1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 23, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
PFSWEB, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 7389 75-2837058
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification Number)
organization)
---------------------
500 NORTH CENTRAL EXPRESSWAY
PLANO, TEXAS 75074
(972) 881-0733
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
MARK C. LAYTON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PFSWEB, INC.
500 NORTH CENTRAL EXPRESSWAY
PLANO, TEXAS 75074
(972) 881-0733
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
Copies to:
MORRIS BIENENFELD, ESQ. STEVEN R. FINLEY, ESQ.
WOLFF & SAMSON, P.A. GIBSON, DUNN & CRUTCHER
5 BECKER FARM ROAD 200 PARK AVENUE
ROSELAND, NEW JERSEY 07068 NEW YORK, NEW YORK 10166
(973) 533-6532 (212) 351-3920
(973) 740-1407 (FAX) (212) 351-4035 (FAX)
Approximate date of commencement of proposed sale to the public: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) PRICE(2) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------
Common Stock, no par
value................. 3,565,000 $14.00 $49,910,000 $13,875
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
(1) Includes 465,000 shares that the Underwriters have the option to purchase
solely to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457 under the Securities Act.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED SEPTEMBER 23, 1999
PROSPECTUS
3,100,000 SHARES
PFS LOGO
COMMON STOCK
This is the initial public offering of common stock by PFSweb, Inc. We are
selling 3,100,000 shares of common stock. The estimated initial public offering
price is between $12.00 and $14.00 per share.
------------------
There is currently no public market for the common stock. In connection
with this offering, we will apply to list our common stock on the Nasdaq
National Market under the symbol "PFSW."
------------------
We are currently a subsidiary of Daisytek International Corporation. When
the offering is completed, Daisytek will own approximately 82.2% of our
outstanding shares of common stock.
------------------
PER SHARE TOTAL
--------- -----
Public offering price..................................... $ $
Underwriting discount..................................... $ $
Proceeds, before offering expenses, to PFSweb............. $ $
The underwriters may also purchase up to 465,000 additional shares of
common stock from us at the public offering price, less the underwriting
discount, within 30 days from the date of this prospectus to cover
over-allotments.
Delivery of the shares of common stock will be made on or about
, 1999.
------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
HAMBRECHT & QUIST
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER
INCORPORATED
WILLIAM BLAIR & COMPANY
JEFFERIES & COMPANY, INC.
, 1999
3
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.......................................... 1
Risk Factors................................................ 6
Forward-Looking Statements.................................. 14
Proposed Spin-off........................................... 15
Use of Proceeds............................................. 17
Dividend Policy............................................. 17
Capitalization.............................................. 18
Dilution.................................................... 20
Selected Combined Historical and Pro Forma Financial and
Other Data................................................ 22
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 27
Business.................................................... 38
Management.................................................. 47
Certain Transactions........................................ 57
Principal Stockholder....................................... 64
Description of Capital Stock................................ 65
Shares Eligible for Future Sale............................. 68
Underwriting................................................ 69
Legal Matters............................................... 71
Experts..................................................... 71
Where You Can Find More Information......................... 72
Index to Financial Statements............................... F-1
------------------
Unless otherwise indicated, all references to "PFSweb," "we," "us" and
"our" refer to PFSweb, Inc., a Delaware corporation, and the subsidiaries of
Daisytek representing the business operations of PFSweb that will become
subsidiaries of PFSweb upon completion of this offering. All references to
"Daisytek" refer to Daisytek International Corporation, a Delaware corporation,
and its subsidiaries.
i
4
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary does not contain all of the information that you should
consider before investing in our common stock. You should read the entire
prospectus carefully, including the information under "Risk Factors" beginning
on page 6 and the financial statements beginning on page F-1, before making an
investment decision.
OUR BUSINESS
We are an international provider of transaction management services for
both traditional commerce and electronic commerce, or e-commerce, companies. We
provide a comprehensive suite of services, including order management, customer
care services, billing services, information management and distribution
services. We offer our services as an integrated solution, which enables our
clients to outsource their complete transaction management infrastructure
requirements to a single source. We currently provide transaction management
services to over 30 clients that operate in a range of markets, including
apparel, computer products, printers, sporting goods and consumer electronics,
among others. Our clients include various divisions of IBM, Hewlett-Packard,
Thomson Consumer Electronics, Nokia, Tektronix, Global Sports Interactive,
American Eagle Outfitters and ISA International plc.
