SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 25, 2002
PFSWEB, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 000-28275 75-2837058
-------- --------- ----------
(State or other jurisdiction of (Commission File (I.R.S. Employer
incorporation) Number) Identification Number)
500 NORTH CENTRAL EXPRESSWAY
PLANO, TX 75074
---------------
(Address of principal executive offices)
(972) 881-2900
--------------
(Registrant's telephone number, including area code)
NONE
----
(Former name or former address, if changed since last report)
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On November 12, 2002, PFSweb, Inc. ("PFSweb") filed a Current
Report on Form 8-K to report its acquisition of the remaining 51%
membership interest in Business Supplies Distributors Holdings,
LLC ("Holdings") pursuant to an Assignment of Membership Interest
between Inventory Financing Partners, LLC ("IFP") and Priority
Fulfillment Services, Inc. ("PFS") dated October 25, 2002.
Pursuant to Item 7 of Form 8-K, PFSweb indicated that it would
file the financial statements of the business acquired as required
by Item 7(a) and the pro forma financial information as required
by Item 7(b) by amendment. This amendment is being filed to
provide such required financial statements.
On October 25, 2002, PFS, a wholly-owned subsidiary of PFSweb,
purchased from IFP a 51% membership interest in Holdings for a
purchase price of $331,758. Prior to the transaction, PFS owned
49% of the membership interests in Holdings, and PFS and IFP were
the only members thereof and were parties to the Holdings
Operating Agreement. As a result of the transaction, PFS owns 100%
of the membership interests in Holdings and is the sole member
thereof. The purchase price was paid in cash from PFS' cash on
hand.
As a result of the transaction, PFS controls Holdings'
wholly-owned subsidiaries, Supplies Distributors, Inc., Supplies
Distributors of Canada, Inc., Business Supplies Distributors
Europe B.V. and Supplies Distributors, S.A. (collectively,
"Supplies Distributors"). Supplies Distributors is an
international distributor of IBM printing supplies and other
products.
The transaction will be accounted for as a purchase under
Statement of Financial Accounting Standards No. 141 and will
result in the consolidation of Holdings' accounts with those of
PFS. Prior to this acquisition, PFS had accounted for its 49%
interest in Holdings using the modified equity method of
accounting.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
<Table>
<Caption>
(a) Financial Statements of Business Acquired. Page
Condensed Consolidated Financial Statements of Business
Supplies Distributors Holdings, LLC as of September 30, 2002
(unaudited) and December 31, 2001 and for the nine months
ended September 30, 2002 (unaudited) and the period from July F-1
3, 2001 (inception) to September 30, 2001 (unaudited). Notes
to Unaudited Condensed Consolidated Financial Statements.
Audited Consolidated Financial Statements of Business
Supplies Distributors Holdings, LLC as of December 31, 2001
and for the period from July 3, 2001 (inception) to December F-10
31, 2001. Notes to Audited Consolidated Financial Statements.
(b) Pro Forma Financial Information.
Unaudited Pro Forma Condensed Consolidated Financial Data
of PFSweb and Holdings as of September 30, 2002 and for the
nine months ended September 30, 2002 and the nine month period F-24
ending December 31, 2001. Notes to Unaudited Pro Forma
Condensed Consolidated Financial Data.
(c) Exhibits.
</Table>
Exhibit 2.1 * - Assignment of Membership Interest between
Inventory Financing Partners, LLC and Priority Fulfillment
Services, Inc.
* Previously filed.
BUSINESS SUPPLIES DISTRIBUTORS HOLDINGS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<Table>
<Caption>
September 30, December 31,
2002 2001
------------- ------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ....................................... $ 833 $ 578
Restricted cash ................................................. 766 --
Accounts receivable, net of allowance for doubtful
accounts of $152 and $616, as of September 30, 2002
and December 31, 2001, respectively .......................... 24,387 23,231
Inventories, net ................................................ 36,200 32,847
Inventories in-transit .......................................... 993 10,544
Other receivables ............................................... 3,723 12,364
Prepaid expenses and other current assets ....................... 1,035 683
------------- ------------
Total current assets .................................... 67,937 80,247
------------- ------------
OTHER ASSETS, net (including restricted cash of $979 and $982 at
September 30, 2002 and December 31, 2001, respectively) ....... 1,083 1,307
------------- ------------
Total assets ............................................ $ 69,020 $ 81,554
============= ============
LIABILITIES AND MEMBERS' CAPITAL
CURRENT LIABILITIES:
Current portion of long-term debt ............................... $ 35,103 $ --
Trade accounts payable .......................................... 2,506 4,205
Trade accounts payable -- related parties ....................... 1,105 2,403
Value added tax payable ......................................... -- 1,424
Marketing funds payable ......................................... 368 493
Accrued expenses ................................................ 679 717
Income taxes payable ............................................ 854 409
------------- ------------
Total current liabilities ............................... 40,615 9,651
------------- ------------
LONG-TERM DEBT, less current portion .............................. 16,790 59,038
------------- ------------
NOTE PAYABLE TO AFFILIATE ......................................... 8,800 11,655
------------- ------------
COMMITMENTS AND CONTINGENCIES
MEMBERS' CAPITAL:
Capital contributions ........................................... 1,000 1,000
Retained earnings ............................................... 1,417 401
Unrealized gain (loss) on investment ............................ 260 (85)
Accumulated other comprehensive income (loss) ................... 138 (106)
------------- ------------
Total members' capital .................................. 2,815 1,210
------------- ------------
Total liabilities and members' capital .................. $ 69,020 $ 81,554
============= ============
</Table>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-1
BUSINESS SUPPLIES DISTRIBUTORS HOLDINGS, LLC AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<Table>
<Caption>
July 3, 2001
Nine Months (Inception)
Ended through
September 30, September 30,
2002 2001
------------- -------------
NET REVENUES ..................................................... $ 163,653 $ 17,904
COST OF GOODS SOLD ............................................... 154,274 16,715
------------- -------------
Gross profit ................................................... 9,379 1,189
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(including affiliate expenses of $4,644 and $615, respectively) .. 4,975 882
------------- -------------
Income from operations ......................................... 4,404 307
INTEREST EXPENSE, net ............................................ 2,424 93
------------- -------------
Income before income taxes ..................................... 1,980 214
INCOME TAX EXPENSE ............................................... 754 62
------------- -------------
NET INCOME ....................................................... $ 1,226 $ 152
============= =============
</Table>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-2
BUSINESS SUPPLIES DISTRIBUTORS HOLDINGS, LLC AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
July 3, 2001
Nine Months (Inception)
Ended through
September 30, September 30,
2002 2001
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................... $ 1,226 $ 152
Adjustments to reconcile net income to net cash used in
operating activities:
Amortization ............................................... 72 --
Allowances for doubtful accounts ........................... (319) 114
Provision for inventory obsolescence ....................... 88 --
Changes in operating assets and liabilities, net of
effect of acquisition:
Accounts receivables ..................................... (117) (15,568)
Inventories, net ......................................... 7,657 (12,668)
Prepaid expenses and other current assets ................ 8,724 15,728
Accounts payable and accrued expenses .................... (4,335) (22,781)
------------- -------------
Net cash provided by (used in) operating
activities ............................................ 12,996 (35,023)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in acquisition of BSD Companies, net ............ -- 7,555
------------- -------------
Net cash provided by investing activities ............. -- 7,555
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions ......................................... -- 1,000
Proceeds from (payments on) debt, net ......................... (8,931) 20,503
Proceeds from (payments on) affiliate loan, net ............... (2,855) 8,800
Dividends paid ................................................ (210) --
Restricted cash ............................................... (763) --
------------- -------------
Net cash provided by (used in) financing activities ... (12,759) 30,303
------------- -------------
EFFECT OF EXCHANGE RATES ON CASH ................................ 18 25
------------- -------------
NET INCREASE IN CASH ............................................ 255 2,860
CASH AND CASH EQUIVALENTS, beginning of period .................. 578 --
------------- -------------
CASH AND CASH EQUIVALENTS, end of period ........................ $ 833 $ 2,860
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest ........................................ $ 2,096 $ 8
============= =============
Cash paid for taxes ........................................... $ 510 $ --
============= =============
</Table>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-3
BUSINESS SUPPLIES DISTRIBUTORS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. OVERVIEW AND BASIS OF PRESENTATION:
PFSweb, Inc. ("PFSweb"), Daisytek International, Inc. ("Daisytek"),
Business Supplies Distributors, Inc., (a Daisytek subsidiary -- "BSD"), and
International Business Machines Corporation ("IBM") were parties to various
Master Distributor Agreements that had various scheduled expiration dates
through September 2001. Under these agreements, BSD and its affiliates Business
Supplies Distributors Europe B.V. ("BSD Europe"), a Daisytek subsidiary, and BSD
(Canada) Inc., a Daisytek subsidiary ("BSD Canada" and together with BSD and BSD
Europe, the "BSD Companies"), acted as master distributors of various IBM and
other products. Daisytek provided financing and credit support to the BSD
Companies and PFSweb provided transaction management and fulfillment services
to the BSD Companies. On June 8, 2001, Daisytek notified PFSweb and IBM that it
did not intend to renew these agreements upon their scheduled expiration dates.
