
party, service fees earned by PFSweb from BSD, associated with the same business
endeavor, were $0.4 million and $2.2 million, respectively. For the three and
six months ended September 30, 2001, our revenue was negatively impacted by
lower than anticipated IBM related activity due to the transition to Supplies
Distributors from Daisytek but was benefited by approximately $0.8 million of
service fee adjustments resulting from the finalization of the Daisytek
contract. Service fee revenue earned from the
13
IBM business for the three and six months ended September 30, 2000 were reduced
by $1.3 million foreign currency transaction losses applicable to the
devaluation of the Euro that were required, under the terms of the arrangements
between the Company and BSD, to be included in the service fee calculation.
Other Revenue. Other revenue of $0.1 million for the six months ended
September 30, 2001 and $1.7 million for the three and six months September 30,
2000, respectively, represents the fees charged to clients in conjunction with
early contract terminations.
Cost of Service Fee Revenue. Cost of service fee revenue was $5.7 million
for the three months ended September 30, 2001, as compared to $9.5 million
during the three months ended September 30, 2000, a decrease of $3.8 million or
39.9%. The resulting service fee gross profit was $3.6, million or 38.9% of
service fee revenue, during the three months ended September 30, 2001 as
compared to $1.8 million, or 16.0% of service fee revenue for the three months
ended September 30, 2000. Cost of service fee revenue was $11.8 million for the
six months ended September 30, 2001, as compared to $18.1 million during the six
months ended September 30, 2000, a decrease of $6.3 million or 35.0%. The
resulting service gross profit was $6.9 million, or 37.1% of service fee
revenue, during the six months ended September 30, 2001 as compared to $6.5
million, or 26.5% of service fee revenue, for the six months ended September 30,
2000. For the three and six months ended September 30, 2000, the service fee
gross profit was negatively impacted by a $1.3 million reduction in revenue
applicable to foreign currency transaction losses discussed above, for which
there was no reduction in costs. In addition, the gross profit earned on certain
contracts terminated during fiscal 2001 was lower than other contracts the
Company continues to operate. For the three and six months ended September 30,
2001, our gross profit margin was negatively impacted by lower than anticipated
IBM related activity due to the transition to Supplies Distributors from
Daisytek but was benefited by approximately $0.8 million of service fees
adjustments resulting from the finalization of the Daisytek contract for which
the related service activities were performed in earlier periods. Additionally,
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 reduce our operating costs, increase our gross profit margin and gross
profit percentage.
Cost of Other Revenue. Cost of other revenue for the three and six months
ended September 30, 2001 reflect the reversal of accruals made in the prior year
for estimated client termination costs that were determined this period to be in
excess of the actual costs. Cost of other revenue for the three and six months
ended September 30, 2000 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 $5.3
million for the three months ended September 30, 2001, or 57.1% of revenues, as
compared to $7.9 million, or 60.6% of revenues, for the three months ended
September 30, 2000. SG&A expenses were $11.3 million for the six months ended
September 30, 2001, or 60% of revenues, as compared to $13.1 million, or 49.7%
of revenues, for the six months ended September 30, 2000. The decrease in SG&A
expenses are due to costs incurred in the prior year periods which there are no
or lower comparable costs incurred in the current year periods. These relate to
approximately $1.4 million of incremental costs applicable to client disputed
items, primarily reflected as a provision for doubtful accounts, a $0.5 million
foreign currency transaction loss, due to a devaluation of the Euro, and the
favorable resolution of accounts and VAT receivables in the quarter ended
September 30, 2001, offset by an increase in stand alone public company
expenses, consisting primarily of taxes and insurance, incremental professional
services 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
previously used by PFSweb to provide outsourcing services to Daisytek. For the
three months ended September 30, 2001, other reflects the collection of $0.5
million of the deferred proceeds, which were subject to certain performance
criteria, applicable to this sale. For the six months ended September 30, 2001,
cash proceeds of $10.6 million (excluding $0.3 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 $5.5
million
14
gain. The net gain was offset by a $0.7 million non-cash charge associated with
the Company's modification of certain stock options held by employees of our
former parent company Daisytek.