As the Internet has become an increasingly important communications medium,
merchants and consumers have embraced using the Internet to buy and sell goods
and services. International Data Corporation, or IDC, currently forecasts that
the actual number of Web buyers worldwide will expand from nearly 31 million in
1998 to more than 182 million in 2003 and that the amount of worldwide commerce
conducted over the Internet will increase from approximately $50 billion in 1998
to approximately $1.3 trillion in 2003. To succeed on-line, a merchant must
attract customers to its Web site and provide an appealing and easy to use
environment that encourages customers to place an order. Once the customer
places an order, the merchant must then process the order by executing numerous
transactions, such as confirming product availability, authorizing a credit card
purchase, calculating sales tax, fulfilling the order and, when necessary,
processing returns. These "behind the scenes" activities are critical to
complete the entire transaction.
While early adopters of e-commerce business models often developed their
own transaction management systems, today many on-line merchants seek to
outsource their transaction management requirements. We believe that we are
strategically positioned to benefit from the growing use and acceptance of
e-commerce.
We offer a comprehensive suite of services, including:
- order management, including Internet shopping cart and on-line order
management;
- customer care services, including Web-enabled customer care centers
integrating voice, e-mail, data and chat communications;
- billing services, including secure on-line credit card processing,
invoicing, credit management and collection;
- information management, including real-time data interfaces, data
exchange services and data mining; and
- distribution services, including inventory management, product
warehousing, order picking and packing, transportation management and
product return administration.
1
5
Our integrated solution enables our clients to focus on their core
business, products and services instead of making substantial investments in
transaction management infrastructure and ongoing personnel. Additionally, our
services enable our clients to quickly capitalize on new business opportunities,
provide an improved experience for their customers, improve operating
efficiencies and cash flows and access sophisticated technology infrastructure.
Our objective is to grow rapidly by being an international provider of
business-to-business and business-to-consumer transaction management services
for both traditional and e-commerce businesses. The key elements of our business
strategy are to:
- target clients with major brand names;
- expand existing client relationships;
- promote our PFSweb brand;
- seek strategic alliances and acquisitions; and
- expand our international presence.
OUR RELATIONSHIP WITH DAISYTEK
We are currently a subsidiary of Daisytek International Corporation, one of
the world's largest wholesale distributors of non-paper consumable computer
supplies and professional video and audio tape products. Our business unit was
formed in 1991 to leverage Daisytek's core competencies in customer service,
order management, product fulfillment and distribution. Since 1996, the
operations of our business unit have been primarily focused in several Daisytek
subsidiaries operating collectively as Priority Fulfillment Services, Inc.
("PFS"). After the completion of this offering, Daisytek will own approximately
82.2% of the outstanding shares of our common stock, or approximately 80.1% if
the underwriters exercise their over-allotment option in full. Daisytek has
announced that it plans to effect the complete separation of PFSweb from
Daisytek sometime in mid-2000 (and within one year of the closing of this
offering) through a pro rata distribution to its common stockholders of all of
the shares of our common stock which Daisytek then holds (which is also known as
a "spin-off"). There are, however, various conditions to the completion of the
spin-off, and we cannot assure you as to whether or when it will occur.
Upon completion of this offering we will enter into a number of agreements
with Daisytek relating to our business and our proposed spin-off from Daisytek.
Under these agreements, Daisytek will continue to provide us with certain
administrative services and facilities, and we will provide Daisytek with
transaction management services for its U.S. wholesale consumable computer
supplies business. See "Certain Transactions" and "Risk Factors -- Risks Related
to Daisytek".
We were incorporated in Delaware in 1999 to be, upon completion of this
offering, the parent holding company for PFS. Our principal executive offices
are located at 500 North Central Expressway, Plano, Texas 75074, and our
telephone number is 972-881-0733.
We maintain a Web site at www.pfsweb.com, and Daisytek maintains a Web site
at www.daisytek.com. Information contained on these Web sites does not
constitute part of this prospectus and is not incorporated by reference in this
prospectus.
2
6
THE OFFERING
Common stock offered by
PFSweb.......................... 3,100,000 shares
Common stock to be outstanding
after the offering.............. 17,405,000 shares
Use of proceeds................. - to repay an intercompany payable to
Daisytek ($ million as of October 31,
1999);
- to acquire certain assets from Daisytek of
approximately $ million;
- for presently anticipated capital
expenditures of $ million; and
- the balance of the proceeds for general
working capital and possible acquisitions.
See "Use of Proceeds."