On July 3, 2001, PFSweb and Inventory Financing Partners, LLC ("IFP")
formed Business Supplies Distributors Holdings, LLC ("Holdings"), and Holdings
formed a wholly-owned subsidiary, Supplies Distributors, Inc. ("Supplies
Distributors") (see Note 6). Concurrently, Supplies Distributors formed its
wholly-owned subsidiaries Supplies Distributors of Canada, Inc. ("SDC") and
Supplies Distributors S.A. ("SDSA"), a Belgium corporation. Supplies
Distributors, SDSA, PFSweb and IBM entered into new Master Distributor
Agreements to replace the prior agreements. Under the new agreements, Supplies
Distributors and SDSA act as master distributors of various IBM products and,
pursuant to a transaction management services agreement between PFSweb and
Supplies Distributors, PFSweb provides transaction management and fulfillment
services to Supplies Distributors. On September 26, 2001, Supplies Distributors
purchased all of the stock of the BSD Companies for a purchase price of $923,000
and incurred $60,000 of acquisition costs. In conjunction with the purchase, BSD
and Supplies Distributors were merged with Supplies Distributors being the
surviving corporation. Effective December 31, 2001, BSD Canada and SDC were
amalgamated, with SDC being the surviving corporation.
All references to the "Company" include Holdings and Supplies
Distributors and its subsidiaries.
The Company, through its subsidiaries, is primarily a master
distributor of various IBM products. Supplies Distributors and SDSA have
obtained certain financing (see Note 4, 5 and 6) that allows them to fund the
working capital requirements for the sale of IBM products. Pursuant to the
transaction management services agreement between PFSweb and Supplies
Distributors, PFSweb provides to Supplies Distributors and SDSA such services as
managed web hosting and maintenance, procurement support, web-enabled customer
contact center services, customer relationship management, financial services
including billing and collection services, information management, selected
financial services and international distribution services. Additionally, IBM
and Holdings have outsourced the product demand generation to Global Marketing
Services, Inc. ("GMS"). The Company, via its arrangements with GMS and PFSweb,
sells its products in the United States, Canada and Europe.
All of the agreements between PFSweb and Holdings were made in the
context of a related party relationship and were negotiated in the overall
context of PFSweb's and Holdings' prior arrangement with IBM. Although
management generally believes that the terms of these agreements are consistent
with fair market values, there can be no assurance that the prices charged to or
by each company under these arrangements are not higher or lower than the prices
that may be charged by, or to, unaffiliated third parties for similar services.
The unaudited interim condensed consolidated financial statements as of
September 30, 2002, and for the nine months ended September 30, 2002 and the
period from July 3, 2001 (inception) to September 30, 2001, 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. In the opinion
of management and subject to the foregoing, the unaudited interim condensed
consolidated financial statements of the Company include all adjustments,
F-4
BUSINESS SUPPLIES DISTRIBUTORS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
consisting of only normal recurring adjustments, necessary for a fair
presentation of the Company's financial position as of September 30, 2002, its
results of operations and cash flows for the nine months ended September 30,
2002 and the period from July 3, 2001 (inception) to September 30, 2001. 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 or members' capital.
2. RECENTLY ISSUED ACCOUNTING PRINCIPLES:
On January 1, 2002, the Company adopted the provisions of EITF D-103
"Income Characterization of Reimbursements Received for 'Out-of-Pocket' Expenses
Incurred." The Company's billings for reimbursable expenses, such as customer
marketing programs, are deducted from cost of goods sold under the EITF. Prior
period amounts reclassified as a result of the adoption of the EITF were not
material to the Company's consolidated financial statements.
3. MEMBERS' CAPITAL:
In May 2002, the Company paid a $0.2 million dividend to IFP. Pursuant
to the terms of its credit agreements, Holdings is currently limited to annual
cash dividends of $0.6 million.
The members' capital accounts are as follows (in thousands):
<Table>
<Caption>
September 30, December 31,
2002 2001
------------- ------------
PFSweb ..................................... $ 2,109 $ 750
IFP ........................................ 706 460
------------- ------------
Total members' capital ..................... $ 2,815 $ 1,210
============= ============
</Table>
4. DEBT AND LONG-TERM DEBT:
Debt consists of the following (in thousands):
<Table>
<Caption>
September 30, December 31,
2002 2001
------------- ------------
Inventory and working capital financing agreement,
United States ......................................... $ 22,431 $ 39,292
Inventory and working capital financing agreement,
Europe ................................................ 12,477 19,746
Loan and security agreement, United States ................ 13,654 --
Factoring agreement, Europe ................................ 3,135 --
Other ...................................................... 196 --
------------- ------------
Total ...................................................... 51,893 59,038
Less current portion of long-term debt ..................... 35,103 --
------------- ------------
Long-term debt, less current portion ....................... $ 16,790 $ 59,038
============= ============
</Table>
INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT, UNITED STATES
On September 27, 2001, Supplies Distributors entered into a short-term
credit facility with IBM Credit Corporation ("IBM Credit") to finance its
distribution of IBM products in the United States. At inception, the facility
provided for a $40 million credit line and expired on January 25, 2002. Prior to
expiration, the credit line was increased to $45 million and extended through
March 25, 2002. Availability under the credit facility was subject to certain
borrowing base limitations, including eligible receivables and inventory, as
F-5
BUSINESS SUPPLIES DISTRIBUTORS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
defined. Supplies Distributors entered into a Blocked Account Agreement with its
bank and IBM Credit whereby a security interest was granted to IBM Credit for
all customer remittances received in specified bank accounts. At December 31,
2001, these bank accounts held $1.0 million, which was restricted for payment to
IBM Credit. Borrowings under the credit facility accrued interest, after a
defined free financing period, at prime rate plus 1%, which was 6.0% as of
December 31, 2001. Supplies Distributors paid a quarterly commitment fee of
0.375% on the unused portion of the commitment, and a monthly service fee. On
March 29, 2002, Supplies Distributors entered into an amended credit facility
with IBM Credit. The asset based credit facility provides financing for
purchasing IBM inventory up to $27.5 million through its expiration on March 29,
2003. The credit facility contains cross default provisions, various
restrictions upon the ability of Holdings and Supplies Distributors to, among
others, merge, consolidate, sell assets, incur indebtedness, make loans and
payments to related parties, provide guarantees, make investments and loans,
pledge assets, make changes to capital stock ownership structure and pay
dividends; as well as financial covenants, such as annualized revenue to working
capital, net profit after tax to revenue, and total liabilities to tangible net
worth, as defined, and are secured by all of the assets of Supplies
Distributors, as well as collateralized guaranties of Holdings and PFSweb.
Additionally, PFSweb is required to maintain a minimum subordinated receivable
balance from Supplies Distributors and a minimum shareholders' equity (see Note
6).
INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT, EUROPE
On September 27, 2001, SDSA entered into a short-term credit facility
with IBM Belgium Financial Services S.A. ("IBM Belgium") to finance its
distribution of IBM products in Europe. At inception, the facility provided for
a 20 million euro credit line (approximately $19.6 million) and expired on
January 25, 2002. Prior to expiration, the credit line was increased to 27
million euros (approximately $26.5 million) and extended through March 25, 2002.
Availability under the credit facility was subject to certain borrowing base
limitations, including eligible receivables and inventory, as defined. SDSA
entered into a Blocked Account Agreement with its bank and IBM Belgium whereby a
security interest was granted to IBM Belgium for all customer remittances
received in specified bank accounts. Borrowings under the credit facility
accrued interest, after a defined free financing period, at euribor plus 4%,
which was 7.425% as of December 31, 2001. SDSA paid a monthly service fee on the
commitment. On March 29, 2002, SDSA and BSD Europe entered into an amended
credit facility with IBM Belgium. The asset based credit facility with IBM
Belgium provides up to 22 million Euros (approximately $21.6 million) in
financing for purchasing IBM inventory. The IBM Belgium facility remain in force
until not less than 60 days written notice by any party, but no sooner than
March 29, 2003. The credit facility contains cross default provisions, various
restrictions upon the ability of Holdings and Supplies Distributors to, among
others, merge, consolidate, sell assets, incur indebtedness, make loans and
payments to related parties, provide guarantees, make investments and loans,
pledge assets, make changes to capital stock ownership structure and pay
dividends; as well as financial covenants, such as annualized revenue to working
capital, net profit after tax to revenue, and total liabilities to tangible net
worth, as defined, and are secured by all of the assets of Supplies
Distributors, as well as collateralized guaranties of Holdings and PFSweb.
Additionally, PFSweb is required to maintain a minimum subordinated receivable
balance from Supplies Distributors and a minimum shareholders' equity (see Note
6).