Interest Income. Interest income was $0.1 million for the three months ended
September 30, 2001 as compared to interest income of $0.3 million for the three
months ended September 30, 2000. Interest income was $0.3 million for the six
months ended September 30, 2001 as compared to interest income of $0.6 million
for the six months ended September 30, 2000. The reduction in interest income is
primarily attributable to lower interest rates.
Income Taxes. For the three months ended September 30 2001, we did not
record an income tax benefit associated with our net loss. 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 September 30, 2001, which are primarily related to our net
operating loss carryforwards. For the six months ended September 30, 2001, we
did not record any tax expense associated with our net income due to the
expectation of losses for the year. Although we had a pre-tax loss for the three
and six months ended September 30, 2000, we recorded an income tax provision
associated with a pre-tax income from our Canadian operations.
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 $10.6 million (excluding $0.3 million of
remaining deferred proceeds) have been received for assets with an approximately
$4.5 million net book value with a resulting $5.5 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 is providing Daisytek with certain transitional and
information technology services for which the Company is receiving monthly
service fees, subject to satisfaction of certain performance criteria.
The Company, Business Supplies Distributors, a Daisytek subsidiary
("BSD"), Daisytek and IBM were parties to various Master Distributor Agreements
which had various scheduled expirations dates through September 2001. Under
these agreements, BSD acted as a master distributor of various IBM products,
Daisytek provided financing and credit support to BSD and the Company provided
transaction management and fulfillment services to BSD. On June 8, 2001,
Daisytek notified the Company and IBM that it did not intend to renew these
agreements upon their scheduled expiration dates. In August 2001, the Company
and Inventory Financing Partners, LLC ("IFP") formed Business Supplies
Distributors Holdings, LLC ("Holdings"), and Holdings formed a wholly-owned
subsidiary, BSD Acquisition Corp. ("Supplies Distributors"), and Supplies
Distributors, the Company and IBM entered into Master Distributor Agreements to
replace the prior agreements. Under these agreements, Supplies Distributors acts
as a master distributor of various IBM products and, pursuant to a transaction
management services agreement between the Company and Supplies Distributors, the
Company provides transaction management and fulfillment services to Supplies
Distributors. The Company made an equity investment of $0.75 million in Holdings
for a 49% voting interest, and IFP made an equity investment of $0.25 million in
Holdings for a 51% voting interest. As of September 30, 2001, certain officers
and directors of the Company owned, individually, a 9.8% non-voting interest,
and, collectively, a 49% non-voting interest, in IFP. In addition to its equity
investment in Holdings, the Company has also provided Supplies Distributors with
a subordinated loan which, as of September 30, 2001, had an outstanding balance
of $8.8 million and accrued interest at an effective rate of approximately 10%.
Additional subordinated loans may be necessary in the future to support the
expected growth in Supplies Distributors' business.
15
On September 26, 2001, Supplies Distributors purchased all of the stock of
BSD for a purchase price of $923,000 and certain inventory purchase discount
rights. On September 27, 2001, Supplies Distributors entered into short-term
credit facilities with IBM Credit Corporation and IBM Belgium Financial Services
S.A. for the purpose of financing its distribution of IBM products. The
facilities include $40 million for the U.S. operations and 20 million Euros
(approximately $18 million) for the European operations. The Company has
provided a collateralized guaranty to secure the repayment of these credit
facilities. As of October 31, 2001 the outstanding balance of the credit
facilities guaranteed by PFSweb was approximately $37 million.
Supplies Distributors' credit facilities with IBM Credit Corporation and
IBM Belgium Financial Services S.A. expire in January 2002. The Company believes
that Supplies Distributors should be able to renew its credit facilities with
IBM Credit Corporation and IBM Belgium Financial Services S.A., prior to or at
expiration, under longer terms. However, IBM Credit Corporation and IBM Belgium
Financial Services. S.A. have expressed a desire to reduce the overall amounts
being provided to Supplies Distributors and therefore, the Company and Supplies
Distributors are currently seeking to obtain additional asset based financing
for portions of the IBM business. Although the Company currently anticipates
Supplies Distributors retaining its financing from IBM Credit Corporation and
IBM Belgium Financial Services S.A. for a portion of the IBM business, the
Company can provide no assurance with respect to Supplies Distributors' ability
to renew its credit facilities with IBM Credit Corporation and IBM Belgium
Financial Services S.A. at their expiration, increase its borrowing capacity, or
obtain financing from additional lenders. Either the Company or Supplies
Distributors will have to obtain financing to maintain the IBM business
arrangements. After giving effect to the termination of our agreement with
Daisytek, approximately 15% to 20% of our revenue will be derived from our
arrangements with Supplies Distributors applicable to the IBM business
arrangements.