Proposed Nasdaq National Market
symbol........................ "PFSW"
Unless otherwise noted, the information in this prospectus assumes the
underwriters do not exercise their option to purchase an additional 465,000
shares of common stock from us to cover over-allotments. The number of
outstanding shares used in this prospectus is 17,405,000 and excludes 1,376,500
shares of common stock issuable upon exercise of outstanding options and
4,623,500 shares of common stock available for the future grant of stock options
under our stock option plans.
FISCAL YEAR
Our fiscal year and Daisytek's fiscal year ends on March 31 of each year.
All references to fiscal years in this prospectus refer to the fiscal years
ending in the indicated calendar years. For example, "fiscal 1999" refers to the
fiscal year ended March 31, 1999.
PRO FORMA AND SUPPLEMENTAL PRO FORMA FINANCIAL INFORMATION
Our historical financial statements reflect our operations and client
agreements prior to the following transactions. As of October 1, 1999, we have
restructured our arrangements with IBM, one of our key clients, so that the
transaction management services we provide for IBM will no longer include
purchasing and reselling IBM product inventory, but instead will be reflected as
service fees. In addition, upon completion of this offering, we will enter into
a transaction management services agreement with Daisytek and begin recording
service fee revenue under this agreement. Our historical financial statements,
therefore, may not provide a meaningful basis for analyzing our business in the
future. To assist in evaluating our ongoing business, we have provided the
following pro forma and supplemental pro forma financial information.
The column labeled "pro forma" shows how our historical financial data
would reflect:
- the reclassification of Daisytek's net investment as common stock and
additional paid-in-capital;
- the issuance of 3,100,000 shares of common stock in this offering and the
anticipated application of the net proceeds; and
- the incremental cost we expect to incur as a stand-alone publicly traded
company.
3
7
The column labeled "supplemental pro forma" shows how the pro forma
financial data would reflect what our results would have been:
- under our prior IBM agreements if we had received service fees instead of
purchasing IBM products and reselling them;
- if we had performed transaction management services and recorded service
fee revenue for our business with Daisytek under our new agreement; and
- if we had acquired certain assets and liabilities from Daisytek as part
of our separation from Daisytek.
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR ENDED MARCH 31, 1999
-----------------------------------
SUPPLEMENTAL
ACTUAL PRO FORMA PRO FORMA
-------- --------- ------------
(UNAUDITED)
COMBINED STATEMENT OF OPERATIONS DATA:
Revenues:
Product revenue...................................... $ 93,702 $ 93,702 $ --
Service fee revenue.................................. 7,547 7,547 31,510
-------- -------- -------
Total revenues.................................. 101,249 101,249 31,510
-------- -------- -------
Gross profit........................................... 7,591 7,591 12,984
Income (loss) from operations.......................... 1,032 (1,277) 4,352
Net income (loss)...................................... $ 385 $ (428) $ 2,943
======== ======== =======
PER SHARE DATA:
Net income (loss) per share:
Basic and diluted...................................... $ 0.03 $ (0.02) $ 0.17
======== ======== =======
Weighted average number of shares outstanding:
Basic and diluted...................................... 14,305 17,405 17,405
THREE MONTHS ENDED JUNE 30, 1999
----------------------------------
SUPPLEMENTAL
ACTUAL PRO FORMA PRO FORMA
------- --------- ------------
(UNAUDITED)
COMBINED STATEMENT OF OPERATIONS DATA:
Revenues:
Product revenue...................................... $32,620 $32,620 $ --
Service fee revenue.................................. 3,191 3,191 9,250
------- ------- -------
Total revenues.................................. 35,811 35,811 9,250
------- ------- -------
Gross profit........................................... 2,787 2,787 3,423
Income (loss) from operations.......................... (1) (597) 307
Net income (loss)...................................... $ (198) $ (335) $ 271
======= ======= =======
PER SHARE DATA:
Net income (loss) per share:
Basic and diluted...................................... $ (0.01) $ (0.02) $ 0.02
======= ======= =======
Weighted average number of shares outstanding:
Basic and diluted...................................... 14,305 17,405 17,405
JUNE 30, 1999
----------------------------------
SUPPLEMENTAL
ACTUAL PRO FORMA PRO FORMA
------- --------- ------------
(UNAUDITED)
COMBINED BALANCE SHEET DATA:
Working capital........................................ $20,819 $20,839 $13,181
Total assets........................................... 67,967 67,987 39,455
Long-term obligations.................................. 37,349 1,870 260
Shareholders' equity................................... 466 35,965 35,965
4
8
SUMMARY FINANCIAL INFORMATION
The following table presents summary combined financial data for PFSweb.