LOAN AND SECURITY AGREEMENT
On March 29, 2002, Supplies Distributors entered into a loan and
security agreement with Congress Financial Corporation (Southwest) ("Congress")
to provide financing for up to $25 million of eligible accounts receivables in
the U.S. and Canada. The Congress facility expires on the earlier of three years
or the date on which the parties to the IBM Master Distributor Agreement shall
no longer operate under the terms of such agreement and/or IBM no longer
supplies products pursuant to such agreement (see Note 6). Borrowings under the
Congress facility accrue interest at prime rate plus 0.25% or Eurodollar rate
plus 3.0% or on an adjusted basis, as defined. This agreement contains cross
default provisions, various restrictions upon the ability of Holdings and
Supplies Distributors to, among other things, merge, consolidate, sell assets,
incur indebtedness, make loans and payments to related parties, provide
guarantees,
F-6
BUSINESS SUPPLIES DISTRIBUTORS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
make investments and loans, pledge assets, make changes to capital stock
ownership structure and pay dividends, as well as financial covenants, such as
minimum net worth, as defined, and are secured by all of the assets of Supplies
Distributors, as well as collateralized guaranties of Holdings and PFSweb.
Additionally, PFSweb is required to maintain a subordinated loan to Supplies
Distributors of no less than $6.5 million and restricted cash of less than $5.0
million, and is restricted with regard to transactions with related parties,
indebtedness and changes to capital stock ownership structure. Supplies
Distributors and SDC entered into Blocked Account Agreements with their banks
and Congress whereby a security interest was granted to Congress for all
customer remittances received in specified bank accounts. At September 30, 2002,
these bank accounts held $1.0 million, which was restricted for payment to
Congress.
FACTORING AGREEMENT
On March 29, 2002, SDSA entered into a two year factoring agreement
with Fortis Commercial Finance N.V. ("Fortis") to provide factoring for up to
7.5 million euros (approximately $7.4 million) (previously 10 million euros, see
Note 6) of eligible accounts receivables. Borrowings under this agreement accrue
interest at 8.5%, or on an adjusted basis as defined. This agreement contains
various restrictions upon the ability of SDSA to, among other things, merge,
consolidate, incur indebtedness, as well as financial covenants, such as minimum
net worth. This agreement is secured by a guarantee of Supplies Distributors, up
to a maximum of 200,000 euros.
GUARANTEES
PFSweb has provided collateralized guarantees to secure the repayment
of all of the Company's credit facilities. As of September 30, 2002 the
outstanding balance of the credit facilities guaranteed by PFSweb was
approximately $48.8 million. These guarantees expire concurrently with the
expiration of the underlying credit agreements. To the extent Supplies
Distributors fails to comply with its covenants, including its monthly financial
covenant requirements, and the lenders accelerate the repayment of the credit
facility obligations, Supplies Distributors would be required to repay all
amounts outstanding thereunder. In such event, PFSweb would be obligated to
perform under those guarantees and repay, to the extent Supplies Distributors
was unable to, Supplies Distributors' credit facility obligations. Additionally,
if PFSweb was unable to maintain PFSweb's required level of stockholders' equity
(see Note 6), PFSweb could also be obligated to perform under these guarantees.
Any requirement to perform under PFSweb's guarantees would have a material
adverse impact on PFSweb's financial condition and results of operations and no
assurance can be given that PFSweb will have the financial ability to repay all
of such guaranteed obligations. Furthermore, PFSweb is obligated to repay any
over-advance made to Supplies Distributors by its lenders, in the event Supplies
Distributors is unable to do so. An over-advance would arise in the event
borrowings exceeded the maximum amount available under the eligible borrowing
base, as defined.
PFSweb has also provided a guarantee of the obligations of Supplies
Distributors and SDSA to IBM, excluding the trade payables that are financed by
IBM credit.
5. TRANSACTIONS WITH RELATED PARTIES:
In August 2001, Supplies Distributors entered into an Agreement for
Sales Forces Services ("ASFS") with IBM, whereby Supplies Distributors is to
actively generate demand for and promote brand loyalty for IBM products. The
ASFS expires on the earlier of December 31, 2003 or the termination of the
Master Distributor Agreements. The ASFS automatically renews for successive
one-year periods unless either party provides prior written notice. Pursuant to
the ASFS, IBM pays to Supplies Distributors a quarterly service fee as agreed to
by both parties. Supplies Distributors has subcontracted with GMS to provide the
sales force activities for an amount equal to the fees received by Supplies
Distributors. The principal officer of GMS owned 46% of IFP (see Note 6). As of
September 30, 2002 and December 31, 2001, Supplies Distributors had $0.4 million
and $1.1 million, respectively, due from IBM under the terms of the ASFS
included in accounts receivable and approximately $0.4 million and $1.5 million,
respectively, of unpaid service fees due to GMS.
F-7
BUSINESS SUPPLIES DISTRIBUTORS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In August 2001, PFSweb and Supplies Distributors entered into
Transaction Management Services Agreements ("TMSA") whereby PFSweb provides
transaction management and fulfillment services to Supplies Distributors. Under
terms of the TMSA, PFSweb is required to conduct its services within certain
performance levels, as defined, and is liable to indemnify Supplies Distributors
for inventory losses, as defined. The TMSA has terms corresponding with the
Master Distributor Agreements among Supplies Distributors, SDSA, PFSweb, and
IBM, whereby Supplies Distributors and SDSA act as master distributors of
various IBM products. The Master Distributor Agreements expire in August 2003
and can be extended for additional one year term upon mutual agreement by all
parties.
Under the terms of the TMSA, PFSweb charges Supplies Distributors for
its services based on a percentage of Supplies Distributors' shipped revenue.
Percentages vary by geographic location and by the amount of shipped revenue.
Dependent on changes in the type and levels of transactions, percentages charged
by PFSweb can be amended by mutual consent of PFSweb and Supplies Distributors.
Pursuant to the TMSA, Supplies Distributors incurred service expenses, reported
as selling, general and administrative expenses in the accompanying consolidated
financial statement, of approximately $4.6 million and $0.6 million to PFSweb
for the nine months ended September 30, 2002 and the period from July 3, 2001
(inception) to September 30, 2001, respectively. As of September 30, 2002 and
December 31, 2001, the Company owes PFSweb $0.7 million and $0.9 million,
respectively.
In September 2001, Supplies Distributors issued a Subordinated Demand
Note (the "Note") to PFSweb in exchange for proceeds of $8.8 million. The
balance of the Note can be increased by PFSweb, at its discretion or as required
to meet the senior financial obligations of the Company, as needed. As of
September 30, 2002 and December 31, 2001, the Note had an outstanding balance of
$8.8 million and $11.7 million, respectively, which is classified as note
payable to affiliate. The Note can be decreased to $8.0 million (previously $6.5
million, see Note 6) subject to Supplies Distributors' compliance with the
covenants of its senior loan facilities, as amended. The Note accrues interest
at a fluctuating rate per annum equal to PFSweb's cost of funds as determined by
PFSweb, approximately 10% as of September 30, 2002 and December 31, 2001. During
the nine months ended September 30, 2002, Supplies Distributors recorded $0.8
million of interest associated with the amount due to PFSweb.
PFSweb issued 12,500 and 21,000 stock options to Supplies Distributors'
President in December 2001 and January 2002, respectively. These options were
immediately vested and have an exercise price of $0.91 and $0.84, respectively.
6. SUBSEQUENT EVENTS:
Effective October 1, 2002, PFSweb purchased the remaining 51% interest
in Holdings from IFP for $0.3 million. As a result of the purchase, in the
future PFSweb will consolidate 100% of Holdings' financial position and results
of operations into PFSweb's consolidated financial statements.
In November 2002 the Company amended its credit facilities with IBM
Credit. The amendments modify certain financial covenants, such as annualized
revenue to working capital and total liabilities to tangible net worth, as
defined. The amendments also increase PFSweb's minimum required subordinated
loan to Supplies Distributors to $8.0 million and reduce PFSweb's minimum
shareholders' equity amount to $24.0 million as of September 30, 2002, $20.0
million for the period from October through December 2002, and $18.0 million for
the period from January through March 2003. Also, in November 2002, SDSA
modified its factoring agreement with Fortis to reduce the maximum factoring
amount from 10 million euros to 7.5 million euros (approximately $7.4 million).
Effective December 1, 2002, Supplies Distributors, SDSA, PFSweb and IBM
amended their Master Distributor Agreements whereby Supplies Distributors and
SDSA act as master distributors of various IBM
F-8
BUSINESS SUPPLIES DISTRIBUTORS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
products. The amendments extend the Master Distributor Agreements until March
31, 2004, and can be extended for additional one year terms upon mutual
agreement by all parties.