During the six months ended September 30, 2001, our working capital
decreased to $16.1 million from $20.0 million at March 31, 2001, primarily due
to the establishment and capitalization of an affiliate, Supplies Distributors,
and the funding of operations and capital expenditures offset by the proceeds
from the sale of a distribution facility. In order to provide additional
financing in the future, in addition to our current cash position, we plan to
evaluate alternatives including establishing our own credit facility, entering
into asset based lending programs, or transferring a portion or all of our
subordinated loan balances, due from Supplies Distributors, to third-parties. 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
additional subordinated loans to Supplies Distributors, if necessary, for the
next twelve months.
Net cash used in financing activities was $0.3 million for the six months
ended September 30, 2001, representing payments on our capital lease obligations
and payments to acquire treasury stock offset by the proceeds from the issuance
of common stock pursuant to our employee stock purchase plan. Net cash used in
financing activities was $0.1 million for the six months ended September 30,
2000, representing payments on our capital lease obligations.
Net cash used in operating activities was $4.0 million for the six months
ended September 30, 2001, and primarily reflected an increase in accounts
receivable of $0.9 million and a decrease in prepaid expenses and other current
assets of $3.4 million and accounts payable and accrued expenses of $5.9
million. The decrease in other current assets primarily relates to the
collection of VAT receivables associated with our European operations. The
decrease in accounts payable is primarily attributable to the remittance of the
VAT monies due to one of our clients and the reversal of client termination
reserves, previously reflected in prior years' costs, and of deferrals
applicable to the finalization of the Daisytek related contract, for which the
related activities occurred in earlier periods. Cash flows used in operating
activities totaled $3.2 million during the six months ended September 30, 2000.
For the six months ended September 30, 2000, the net cash used in operating
activities primarily reflected increases in prepaid expenses and accounts
receivables partially offset by increases in accounts payable and accrued
expenses.
Net cash used by investing activities for the six months ended September
30, 2001 totaled $3.1 million. The net proceeds from the sale of one of our
distribution facilities for $9.9 million were offset by capital expenditures of
$0.8 million, the establishment of a restricted cash balance of $2.7 million, a
subordinated
16
loan of approximately $8.8 million, and an equity investment of $0.8 million in
Supplies Distributors. Cash provided by investing activities was $0.8 million
for the six months ended September 30, 2000. During the six months ended
September 30, 2000, our capital expenditures of $2.6 million for property and
equipment were offset by a $3.4 million reduction of third-party financed
inventory. Capital expenditures have historically consisted primarily of
additions to upgrade our management information systems, including our
Internet-based customer tools, other methods of e-commerce and general expansion
of our facilities, both domestic and foreign. We expect to incur 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 $2 to $4 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 approximately $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 quarterly
variability. We believe that with our current client mix, our business activity
will be at its lowest in the quarter ended March 31 and at its highest 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.
CHANGE IN FISCAL YEAR
The Company has elected to change its fiscal year from March 31 to December
31.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to various market risks including interest rates on our
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.
17
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 may also include other currencies applicable to certain of our
international operations. We may, from time to time, employ derivative financial
instruments to manage our exposure to fluctuations in foreign currency rate
risk. To hedge our net investment and long-term intercompany payable or
receivable balances in foreign operations we may 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.
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.