The data presented in this table are derived from the historical combined
financial statements and notes thereto that are included elsewhere in this
prospectus. You should read those sections for a further explanation of the
financial data summarized here.
Our historical financial information may not necessarily reflect our
results of operations or financial position in the future or what our results of
operations and financial position would have been had we operated as a separate,
stand-alone entity during the periods presented.
FISCAL YEARS ENDED MARCH 31,
-------------------------------------------------------
1999
-----------------------------------
SUPPLEMENTAL
1997 1998 ACTUAL PRO FORMA PRO FORMA
------- ------- -------- --------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
COMBINED STATEMENT OF
OPERATIONS DATA:
Revenues:
Product revenue....... $16,543 $45,804 $ 93,702 $ 93,702 $ --
Service fee revenue... 1,034 3,539 7,547 7,547 31,510
------- ------- -------- -------- -------
Total revenues...... 17,577 49,343 101,249 101,249 31,510
------- ------- -------- -------- -------
Gross profit............ 1,213 3,743 7,591 7,591 12,984
Income (loss) from
operations............ 155 98 1,032 (1,277) 4,352
Net income (loss)....... $ 34 $ (38) $ 385 $ (428) $ 2,943
======= ======= ======== ======== =======
PER SHARE DATA:
Net income (loss) per
share:
Basic and diluted..... $ 0.00 $ (0.00) $ 0.03 $ (0.02) $ 0.17
======= ======= ======== ======== =======
Weighted average number
of shares outstanding:
Basic and diluted..... 14,305 14,305 14,305 17,405 17,405
THREE MONTHS ENDED JUNE 30,
--------------------------------------------
1999
----------------------------------
SUPPLEMENTAL
1998 ACTUAL PRO FORMA PRO FORMA
------- ------- --------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
COMBINED STATEMENT OF
OPERATIONS DATA:
Revenues:
Product revenue....... $20,424 $32,620 $32,620 $ --
Service fee revenue... 1,004 3,191 3,191 9,250
------- ------- ------- -------
Total revenues...... 21,428 35,811 35,811 9,250
------- ------- ------- -------
Gross profit............ 1,249 2,787 2,787 3,423
Income (loss) from
operations............ 95 (1) (597) 307
Net income (loss)....... $ 25 $ (198) $ (335) $ 271
======= ======= ======= =======
PER SHARE DATA:
Net income (loss) per
share:
Basic and diluted..... $ 0.00 $ (0.01) $ (0.02) $ 0.02
======= ======= ======= =======
Weighted average number
of shares outstanding:
Basic and diluted..... 14,305 14,305 17,405 17,405
JUNE 30, 1999
----------------------------------
SUPPLEMENTAL
ACTUAL PRO FORMA PRO FORMA
------- --------- ------------
(IN THOUSANDS)
(UNAUDITED)
COMBINED BALANCE SHEET DATA:
Working capital........................................ $20,819 $20,839 $13,181
Total assets........................................... 67,967 67,987 39,455
Long-term obligations.................................. 37,349 1,870 260
Shareholders' equity................................... 466 35,965 35,965
5
9
RISK FACTORS
You should carefully consider the risks and uncertainties described below
before making an investment decision. Our business, financial condition and
operating results could be adversely affected by any of the following factors,
in which event the trading price of our common stock could decline, and you
could lose part or all of your investment. The risks and uncertainties described
below are not the only ones that we face. Additional risks and uncertainties not
presently known to us, or that we currently think are immaterial, may also
impair our business operations.
RISKS RELATED TO OUR BUSINESS
OUR REVENUE IS DEPENDENT UPON OUR CLIENTS' BUSINESS AND PRODUCT SALES; MANY OF
OUR CLIENT AGREEMENTS ARE TERMINABLE AT WILL.
Our revenue is primarily transaction based and will fluctuate with the
volume of transactions or level of sales of the products by our clients for
which we provide transaction management services. If we dedicate significant
resources to clients whose business does not generate substantial transactions
or whose products do not generate substantial customer sales, our business may
be materially adversely affected. In addition, many of our agreements with our
clients are terminable by either party without cause. Therefore, we cannot
assure you that any of our clients will continue to use our services for any
period of time.