F-9
INDEPENDENT AUDITORS' REPORT
To the Members of
Business Supplies Distributors Holdings, LLC:
We have audited the accompanying consolidated balance sheet of Business
Supplies Distributors Holdings, LLC and subsidiaries as of December 31, 2001,
and the related consolidated statements of operations, members' capital and
comprehensive income, and cash flows for the period from July 3, 2001
(inception) to December 31, 2001. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Business
Supplies Distributors Holdings, LLC and subsidiaries as of December 31, 2001,
and the results of their operations and their cash flows for the period from
July 3, 2001 (inception) to December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
Dallas, Texas
March 29, 2002
F-10
BUSINESS SUPPLIES DISTRIBUTORS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2001
(IN THOUSANDS)
<Table>
<Caption>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................ $ 578
Accounts receivable, net of allowance for doubtful
accounts of $616 ...................................... 23,231
Inventories, net ......................................... 32,847
Inventories in-transit ................................... 10,544
Other receivables ........................................ 12,364
Prepaid expenses and other current assets ................ 683
----------
Total current assets ............................. 80,247
----------
OTHER ASSETS, net (including restricted cash of $982) ...... 1,307
----------
Total assets ..................................... $ 81,554
==========
LIABILITIES AND MEMBERS' CAPITAL
CURRENT LIABILITIES:
Trade accounts payable ................................... $ 4,205
Trade accounts payable -- related parties (Note 7) ....... 2,403
Value added tax payable .................................. 1,424
Marketing funds payable .................................. 493
Accrued expenses ......................................... 717
Income taxes payable ..................................... 409
----------
Total current liabilities ........................ 9,651
----------
LONG-TERM DEBT (Note 6) .................................... 59,038
----------
NOTE PAYABLE TO AFFILIATE .................................. 11,655
----------
COMMITMENTS AND CONTINGENCIES
MEMBERS' CAPITAL:
Capital contributions .................................... 1,000
Retained earnings ........................................ 401
Unrealized loss on investment ............................ (85)
Accumulated other comprehensive loss ..................... (106)
----------
Total members' capital ........................... 1,210
----------
Total liabilities and members' capital ........... $ 81,554
==========
</Table>
The accompanying notes are an integral part of
these consolidated financial statements
F-11
BUSINESS SUPPLIES DISTRIBUTORS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS FOR
THE PERIOD FROM JULY 3, 2001 (INCEPTION) THROUGH DECEMBER 31, 2001
(IN THOUSANDS)
<Table>
NET REVENUES....................................................... $ 75,444
COST OF GOODS SOLD................................................. 71,870
---------
Gross profit..................................................... 3,574
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(including affiliate expenses of $1,384, Note 7)................... 2,098
---------
Income from operations........................................... 1,476
INTEREST EXPENSE, net.............................................. 803
---------
Income before income taxes....................................... 673
INCOME TAX EXPENSE................................................. 272
---------
NET INCOME......................................................... $ 401
=========
</Table>
The accompanying notes are an integral part of
these consolidated financial statements.
F-12
BUSINESS SUPPLIES DISTRIBUTORS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF MEMBERS' CAPITAL AND COMPREHENSIVE INCOME
FOR THE PERIOD FROM JULY 3, 2001 (INCEPTION) THROUGH DECEMBER 31, 2001
(IN THOUSANDS)
<Table>
<Caption>
ACCUMULATED
MEMBERS' UNREALIZED OTHER TOTAL
CAPITAL RETAINED LOSS ON COMPREHENSIVE MEMBERS' COMPREHENSIVE
CONTRIBUTIONS EARNINGS INVESTMENT LOSS CAPITAL INCOME
------------- -------- ---------- ------------- -------- -------------
Balance, at inception..... $ -- $ -- $ -- $ -- $ --
Net income.............. -- 401 -- 401 $ 401
Capital contributions... 1,000 -- -- 1,000 --
Unrealized loss on
investment........... -- -- (85) -- (85) (85)
Other comprehensive
loss -- foreign
currency translation
adjustment........... -- -- -- (106) (106) (106)
------- ----- ----- ------ ------ ------
Comprehensive income...... $ 210
======
Balance, December 31, 2001 $ 1,000 $ 401 $ (85) $ (106) $1,210
======= ===== ===== ====== ======
</Table>
The accompanying notes are an integral part of
these consolidated financial statements.
F-13
BUSINESS SUPPLIES DISTRIBUTORS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JULY 3, 2001 (INCEPTION) THROUGH DECEMBER 31, 2001
(IN THOUSANDS)
<Table>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................... $ 401
Adjustments to reconcile net income to net cash used in
operating activities:
Amortization................................................ 51
Provision for doubtful accounts............................. 353
Provision for inventory obsolescence........................ 13
Deferred income taxes....................................... (300)
Changes in operating assets and liabilities, net of
effect of acquisition:
Accounts receivables...................................... (20,480)
Inventories, net.......................................... (30,154)
Prepaid expenses and other current assets................. (7,229)
Accounts payable and accrued expenses..................... (20,625)
----------
Net cash used in operating activities.................. (77,970)
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in acquisition of BSD Companies, net (Note 3).... 7,555
----------
Net cash provided by investing activities.............. 7,555
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions.......................................... 1,000
Proceeds from debt............................................. 59,352
Proceeds from affiliate loan................................... 11,655
Restricted cash................................................ (982)
----------
Net cash provided by financing activities.............. 71,025
----------
EFFECT OF EXCHANGE RATES ON CASH................................. (32)
----------
NET INCREASE IN CASH............................................. 578
CASH AND CASH EQUIVALENTS, beginning of period................... --
----------
CASH AND CASH EQUIVALENTS, end of period......................... $ 578
==========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest......................................... $ 463
==========
Cash paid for taxes............................................ $ --
==========
</Table>
The accompanying notes are an integral part of
these consolidated financial statements.
F-14
BUSINESS SUPPLIES DISTRIBUTORS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OVERVIEW AND BASIS OF PRESENTATION:
PFSweb, Inc. ("PFS"), Daisytek International, Inc. ("Daisytek"),
Business Supplies Distributors, Inc., (a Daisytek subsidiary -- "BSD"), and
International Business Machines Corporation ("IBM") were parties to various
Master Distributor Agreements that had various scheduled expiration dates
through September 2001. Under these agreements, BSD and its affiliates Business
Supplies Distributors Europe B.V. ("BSD Europe"), a Daisytek subsidiary, and BSD
(Canada) Inc., a Daisytek subsidiary ("BSD Canada" and together with BSD and BSD
Europe, the "BSD Companies"), acted as master distributors of various IBM and
other products. Daisytek provided financing and credit support to the BSD
Companies and PFS provided transaction management and fulfillment services to
the BSD Companies. On June 8, 2001, Daisytek notified PFS and IBM that it did
not intend to renew these agreements upon their scheduled expiration dates.
On July 3, 2001, PFS and Inventory Financing Partners, LLC ("IFP")
formed Business Supplies Distributors Holdings, LLC ("Holdings"), and Holdings
formed a wholly-owned subsidiary, Supplies Distributors, Inc. ("Supplies
Distributors"). Concurrently, Supplies Distributors formed its wholly-owned
subsidiaries Supplies Distributors of Canada, Inc. ("SDC") and Supplies
Distributors S.A. ("SDSA"), a Belgium corporation. Supplies Distributors, SDSA,
PFS and IBM entered into new Master Distributor Agreements to replace the prior
agreements (see Note 4). Under the new agreements, Supplies Distributors and
SDSA act as master distributors of various IBM products and, pursuant to a
transaction management services agreement between PFS and Supplies Distributors,
PFS provides transaction management and fulfillment services to Supplies
Distributors. On September 26, 2001, Supplies Distributors purchased all of the
stock of the BSD Companies for a purchase price of $923,000 and incurred $60,000
of acquisition costs. In conjunction with the purchase, BSD and Supplies
Distributors were merged with Supplies Distributors being the surviving
corporation. Effective December 31, 2001, BSD Canada and SDC were amalgamated,
with SDC being the surviving corporation.
All references to the "Company" include Holdings and Supplies
Distributors and its subsidiaries.
The Company, through its subsidiaries, is primarily a master
distributor of various IBM products. Supplies Distributors and SDSA have
obtained certain financing (see Note 6 and 7) that allows them to fund the
working capital requirements for the sale of IBM products. Pursuant to the
transaction management services agreement between PFS and Supplies Distributors,
PFS provides to Supplies Distributors and SOSA such services as managed website
hosting and maintenance, procurement support, web-enabled customer contact
center services, customer relationship management, financial services including
billing and collection services, information management, selected financial
services and international distribution services. Additionally, IBM and Holdings
have outsourced its product demand generation to Global Marketing Services, Inc.
("GMS"). The Company, via its arrangements with GMS and PFS, sells its products
in the United States, Canada and Europe.
All of the agreements between PFS and Holdings were made in the
context of a related party relationship and were negotiated in the overall
context of PFS' and Holdings prior arrangement with IBM. Although management
generally believes that the terms of these agreements are consistent with fair
market values, there can be no assurance that the prices charged to or by each
company under these arrangements are not higher or lower than the prices that
may be charged by, or to, unaffiliated third parties for similar services.
2. SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
F-15
BUSINESS SUPPLIES DISTRIBUTORS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.
REVENUE AND COST RECOGNITION
The Company recognizes revenue upon shipment of product to customers
and collectibility is reasonably assured. Collectibility is evaluated on an
individual customer basis taking into consideration historical payment trends,
current financial position, results of independent credit evaluations and
payment terms. The Company permits its customers to return defective products
(which are then returned by the Company to the manufacturer) and incorrect
shipments for credit against other purchases and provides for estimated returns
and allowances. The Company offers terms to its customers that it believes are
standard for its industry.
Freight costs billed to customers are reflected as components of net
revenues. Freight costs incurred by the Company are recorded as a component of
cost of good sold. The Company records its costs as they are incurred by the
Company or its service providers.
CONCENTRATION OF BUSINESS AND CREDIT RISK
In conjunction with Supplies Distributors' financing, PFS provided
certain collaterized guarantees on behalf of Supplies Distributors. Supplies
Distributors' ability to obtain financing on similar terms would be
significantly impacted without these guarantees. Additionally, since Holdings
has limited personnel and physical resources, its ability to conduct business
could be materially impacted by contract terminations by either PFS or GMS.
All of the Company's revenue was generated by sales of product
purchased under master distributor agreements with one supplier. Sales to two
customers accounted for approximately 25% of the Company's total revenues. No
other client accounted for 10% or more of the Company's revenue. As of December
31, 2001, two customers accounted for over 37% of trade accounts receivable on
an aggregate basis.
CASH AND CASH EQUIVALENTS
Cash equivalents are defined as short-term highly liquid investments
with original maturities of three months or less.
INVENTORIES
Inventories (merchandise, held for resale, all of which are finished
goods) are stated at the lower of weighted average cost or market. As of
December 31, 2001, the Company's allowance for obsolete inventory is
approximately $13,000.
INVENTORIES IN-TRANSIT
Inventories in-transit represents merchandise that has not been
received by the Company but that has been shipped and invoiced by the Company's
vendors. The corresponding payable for inventories in-transit is included in
long-term debt in the accompanying consolidated financial statements.
F-16
BUSINESS SUPPLIES DISTRIBUTORS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OTHER RECEIVABLES
Other receivables represent $7.1 million of Value Added Tax ("VAT")
amounts due from European governments for refundable VAT payments made in the
ordinary course of business and $5.2 million of amounts due from IBM under the
Master Distributor Agreements (see Note 4).
OTHER ASSETS
Other assets includes restricted cash of $1.0 million, which represents
customer remittances received in Holdings' bank accounts that are payable to
certain of the Company's lenders, and the value attributable to the Master
Distributor Agreements of $0.4 million. This indentifiable intangible asset is
being amortized on a straight-line basis over the terms of the Master
Distributor Agreements which are two years. The Company assesses the
recoverability of this intangible asset by determining whether the amortization
of the remaining balance over its remaining life can be recovered through
undiscounted future operating cash flows of the associated contracts.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
For the Company's Canadian and European operations, the local currency
is the functional currency. All assets and liabilities are translated at
exchange rates in effect at the end of the period, and income and expense items
are translated at the average exchange rates for the period. Translation
adjustments are reported as a separate component of members' equity.
Gains or losses on intercompany foreign currency transactions that are
of a long-term investment nature are also reported as a separate component of
members' capital.
INCOME TAXES
Although Holdings is an LLC, it has elected to be taxed, for federal
income tax purposes, as a C corporation. Accordingly, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments, which include cash and
cash equivalents, accounts receivable, accounts payable and debt, approximate
their fair values based on short terms to maturity or current market prices and
rates.
COMPREHENSIVE INCOME
Comprehensive income represents the change in members' capital
available for distribution to the partners pursuant to the Operating Agreements
(see Note 5). Comprehensive income consists of net income, foreign currency
translation adjustments and the loss associated with long-term intercompany
foreign currency transactions.
F-17
BUSINESS SUPPLIES DISTRIBUTORS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITION OF THE BSD COMPANIES:
The following table summarizes the estimated fair value of the assets
acquired and liabilities assumed as of September 26, 2001, the acquisition date
of the BSD Companies (unaudited, in thousands):
<Table>
Cash................................................... $ 8,538
Accounts receivable, net............................... 3,230
Receivable from Daisytek............................... 5,715
Receivable from Supplies Distributors.................. 5,877
Other receivables...................................... 6,022
Inventories, net....................................... 13,516
Other assets -- identifiable intangible (see Note 2)... 378
---------
Total assets acquired.................................. 43,276
---------
Trade accounts payable................................. 40,557
Accrued expenses....................................... 1,679
Other current liabilities.............................. 57
---------
Total liabilities assumed.............................. 42,293
---------
Net assets acquired.................................... $ 983
=========
</Table>
The receivable from Daisytek was repaid concurrently with the
acquisition. The results of the BSD Companies' operations have been included in
the consolidated financial statements since the acquisition date. For the period
from inception through December 31, 2001, the Company recorded approximately
$51,000 of amortization expense associated with the identifiable intangible.
Pro forma revenues and pro forma income from operations for the period
from inception through December 31, 2001, assuming the transaction had occurred
on July 3, 2001, would have been $90.6 million and $2.1 million, respectively.
Because of the negative impact to revenue as a result of the transition of the
master distributor agreements from Daisytek to Supplies Distributors, the pro
forma adjustments to the operating results of the business may not be indicative
of future results.
4. MASTER DISTRIBUTOR AGREEMENTS:
In August 2001, Supplies Distributors, SDSA, PFS and IBM entered into
Master Distributor Agreements whereby Supplies Distributors and SDSA act as
master distributors of various IBM products and PFS provides transaction
management and fulfillment services to Supplies Distributors. The Master
Distributor Agreements expire in August 2003 and can be extended for additional
one year terms upon mutual agreement by all parties. Under the Master
Distributor Agreements, IBM reimburses Supplies Distributors for certain freight
costs, direct costs incurred in passing on any price decreases offered by IBM to
Supplies Distributors customers to cover price protection and certain special
bids, the cost of products provided to replace defective product returned by
customers and other certain expenses as defined. Supplies Distributors can
return to IBM product rendered obsolete by IBM engineering changes after
customer demand ends. IBM determines when a product is obsolete. IBM and SDSA
also have verbal agreements under which IBM reimburses or collects from SDSA
amounts calculated in certain inventory cost adjustments, amounts applicable to
currency related inventory cost variances, and amounts applicable to favorable
or unfavorable gross margin performance versus targeted objectives.
Supplies Distributors and SDSA pass through to customers marketing
programs specified by IBM and administer, along with GMS, such programs
according to IBM guidelines.
5. MEMBERS' CAPITAL:
PFS 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. Certain officers and directors of PFS own,
individually, a 9.8% non-voting interest, and, collectively, a 49% non-voting
interest, in IFP. The contributions do not accrue interest. No member, solely by
reason of being a member, has any obligation to make any additional capital
contribution or loan to Holdings or guaranty any indebtedness or obligation of
Holdings. (See Note 6)
F-18
BUSINESS SUPPLIES DISTRIBUTORS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Holdings' comprehensive income is allocated and distributed to the
members pursuant to the terms of the operating agreement, which expires on
December 31, 2050. Pursuant to the operating agreement, Holdings allocates its
earning and distributes its cash flow, as defined, in the following order of
priority:
o to IFP until it has received a one-time amount equal to its capital
contribution of $0.25 million;
o to IFP until it has received an amount equal to a 35% cumulative
annual return on its capital contribution;
o to PFS until it has received a one-time amount equal to its capital
contribution of $0.75 million;
o to PFS until it has received an amount equal to a 35% cumulative
annual return on its capital contribution; and
o to PFS and IFP, pro rata, in accordance with their respective
capital accounts.
Notwithstanding the foregoing, no distribution may be made if, after giving
effect thereto, the net worth of Holdings shall be less than $1.0 million.
Pursuant to the terms of its credit agreements, Holdings is currently limited to
annual cash dividends of $0.6 million.
Following the earnings allocation priority, the members' capital
accounts as of December 31, 2001 are as follows:
<Table>
PFS...................... $ 750
IFP...................... 460
--------
Total members' capital... $ 1,210
========
</Table>
In the event of liquidations, distributions will be made in accordance
with the operating agreement. The distribution will be made based upon members'
capital as determined on a basis in a manner similar to the comprehensive income
and cash flow distributions described above.