18
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 14, 2001, the Company held its Annual Meeting of
Stockholders. The following matters were acted upon and votes cast or
withheld:
1. Election of one Class II director:
Christopher Yates
For: 15,679,348 Withheld: 182,926
2. Approval of the amendment to the Company's 2000 Employee Stock
Purchase Plan:
For: 4,072,239 Against: 503,488 Abstained: 107,641
No-vote: 11,178,906
3. Appointment of KPMG LLP as auditors for the nine month
transition period ending December 31, 2001:
For: 15,783,616 Against: 54,676 Abstained: 23,982
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** Inventory and Working Capital Financing Agreement by
and among Business Supplies Distributors Holdings,
LLC, BSD Acquisition Corp., Priority Fulfillment
Services, Inc., PFSweb, Inc., Inventory Financing
Partners, LLC and IBM Credit Corporation
10.2** Collateralized Guaranty by and between Priority
Fulfillment Services, Inc. and IBM Credit
Corporation
10.3** Guaranty to IBM Credit Corporation by PFSweb., Inc.
10.4** Notes Payable Subordination Agreement by and between
Priority Fulfillment Services, Inc., BSD Acquisition
Corp., and IBM Credit Corporation
10.5** Stock Purchase Agreement by and among Daisytek,
Incorporated, BSD Acquisition Corp., Priority
Fulfillment Services, Inc., PFSweb, Inc. and
Priority Fulfillment Services Europe B.V.
10.6** Operating Agreement of Business Supplies
Distributors Holdings, LLC
10.7** IBM Global Financing Platinum Plan Agreement (with
Invoice Discounting) by and among Supplies
Distributors S.A., Business Supplies Distributors
Europe B.V., PFSweb B.V., and IBM Belgium Financial
Services S.A.
10.8** Collateralized Guaranty between Priority Fulfillment
Services, Inc. and IBM Belgium Financial Services
S.A.
19
10.9** Guaranty to IBM Belgium Financial Services S.A. by
PFSweb, Inc.
10.10** Subordinated Demand Note by and among BSD Acquisition
Corp. and Priority Fulfillment Service, Inc.
- --------------------
* Incorporated by reference from PFSweb, Inc. Registration Statement on
Form S-1 (Commission File No. 333-87657).
** To be filed by amendment
b) Reports on Form 8-K:
Form 8-K filed on July 13, 2001 reporting Item 8, Change in
Fiscal Year, that on June 28, 2001 PFSweb, Inc. (the
"Company") changed its fiscal year from March 31 to December
31.
20
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: November 14, 2001
PFSweb, Inc.
By: /s/ Thomas J. Madden
-------------------------------
Thomas J. Madden
Chief Financial Officer,
Chief Accounting Officer,
Executive Vice President
21
\
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NO. DESCRIPTION
------- -----------
3.1* Amended and Restated Certificate of Incorporation
3.2* Amended and Restated Bylaws
10.1** Inventory and Working Capital Financing Agreement by and
among Business Supplies Distributors Holdings, LLC, BSD
Acquisition Corp., Priority Fulfillment Services, Inc.,
PFSweb, Inc., Inventory Financing Partners, LLC and IBM
Credit Corporation
10.2** Collateralized Guaranty by and between Priority Fulfillment
Services, Inc. and IBM Credit Corporation
10.3** Guaranty to IBM Credit Corporation by PFSweb., Inc.
10.4** Notes Payable Subordination Agreement by and between
Priority Fulfillment Services, Inc., BSD Acquisition Corp.
and IBM Credit Corporation
10.5** Stock Purchase Agreement by and among Daisytek,
Incorporated, BSD Acquisition Corp., Priority Fulfillment
Services, Inc., PFSweb, Inc. and Priority Fulfillment
Services Europe B.V.
10.6** Operating Agreement of Business Supplies Distributors
Holdings, LLC
10.7** IBM Global Financing Platinum Plan Agreement (with Invoice
Discounting) by and among Supplies Distributors, S.A.,
Business Supplies Distributors Europe B.V., PFSweb B.V., and
IBM Belgium Financial Services S.A.
10.8** Collateralized Guaranty between Priority Fulfillment
Services, Inc. and IBM Belgium Financial Services S.A.
10.9** Guaranty to IBM Belgium Financial Services S.A. by PFSweb,
Inc.
10.10** Subordinated Demand Note by and among BSD Acquisition Corp.
and Priority Fulfillment Service, Inc.
</Table>
- ----------------------
* Incorporated by reference from PFSweb, Inc. Registration Statement on
Form S-1 (Commission File No. 333-87657).
** To be filed by amendment