WE ANTICIPATE INCURRING SIGNIFICANT EXPENSES IN THE FORESEEABLE FUTURE WHICH MAY
REDUCE OUR PROFITABILITY.
In order to reach our business growth objectives, we expect to incur
significant operating and marketing expenses, as well as capital expenditures,
during the next several years. We also expect to incur significant expenses in
connection with the spin-off of our company from Daisytek. In order to offset
these expenses, we will need to generate significant additional revenue. We
cannot assure you that we will generate sufficient revenue to be profitable or
that we will be able to sustain or increase profitability on a quarterly or an
annual basis in the future. If our revenue grows more slowly than we anticipate
or if our operating and marketing expenses exceed our expectations, our business
would be materially adversely affected.
OUR SYSTEMS MAY NOT ACCOMMODATE SIGNIFICANT GROWTH IN OUR NUMBER OF CLIENTS.
Our success depends on our ability to handle a large number of transactions
for many different clients in various product categories. We expect that the
volume of transactions will increase significantly as we expand our operations.
If this occurs, additional stress will be placed upon the network hardware and
software that manages our operations. We cannot assure you of our ability to
efficiently manage a large number of transactions. If we are not able to
maintain an appropriate level of operating performance, we may develop a
negative reputation and our business, would be materially adversely affected.
BECAUSE WE MUST ALWAYS HAVE SUFFICIENT CAPACITY, WE MAY ENTER INTO
DISADVANTAGEOUS CONTRACTS.
We expect that the number of transactions and products that we handle will
continue to grow in the future. In order to ensure that we are able to handle
such additional transactions and products, we may be required to locate and
obtain additional facilities, including warehouse space, and acquire additional
systems and equipment. If we overestimate the facilities and systems capacity
that we require, we may be obligated to pay for more capacity than we actually
use, resulting in our incurring costs without corresponding revenue. Conversely,
if we underestimate our capacity needs, we may be unable to provide the
necessary services for our clients or may be required to obtain additional
capacity through more expensive means. The occurrence of either of these
situations could significantly reduce our operating margins and adversely affect
our business.
6
10
WE FACE COMPETITION FROM MANY SOURCES THAT COULD ADVERSELY AFFECT OUR BUSINESS.
Many companies offer, on an individual basis, one or more of the same
services as we do, and many of our competitors have greater financial,
distribution and marketing resources than we do. These competitors can use their
greater resources to expand their sales efforts, lower prices or increase their
range of services to include all the services we offer. In many instances, our
competition is the in-house operations of our potential clients themselves. We
cannot be certain that we will be able to compete successfully against these or
other competitors who may enter the market in the future.
OUR SALES AND IMPLEMENTATION CYCLES ARE HIGHLY VARIABLE AND MAY CAUSE OUR
OPERATING RESULTS TO VARY WIDELY.
The sales cycle for our services is variable, typically ranging between a
few weeks to several months from initial contact with the potential client to
the signing of a contract. Occasionally sales require substantially more time.
Delays in executing client contracts may affect our revenue and cause our
operating results to vary widely. We believe that a potential client's decision
to purchase our services is discretionary, involves a significant commitment of
its resources and is influenced by intense internal and external pricing and
operating comparisons. To successfully sell our services, we generally must
educate our potential clients regarding the use and benefit of our services,
which can require significant time and resources. Consequently, the period
between initial contact and the purchase of our services is often long and
subject to delays associated with the lengthy approval and competitive
evaluation processes that typically accompany significant operational decisions.
Additionally, the time required to implement our systems and integrate a new
client can range from several weeks to several months. Delays in integrating new
clients may affect our revenue and cause our operating results to vary widely.
WE ARE DEPENDENT ON OUR KEY PERSONNEL, AND WE NEED TO HIRE AND RETAIN SKILLED
PERSONNEL TO SUSTAIN OUR BUSINESS.
Our performance is highly dependent on the continued services of our
executive officers and other key personnel, the loss of any of whom could
materially adversely affect our business. We currently do not have employment
agreements with any of our executive officers or key personnel. In addition, we
need to attract and retain other highly-skilled technical and managerial
personnel for whom there is intense competition. We cannot assure you that we
will be able to attract and retain the personnel necessary for the continuing
growth of our business. Our inability to attract and retain qualified technical
and managerial personnel would materially adversely affect our business.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS.