6. LONG-TERM DEBT:
As of December 31, 2001, debt consists of the following (in thousands):
<Table>
Inventory and working capital financing agreement, United
States........................................................ $ 39,292
Inventory and working capital financing agreement, Europe....... 19,746
---------
Total debt...................................................... $ 59,038
=========
</Table>
INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT, UNITED STATES
On September 27, 2001, Supplies Distributors entered into a short-term
credit facility with IBM Credit Corporation ("IBM Credit") to finance its
distribution of IBM products in the United States. At inception, the facility
provided for a $40 million credit line and expired on January 25, 2002. Prior to
expiration, the credit line was increased to $45 million and extended through
March 25, 2002. Availability under the credit facility was subject to certain
borrowing base limitations, including eligible receivables and inventory, as
defined. Borrowings under the credit facility accrued interest, after a defined
free financing period, at prime rate plus 1%, which was 6.0% as of December 31,
2001. Supplies Distributors paid a quarterly commitment fee of 0.375% on the
unused portion of the commitment, and a monthly service fee. The credit facility
contained cross default provisions and various monthly financial covenant
compliance requirements for Supplies Distributors and Holdings based on (i)
annualized revenue to working capital, (ii) net profit after tax to revenue, and
(iii) total liabilities to tangible net worth, as defined. In general, these
covenants required minimum levels of net income and capitalization.
Additionally, PFS was required to maintain shareholders' equity of at least $30
million. The credit facility also contained restrictions on certain activities,
including loans and payments to related parties, incurring additional debt,
acquisitions, investments, dividends and asset sales. The credit facility was
secured by a security interest in Supplies Distributors' assets, including
accounts receivable and inventory and 65% of the stock of SDC, and was
F-19
BUSINESS SUPPLIES DISTRIBUTORS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
guaranteed by PFS and Holdings. Supplies Distributors entered into a Blocked
Account Agreement with its bank and IBM Credit whereby a security interest was
granted to IBM Credit for all customer remittances received in specified bank
accounts. At December 31, 2001, these bank accounts held $1.0 million, which was
restricted for payment to IBM Credit.
INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT, EUROPE
On September 27, 2001, SDSA entered into a short-term credit facility
with IBM Belgium Financial Services S.A. ("IBM Belgium") to finance its
distribution of IBM products in Europe. At inception, the facility provided for
a 20 million euro credit line (approximately $18 million) and expired on January
25, 2002. Prior to expiration, the credit line was increased to 27 million euros
(approximately $24.3 million) and extended through March 25, 2002. Availability
under the credit facility was subject to certain borrowing base limitations,
including eligible receivables and inventory, as defined. Borrowings under the
credit facility accrued interest, after a defined free financing period, at
euribor plus 4%, which was 7.425% as of December 31, 2001. SDSA paid a monthly
service fee on the commitment. The credit facility contained cross default
provisions and various monthly financial covenant compliance requirements for
SDSA based on (i) annualized revenue to working capital, (ii) net profit after
tax to revenue, and (iii) total liabilities to tangible net worth, as defined.
In general, these covenants required minimum levels of net income and
capitalization. Additionally, PFS was required to have shareholders' equity of
at least $30 million. The credit facility also contained restrictions on certain
activities, including acquisitions, liquidations, dividends, asset sales and
payments on SDSA's intercompany debt with Supplies Distributors. The credit
facility was secured by a security interest in all of SDSA's assets, including
accounts receivable, bank accounts, inventory and 65% of the stock of SDSA and
BSD Europe and was guaranteed by Holdings, Supplies Distributors and PFS. SDSA
entered into a Blocked Account Agreement with its bank and IBM Belgium whereby a
security interest was granted to IBM Belgium for all customer remittances
received in specified bank accounts.
AMENDED AGREEMENTS
On March 29, 2002, Supplies Distributors entered into amended credit
facilities with IBM Credit and SDSA and BSD Europe entered into amended credit
facilities with IBM Belgium. The asset based credit facility with IBM Credit
provides financing for purchasing IBM inventory up to $32.5 million through June
30, 2002 and $27.5 million from July 1, 2002 through its expiration on March 29,
2003. The asset based credit facility with IBM Belgium provides up to 27 million
Euros (approximately $24.3 million) in financing for purchasing IBM inventory
through June 30, 2002 and 22 million Euros (approximately $19.8 million)
thereafter. The IBM Belgium facility remains in force until not less than 60
days written notice by any party, but no sooner than March 29, 2003. These
credit facilities contain cross default provisions, various restrictions upon
the ability of Holdings, Supplies Distributors, SDSA and BSD Europe to, among
others, merge, consolidate, sell assets, incur indebtedness, make loans and
payments to related parties, provide guarantees, make investments and loans,
pledge assets, make changes to capital stock ownership structure and pay
dividends, as well as financial covenants, such as annualized revenue to working
capital, net profit after tax to revenue, and total liabilities to tangible net
worth, as defined, and are secured by all of the assets of Supplies
Distributors, as well as collateralized guaranties of Holdings and PFS.
Additionally, PFS is required to maintain a subordinated receivable balance of
no less than $6.5 million from Supplies Distributors, and shareholders' equity
of at least $25.0 million.
LOAN AND SECURITY AND FACTORING AGREEMENT
Concurrent with these amended agreements, Supplies Distributors entered
into a loan and security agreement with Congress Financial Corporation
(Southwest) ("Congress") to provide financing for up to $25 million of eligible
accounts receivables in the U.S. and Canada. The Congress facility expires on
the earlier of three years or the date on which the parties to the IBM Master
Distributor Agreement shall no longer operate under the terms of such agreement
and/or IBM no longer supplies products pursuant to such agreement. Borrowings
under the Congress facility accrue interest at prime rate plus 0.25% or
Eurodollar
F-20
BUSINESS SUPPLIES DISTRIBUTORS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
rate plus 3.0% or on an adjusted basis, as defined. In Europe, SDSA entered into
a two year factoring agreement with Fortis Commercial Finance N.V. ("Fortis") to
provide factoring for up to 10 million Euros (approximately $9 million) of
eligible accounts receivables. Borrowings under this agreement accrue interest
at 8.5%, or on an adjusted basis as defined. These credit facilities contain
cross default provisions, various restrictions upon the ability of Holdings,
Supplies Distributors and SDSA to, among other things, merge, consolidate, sell
assets, incur indebtedness, make loans and payments to related parties, provide
guarantees, make investments and loans, pledge assets, make changes to capital
stock ownership structure and pay dividends, as well as financial covenants,
such as minimum net worth, as defined, and are secured by all of the assets of
Supplies Distributors, as well as collateralized guaranties of Holdings and PFS.
Additionally, PFS is required to maintain a subordinated loan to Supplies
Distributors of no less than $6.5 million and restricted cash of less than $5.0
million, and is restricted with regard to transactions with related parties,
indebtedness and changes to capital stock ownership structure.
GUARANTEES
PFS has provided collateralized guarantees to secure the repayment of
all of the Company's credit facilities. As of December 31, 2001 the outstanding
balance of the credit facilities guaranteed by PFS was approximately $59.0
million. In association with the new credit facilities entered into on March 29,
2002, the outstanding balance of the credit facilities guaranteed by PFS was
approximately $48.5 million. These guarantees expire concurrently with the
expiration of the underlying credit agreements. To the extent Supplies
Distributors fails to comply with its covenants, including its monthly financial
covenant requirements, and the lenders accelerate the repayment of the credit
facility obligations, Supplies Distributors would be required to repay all
amounts outstanding thereunder. In such event, PFS would be obligated to perform
under those guarantees and repay, to the extent Supplies Distributors was unable
to, Supplies Distributors' credit facility obligations. Additionally, if PFS was
unable to maintain PFS' required level of stockholders' equity of $25.0 million,
PFS could also be obligated to perform under these guarantees. Any requirement
to perform under PFS' guarantees would have a material adverse impact on PFS'
financial condition and results of operations and no assurance can be given that
PFS will have the financial ability to repay all of such guaranteed obligations.
Furthermore, PFS is obligated to repay any over-advance made to Supplies
Distributors by its lenders. An over-advance would arise in the event borrowings
exceeded the maximum amount available under the eligible borrowing base, as
defined.
PFS has also provided a guarantee of the obligations of Supplies
Distributors and SDSA to IBM, excluding the trade payables that are financed by
IBM credit.
7. TRANSACTIONS WITH RELATED PARTIES:
In August 2001, Supplies Distributors entered into an Agreement for
Sales Forces Services ("ASFS") with IBM, whereby Supplies Distributors is to
actively generate demand for and promote brand loyalty for IBM products. The
ASFS expires on the earlier of December 31, 2003 or the termination of the
Master Distributor Agreements. The ASFS automatically renews for successive
one-year periods unless either party provides prior written notice. Pursuant to
the ASFS, IBM pays to Supplies Distributors a quarterly service fee as agreed to
by both parties. Supplies Distributors has subcontracted with GMS to provide the
sales force activities for an amount equal to the fees received by Supplies
Distributors. The principal officer of GMS owns 46% of IFP. As of December 31,
2001, Supplies Distributors has $1.1 million due from IBM under the terms of the
ASFS included in accounts receivable and approximately $1.5 million of unpaid
service fees due to GMS.
In August 2001, PFS and Supplies Distributors entered into Transaction
Management Services Agreements ("TMSA") whereby PFS provides transaction
management and fulfillment services to Supplies Distributors (see Note 1). Under
terms of the TMSA, PFS is required to conduct its services within certain
performance levels, as defined, and is liable to indemnify Supplies Distributors
for inventory losses, as defined. The TMSA has terms corresponding with the
Master Distributor Agreements (see Note 4).