A significant component of our business strategy is to continue to expand
internationally. For example, we expect to open by calendar year-end an
approximately 150,000 square foot distribution center in Liege, Belgium. We
cannot assure you that we will be successful in expanding into additional
international markets. In addition to the uncertainty regarding our ability to
generate revenue from foreign operations and expand our international presence,
there are risks inherent in doing business internationally, including:
- changing regulatory requirements;
- legal uncertainty regarding foreign laws, tariffs and other trade
barriers;
- political instability;
- potentially adverse tax consequences; and
- foreign currency fluctuations.
7
11
We cannot assure you that one or more of these factors will not materially
adversely affect our business.
WE ARE UNCERTAIN ABOUT OUR NEED FOR AND THE AVAILABILITY OF ADDITIONAL FUNDS
BEYOND THE FUNDS RAISED IN THIS OFFERING.
Our future capital needs are difficult to predict. We may require
additional capital in order to take advantage of unanticipated opportunities,
including strategic alliances and acquisitions, or to respond to changing
business conditions and unanticipated competitive pressures. Additionally, funds
from operations may be less than anticipated. Should these circumstances arise,
we may need to raise additional funds either by borrowing money or issuing
additional equity. We cannot assure you that we will be able to raise such funds
on favorable terms or at all. In addition, although historically we have relied
upon Daisytek as our source of funds, Daisytek is not required to provide us
with funding in the future, and we will be restricted from borrowing from
Daisytek following the spin-off. If we are unable to obtain additional funds, we
may be unable to take advantage of new opportunities or take other actions that
otherwise might be important to our business.
WE MAY ENGAGE IN FUTURE STRATEGIC ALLIANCES OR ACQUISITIONS THAT COULD
DILUTE OUR EXISTING STOCKHOLDERS, CAUSE US TO INCUR SIGNIFICANT EXPENSES OR HARM
OUR BUSINESS.
We may review strategic alliance or acquisition opportunities that would
complement our current business or enhance our technological capabilities.
Integrating any newly acquired businesses, technologies or services, may be
expensive and time-consuming. To finance any acquisitions, it may be necessary
for us to raise additional funds through public or private financings.
Additional funds may not be available on terms that are favorable to us and, in
the case of equity financings, may result in dilution to our stockholders. In
addition, we have limited ability to issue capital stock prior to or after the
spin-off. We may not be able to operate any acquired businesses profitably or
otherwise implement our growth strategy successfully. If we are unable to
integrate any newly acquired entities or technologies effectively, our operating
results could suffer. Future acquisitions by us could also result in large and
immediate write-offs, incurrence of debt and contingent liabilities, or
amortization of expenses related to goodwill and other intangibles, any of which
could harm our operating results.
OUR BUSINESS COULD BE ADVERSELY AFFECTED BY A SYSTEMS OR EQUIPMENT FAILURE,
WHETHER OUR OWN OR OF OUR CLIENTS.
Our operations are dependent upon our ability to protect our distribution
facilities, customer service centers, computer and telecommunications equipment
and software systems against damage and failures. If our business is interrupted
either from accidents or the intentional acts of others, our business could be
materially adversely affected. Damage or failures could result from fire, power
loss, equipment malfunctions, system failures, natural disasters and other
causes. Our short-term disaster recovery and contingency plans may not be
sufficient in the event of widespread damage or failures at our facilities. Our
property and business interruption insurance may not adequately compensate us
for these losses.
Our clients' businesses may also be harmed from any system or equipment
failures we experience. In that event, our relationship with these clients may
be adversely affected, we may lose these clients, our ability to attract new
clients may be adversely affected and we could be exposed to liability.
Interruptions could also result from the intentional acts of others, like
"hackers." If our systems are penetrated by computer hackers, or if computer
viruses infect our systems, our computers could fail or proprietary information
could be misappropriated.
8
12
If our clients suffer similar interruptions in their operations, for any of
the reasons discussed above or for others, our business could also be adversely
affected. Many of our clients' computer systems interface with our own. If they
suffer interruptions in their systems, the link to our systems could be severed
and sales of their products could be slowed or stopped.
A BREACH OF OUR E-COMMERCE SECURITY MEASURES COULD REDUCE DEMAND FOR OUR
SERVICES.
A requirement of the continued growth of e-commerce is the secure
transmission of confidential information over public networks. A party who is
able to circumvent our security measures could misappropriate proprietary
information or interrupt our operations. Any compromise or elimination of our
security could reduce demand for our services.
We may be required to expend significant capital and other resources to
protect against security breaches or to address any problem they may cause.