F-21
BUSINESS SUPPLIES DISTRIBUTORS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the terms of the TMSA, PFS charges Supplies Distributors for its
services based on a percentage of Supplies Distributors' shipped revenue.
Percentages vary by geographic location and by the amount of shipped revenue.
Dependent on changes in the type and levels of transactions, percentages charged
by PFS can be amended by mutual consent of PFS and Supplies Distributors.
Pursuant to the TMSA, Supplies Distributors incurred service expenses, reported
as selling, general and administrative expenses in the accompanying consolidated
financial statement, of approximately $1.4 million to PFS. As of December 31,
2001, the Company owes PFS $0.9 million.
In September 2001, Supplies Distributors issued a Subordinated Demand
Note (the "Note") to PFS in exchange for proceeds of $8.8 million. The balance
of the Note can be increased by PFS, at its discretion or as required to meet
the senior financial obligations of the Company, as needed, and as of December
31, 2001, had an outstanding balance of $11.7 million, which is classified as
note payable to affiliate. The Note can be decreased to $6.5 million subject to
Supplies Distributors' compliance with the covenants of its senior loan
facilities, as amended. The Note accrues interest at a fluctuating rate per
annum equal to PFS' cost of funds as determined by PFS, approximately 10% as of
December 31, 2001. During the period from inception through December 31, 2001,
Supplies Distributors recorded $0.3 million of interest associated with the
amount due to PFS.
In December 2001, PFS issued 12,500 stock options to Supplies
Distributors' President. The options were immediately vested and have an
exercise price of $0.91.
8. INCOME TAXES:
The Company has elected to be taxed as a C corporation. A
reconciliation of the difference between the expected income tax expense at the
U.S. federal statutory corporate tax rate of 34%, and the Company's effective
tax rate, for the period from inception through December 31, 2001, is as follows
(in thousands):
<Table>
Income tax expense (benefit) computed at statutory rate..... $ 228
Impact of foreign taxation at different rate................ 27
Expenses not deductible for tax purposes.................... 17
------
Provision for income taxes................................ $ 272
======
</Table>
The consolidated income before income taxes, by domestic and foreign
entities, for the period from inception through December 31, 2001, is as follows
(in thousands):
<Table>
Domestic........ $ 243
Foreign......... 430
------
Total.... $ 673
======
</Table>
Current and deferred income tax expense for the period from inception
through December 31, 2001, is summarized as follows (in thousands):
<Table>
Current
Domestic............... $ 156
Foreign................ 416
-------
Total current...... 572
-------
Deferred
Domestic............... (55)
Foreign................ (245)
-------
Total deferred..... (300)
-------
Total.............. $ 272
=======
</Table>
F-22
BUSINESS SUPPLIES DISTRIBUTORS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the deferred tax asset (liability) as of December 31,
2001 are as follows (in thousands):
<Table>
Deferred tax asset:
Allowance for doubtful accounts.... $ 300
Other.............................. 31
------
Total deferred tax asset... 331
------
Deferred tax liability:
Total deferred liability... 89
------
Deferred tax asset, net.............. $ 242
======
</Table>
9. SEGMENT AND GEOGRAPHIC INFORMATION:
The Company is organized as a single operating segment, which is
international distribution of computer supplies. Geographic areas in which the
Company operates include the United States, Europe (primarily Belgium), and
Canada.
The following is geographic information by area. Revenues are
attributed based on the Company's domicile. Amounts shown are for the period
from inception through December 31, 2001 (in thousands):
<Table>
Revenues:
United States.. $ 53,077
Europe......... 42,116
Canada......... 4,073
Eliminations... (23,822)
----------
$ 75,444
==========
</Table>
The eliminations amount above primarily relates to intercompany sales
in Europe from BSD Europe to SDSA.
The company has $0.3 million of long-lived assets in the United States
associated with the acquisition of the BSD companies.
F-23
PRO FORMA FINANCIAL INFORMATION
(UNAUDITED)
The following unaudited pro forma condensed consolidated financial
statements as of and for the nine months ended September 30, 2002 and for the
nine month period ended December 31, 2001 are based on the historical financial
statements of PFSweb, Inc. and Holdings after giving effect to the purchase
using the purchase method of accounting and the assumptions and adjustments
described in the accompanying notes to the unaudited pro forma condensed
consolidated financial statements.
The unaudited pro forma condensed consolidated balance sheet presents
the Company's historical financial information as of September 30, 2002, as
adjusted for the acquisition of the remaining 51% membership interest in
Holdings, as if the transaction had occurred on September 30, 2002.
The unaudited pro forma condensed consolidated statements of operations
for the nine months ended September 30, 2002 and the nine month period ended
December 31, 2001 present the Company's historical operations combined with the
historical operations of Holdings, as if the transaction had occurred on April
1, 2001.
The unaudited pro forma condensed consolidated financial statements are
not necessarily indicative of the consolidated financial position or results of
operations for future periods or the financial position or results of operations
that would have been realized had the Company consolidated Holdings during the
periods presented. The unaudited pro forma condensed consolidated financial
statements and the related notes should be read in conjunction with the
historical financial statements of the Company and Holdings.
F-24
PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2002
(IN THOUSANDS)
<Table>
<Caption>
Business
Supplies
ASSETS Distributors
Holdings, Pro Forma Pro Forma
PFSweb, Inc. LLC Adjustments Consolidated
------------ ------------ ----------- ------------
CURRENT ASSETS:
Cash and cash equivalents ............................ $ 8,611 $ 833 $ (332)(a) $ 9,112
Restricted cash ...................................... -- 766 -- 766
Accounts and other receivables, net .................. 6,992 28,110 (681)(b) 34,421
Inventories, net ..................................... -- 36,200 -- 36,200
Inventory in transit ................................. -- 993 -- 993
Prepaid expenses and other current assets ............ 1,946 1,035 -- 2,981
------------ ------------ ----------- ------------
Total current assets ............................ 17,549 67,937 (1,013) 84,473
------------ ------------ ----------- ------------
PROPERTY AND EQUIPMENT, net .............................. 12,411 -- -- 12,411
NOTE RECEIVABLE FROM AFFILIATE ........................... 8,800 -- (8,800)(c) --
RESTRICTED CASH .......................................... 2,877 -- -- 2,877
INVESTMENT IN AFFILIATE .................................. 2,109 -- 332 (a) --
(2,441)(d)
OTHER ASSETS ............................................. 401 1,083 (53)(e) 1,431
------------ ------------ ----------- ------------
Total assets .................................... $ 44,147 $ 69,020 $ (11,975) $ 101,192
============ ============ =========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and
capital lease obligations ........................ $ 1,482 $ 35,103 $ -- $ 36,585
Trade accounts payable ............................... 3,373 3,611 (681)(b) 6,303
Accrued expenses ..................................... 7,219 1,901 -- 9,120
------------ ------------ ----------- ------------
Total current liabilities ....................... 12,074 40,615 (681) 52,008
------------ ------------ ----------- ------------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less
current portion ...................................... 3,436 16,790 -- 20,226
------------ ------------ ----------- ------------
NOTE PAYABLE TO AFFILIATE ................................ -- 8,800 (8,800)(c) --
------------ ------------ ----------- ------------
DEFERRED INCOME .......................................... 1,540 -- -- 1,540
------------ ------------ ----------- ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock ......................................... 18 -- -- 18
Capital contributions ................................ -- 1,000 (1,000)(f) --
Additional paid-in capital ........................... 52,083 -- -- 52,083
Unrealized gain on investment ........................ -- 260 (133)(g) --
(127)(h)
Retained earnings (accumulated deficit) .............. (24,486) 1,417 321 (i) (24,165)
(1,417)(f)
Accumulated other comprehensive gain (loss) .......... (433) 138 (70)(g) (433)
(68)(h)
Treasury stock ....................................... (85) -- -- (85)
------------ ------------ ----------- ------------
Total shareholders' equity ...................... 27,097 2,815 (2,494) 27,418
------------ ------------ ----------- ------------
Total liabilities and shareholders' equity ...... $ 44,147 $ 69,020 $ (11,975) $ 101,192
============ ============ =========== ============
</Table>
The accompanying notes are an integral part of these Pro Forma Condensed
Consolidated Financial Statements.