Because our activities involve the storage and transmission of proprietary
information, such as credit card numbers, security breaches could damage our
reputation and expose us to litigation and possible liability. Our security
measures may not prevent security breaches, and failure to prevent security
breaches may disrupt our operations.
OUR BUSINESS AND SERVICES ARE SUBJECT TO RISKS RELATED TO THE YEAR 2000 PROBLEM.
The "Year 2000" problems of our clients, our internal systems and companies
on the Internet generally could materially adversely affect our systems or
operations.
RISKS RELATED TO DAISYTEK
OUR BUSINESS MAY BE MATERIALLY ADVERSELY AFFECTED IF DAISYTEK DOES NOT COMPLETE
THE SPIN-OFF OF OUR COMPANY.
There are various conditions which must be satisfied, or waived by Daisytek
in its sole discretion, prior to the completion of the spin-off. We cannot
assure you whether or when these conditions will be satisfied or waived by
Daisytek. If any of these conditions are neither satisfied, nor waived by
Daisytek, in a timely manner, the spin-off may not be completed. If the spin-off
is not completed, we may not realize the benefits we expect to achieve in
connection with the spin-off and our business may be materially adversely
affected. Even if all of the conditions to the spin-off are satisfied, or
waived, we cannot assure you when the spin-off will occur or whether or when we
will obtain the expected benefits.
WE DEPEND ON DAISYTEK FOR VARIOUS SERVICES AND FOR A SIGNIFICANT PORTION OF OUR
REVENUE.
We have historically been dependent on Daisytek for various services,
including facilities, human resources, management information systems, as well
as for working capital. We will enter into agreements with Daisytek under which
Daisytek will continue to provide certain of these services to us. When the
terms of these agreements expire, we will need either to extend the term of
these agreements, engage other entities to perform these services or perform
these services ourselves. We cannot assure you that Daisytek will continue to
provide these services after the initial term of the agreements, or that the
cost of these services will not be significantly higher if we purchase services
from other parties or devote resources to handle these functions internally.
In addition, we will be providing transaction management services for
Daisytek's U.S. wholesale consumable computer supplies business under a
five-year agreement. For fiscal 1999, on a supplemental pro forma basis,
Daisytek would have been our largest client. We currently expect that Daisytek
will remain a significant client for the foreseeable future and a substantial
portion of our business will be dependent upon the success of Daisytek's sales
and marketing of its products. Daisytek has the right to terminate the
agreement, subject to the payment of a termination fee. In
9
13
addition, Daisytek has reported that it has experienced, and expects to continue
to experience, a decline in sales growth in its U.S. wholesale consumable
computer supplies business. This decline may adversely affect our financial
condition and results of operations.
All of our agreements with Daisytek were made in the context of a
parent-subsidiary relationship and were negotiated in the overall context of our
spin-off from Daisytek. We cannot assure you that the prices charged to us, or
by us, under these agreements are not higher or lower than the prices that may
be charged by, or to, unaffiliated third parties for similar services.
THROUGH ITS OWNERSHIP OF OUR STOCK, DAISYTEK WILL BE ABLE TO EXERT SUBSTANTIAL
INFLUENCE OVER OUR MANAGEMENT AND CORPORATE AFFAIRS.
After the completion of this offering, Daisytek will own approximately
82.2% of our outstanding shares of common stock, or approximately 80.1% if the
underwriters exercise their over-allotment option in full. As long as Daisytek
owns a majority of our outstanding common stock, Daisytek will continue to be
able to elect our entire board of directors and to remove any director, with or
without cause, and generally to determine the outcome of all corporate actions
requiring stockholder approval. As a result, Daisytek will be in a position to
continue to control all matters affecting our company, including:
- the composition of our board of directors and, through it, any decisions
with respect to the direction and policies of our company, including the
appointment and removal of officers;
- any decisions with respect to mergers or other business combinations
involving our company;
- the acquisition or disposition of assets by our company;
- future issuances of common stock or other securities of our company;
- the incurrence of debt by our company;
- amendments, waivers and modifications to our transaction management
services agreement with Daisytek and other agreements relating to our
spin-off from Daisytek;
- the payment of dividends on our common stock; and
- decisions with respect to treatment of items in those of our tax returns
which are consolidated or combined with Daisytek tax returns.
WE MAY HAVE POTENTIAL BUSINESS CONFLICTS OF INTEREST WITH DAISYTEK.