F-25
PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2002
(IN THOUSANDS)
<Table>
<Caption>
Business
Supplies
Distributors
Holdings, Pro Forma Pro Forma
PFSweb, Inc. LLC Adjustments Consolidated
------------ ------------ ----------- ------------
REVENUES:
Gross product revenue .......................... $ -- $ 163,653 $ -- $ 163,653
Gross service fee revenue ...................... 26,289 -- -- 26,289
Gross service fee revenue, affiliate ........... 4,862 -- (4,862)(j) --
------------ ------------ ----------- ------------
Total gross revenues ....................... 31,151 163,653 (4,862) 189,942
Less pass-through charges ...................... 2,973 -- (129)(j) 2,844
------------ ------------ ----------- ------------
Net revenues ............................... 28,178 163,653 (4,733) 187,098
COSTS OF REVENUES:
Cost of product revenue ........................ -- 154,274 -- 154,274
Cost of service fee revenue .................... 17,552 -- (1,666)(k) 15,886
------------ ------------ ----------- ------------
Total costs of revenues .................... 17,552 154,274 (1,666) 170,160
------------ ------------ ----------- ------------
Gross profit ............................... 10,626 9,379 (3,067) 16,938
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ...................................... 20,636 4,975 (4,733)(j) 22,508
1,666 (k)
(36)(l)
OTHER .............................................. 2,170 -- -- 2,170
------------ ------------ ----------- ------------
Income (loss) from operations .............. (12,180) 4,404 36 (7,740)
EQUITY IN EARNINGS OF AFFILIATE .................... 1,163 -- (1,163)(m) --
INTEREST EXPENSE (INCOME), NET ..................... (688) 2,424 -- 1,736
------------ ------------ ----------- ------------
Income (loss) before income taxes ......... (10,329) 1,980 (1,127) (9,476)
INCOME TAX EXPENSE ................................. -- 754 (343)(n) 411
------------ ------------ ----------- ------------
NET INCOME (LOSS) .................................. $ (10,329) $ 1,226 $ (784) $ (9,887)
============ ============ =========== ============
NET LOSS PER SHARE:
Basic and diluted ............................. $ (0.57) $ (0.54)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING:
Basic and diluted ............................. 18,201 18,201
============ ============
</Table>
The accompanying notes are an integral part of these Pro Forma Condensed
Consolidated Financial Statements.
F-26
PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<Table>
<Caption>
Business
Supplies
Distributors
Holdings, LLC
PFSweb, Inc. July 3, 2001
Nine Months (inception)
ended through
December 31, December 31, Pro Forma Pro Forma
2001 2001 Adjustments Consolidated
------------ ------------ ----------- ------------
REVENUES:
Gross product revenue .......................... $ -- $ 75,444 $ -- $ 75,444
Gross service fee revenue ...................... 29,955 -- -- 29,955
Gross service fee revenue, affiliate ........... 1,719 -- (1,719)(j) --
Other revenues ................................. 100 -- -- 100
------------ ------------ ----------- ------------
Total gross revenues ....................... 31,774 75,444 (1,719) 105,499
Less pass-through charges ...................... 3,721 -- (335)(j) 3,386
------------ ------------ ----------- ------------
Net revenues ............................... 28,053 75,444 (1,384) 102,113
COSTS OF REVENUES:
Cost of product revenue ........................ -- 71,870 -- 71,870
Cost of service fee revenue .................... 17,984 -- (768)(k) 17,216
Cost of other revenue .......................... (627) -- -- (627)
------------ ------------ ----------- ------------
Total costs of revenues .................... 17,357 71,870 (768) 88,459
------------ ------------ ----------- ------------
Gross profit ............................... 10,696 3,574 (616) 13,654
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ...................................... 17,117 2,098 (1,384)(j) 18,573
768 (k)
(26)(l)
OTHER .............................................. (5,141) -- -- (5,141)
------------ ------------ ----------- ------------
Income (loss) from operations .............. (1,280) 1,476 26 222
INTEREST EXPENSE (INCOME), NET ..................... (496) 803 -- 307
------------ ------------ ----------- ------------
Income (loss) before income taxes .......... (784) 673 26 (85)
INCOME TAX EXPENSE (BENEFIT) ....................... (219) 272 (101)(n) (48)
------------ ------------ ----------- ------------
NET INCOME (LOSS) .................................. $ (565) $ 401 $ 127 $ (37)
============ ============ =========== ============
NET LOSS PER SHARE:
Basic and diluted ............................. $ (.03) $ --
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING:
Basic and diluted ............................. 18,036 18,036
============ ============
</Table>
The accompanying notes are an integral part of these Pro Forma Condensed
Consolidated Financial Statements.
F-27
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
On October 25, 2002, Priority Fulfillment Services, Inc. ("PFS"), a
wholly-owned subsidiary of PFSweb, Inc. (the "Company"), purchased from
Inventory Financing Partners, LLC ("IFP") a 51% membership interest in Business
Supplies Distributors Holdings, LLC ("Holdings") for a purchase price of
$331,758 (the "Purchase"). Prior to the transaction, PFS owned 49% of the
membership interests in Holdings, and PFS and IFP were the only members thereof
and were parties to the Holdings Operating Agreement. As a result of the
transaction, PFS owns 100% of the membership interests in Holdings and is the
sole member thereof. The purchase price was paid in cash from PFS' cash on hand.
As the result of the transaction, PFS controls Holdings' wholly-owned
subsidiaries, Supplies Distributors, Inc., Supplies Distributors of Canada,
Inc., Business Supplies Distributors Europe B.V. and Supplies Distributors, S.A.
(collectively, "Supplies Distributors"). Supplies Distributors is an
international distributor of IBM printing supplies and other products.
The pro forma information related to the Purchase have been prepared in
accordance with Statement of Financial Accounting Standards (SFAS) No. 141,
"Business Combinations." The Company will account for the transaction as a
purchase under SFAS No.141 and will result in the consolidation of Holdings'
accounts with those of the Company. Prior to this acquisition, the Company had
accounted for its 49% interest in Holdings using the modified equity method of
accounting. The purchase price will be allocated to individual assets and
liabilities assumed based on their estimated fair values. For purposes of the
unaudited pro forma consolidated financial information, the purchase price of
the assets acquired and liabilities assumed has been allocated based on
preliminary estimates of fair value, which are still being finalized. The
information presented herein may differ from the final purchase price
allocation; however, such allocations are not expected to differ materially from
the preliminary amounts.
2. ALLOCATION OF PURCHASE PRICE
<Table>
(In thousands)
Cash and cash equivalents (including
restricted cash of $1,745)............. $ 2,578
Accounts and other receivables.............. 28,110
Inventories................................. 37,193
Prepaid expenses............................ 684
Other assets, net........................... 402
---------
Total assets acquired................ $ 68,967
---------
Trade accounts payable...................... $ 3,611
Accrued expenses............................ 1,901
Debt (guaranteed by the Company)............ 48,823
Other debt.................................. 3,070
Note payable to affiliate................... 8,800
---------
Total liabilities assumed............ 66,205
---------
Net assets........................... 2,762
Less PFS' prior investment.................. 2,109
---------
Net assets acquired.................. 653
Less cash purchase price.................... 332
---------
Extraordinary gain on purchase....... $ 321
=========
</Table>
3. PRO FORMA ADJUSTMENTS
The following are descriptions for the pro forma purchase accounting
and other merger related adjustments that have been reflected in the
accompanying Unaudited Pro Forma Condensed Consolidated Financial Statements:
F-28
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(a) Cash paid for the remaining 51% membership interest in Holdings.
(b) Adjustment to eliminate balances payable among the Company and Holdings
reflected in the historical financial statements.
(c) Adjustment to eliminate the subordinated note due to PFS from Holdings
reflected in the historical financial statements.
(d) Adjustment to eliminate the Company's historical investment in Holdings
reflected in the historical financial statements.
(e) Adjustment to eliminate 51% of Holdings' identified intangible asset as
reflected in the historical financial statements.
(f) Reflects the elimination of historical Holdings' equity amounts.
(g) Reflects the elimination of 51% of historical Holdings' equity amounts.
(h) Reflects the elimination of the Company's historical 49% membership
interest of historical Holding's equity amounts.
(i) Adjustment to record the Company's extraordinary gain on the Purchase due
to excess net assets acquired over cash paid.
(j) Reflects the elimination of transactions between the Company and Holdings.
During the nine months ended September 30, 2002 and the period from July 3,
2001 (inception) to December 31, 2001, the Company recorded net service fee
revenue of $4.7 million and $1.4 million, respectively, from Holdings under
the Company's transaction management service fee arrangement with Holdings.
Holdings recorded these amounts as selling, general and administrative
expense.
(k) Adjustment to reclassify historical costs of net service fees under the
Company's transaction management service fee arrangement with Holdings as
selling, general and administrative expenses.
(l) Adjustment to eliminate 51% of amortization expense for Holdings'
identified intangible asset as reflected in the historical financial
statements.
(m) Adjustment to eliminate the Company's equity in earnings of Holdings as
reflected in the historical financial statements.
(n) Adjustment to eliminate the historical, domestic federal income tax expense
as the Company will include Holdings' United States operations in the
Company's consolidated federal income tax return.
F-29
SIGNATURE
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 hereunto duly authorized.
PFSweb, Inc.
Dated: January 8, 2003 By: /s/ THOMAS J. MADDEN
---------------------------------
Thomas J. Madden
Executive Vice President, Chief
Financial and Accounting Officer