Daisytek will continue to be our largest customer for a significant period
of time and, unless and until Daisytek completes the spin-off of our common
stock, it will continue to be our controlling stockholder. As a result,
conflicts of interest may arise between us and Daisytek in a number of areas,
including:
- the nature, quality and pricing of services we provide to Daisytek;
- the nature, quality and pricing of transitional services Daisytek has
agreed to provide to us;
- labor, tax, employee benefit and other matters relating to the spin-off
of our company from Daisytek;
- the incurrence of debt by our company and business combinations by our
company;
- sales or distributions by Daisytek of all or any portion of its ownership
interest in our company; and
- Daisytek's ability to control the management and affairs of our company.
We cannot assure you that we will be able to resolve any potential
conflicts or that, if resolved, we would not be able to receive more favorable
resolution if we were dealing with an unaffiliated party. Our transaction
management services agreement with Daisytek and the other agreements we will
enter into with Daisytek may be amended from time to time upon agreement between
the parties. As long as we are controlled by Daisytek, we cannot assure you that
Daisytek would not
10
14
require us to agree to an amendment to the transaction management services
agreement or any other agreement that may be more or less favorable to us than
the current terms of the agreement. In addition, our ability to incur
indebtedness, make acquisitions and dispositions and issue stock is restricted
under the terms of an agreement that we will enter into with Daisytek.
OUR DIRECTORS MAY HAVE CONFLICTS OF INTEREST BECAUSE THEY ARE ALSO DIRECTORS OF
DAISYTEK.
After this offering, all of the members of our board of directors will also
be directors of Daisytek and our chairman, chief executive officer and chief
financial officer will also serve in such capacities for Daisytek. In addition,
many of our executive officers, directors and employees hold shares of Daisytek
common stock and options to acquire shares of Daisytek common stock. These
individuals may have conflicts of interest with respect to certain decisions
involving business opportunities and similar matters that may arise in the
ordinary course of our business or the business of Daisytek. Conflicts, if any,
could be resolved in a manner adverse to us and our stockholders, which could
materially adversely affect our business, results of operations and financial
condition.
WE HAVE POTENTIAL LIABILITY TO DAISYTEK FOR TAX INDEMNIFICATION OBLIGATIONS.
We will indemnify Daisytek for any tax liability it suffers arising out of
our actions after the spin-off that would cause the spin-off to lose its
qualification as a tax-free distribution for federal income tax purposes. In the
event that we are required to do so, that indemnification would have a material
adverse effect on our business.
WE HAVE POTENTIAL LIABILITY FOR DAISYTEK'S TAX OBLIGATIONS.
For all periods in which Daisytek owns or owned 80% or more of our capital
stock, we are included in Daisytek's consolidated group for federal income tax
purposes. If Daisytek or other members of the consolidated group fail to make
any federal income tax payments, we would be liable for the shortfall since each
member of a consolidated group is liable for the group's entire tax obligation.
WE HAVE LIMITED ABILITY TO ISSUE COMMON STOCK PRIOR TO OR AFTER THE SPIN-OFF.
In order for the spin-off to be tax-free to Daisytek and Daisytek's
stockholders, we will agree not to issue additional shares of capital stock
before the spin-off if it would prevent Daisytek from distributing at least 80%
of our capital stock in the spin-off. Similarly, we will agree upon certain
limitations during the two-year period after the spin-off, such as issuing an
additional amount of our capital stock in a single transaction or series of
transactions related to the spin-off which, when combined with the common stock
issued in this offering, could cause a 50% or greater change in the vote or
value of our outstanding capital stock. These restrictions may impede our
ability to complete transactions using our capital stock or to attract qualified
persons to become officers or directors.
WE HAVE POTENTIAL LIABILITY AS A GUARANTOR OF DAISYTEK'S INDEBTEDNESS.
Together with several other Daisytek subsidiaries, we are a guarantor of
all amounts outstanding under Daisytek's $85 million line of credit. If Daisytek
should default under this line of credit, we may be required to pay under this
guaranty which would have a material adverse effect on our business.
OUR HISTORICAL FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF OUR RESULTS AS
A SEPARATE COMPANY.
The historical financial information included in this prospectus may not
reflect what our results of operations, financial position and cash flows would
have been had we been a separate, stand-
11
15
alone entity during the periods presented or what our results of operations,
financial position and cash flows will be in the future. This is because:
- we made certain adjustments and allocations since Daisytek did not
account for us as, and we were not operated as, a single stand-alone
business for the periods presented; and
- the information does not reflect many significant changes that will occur
in our funding and operations as a result of our separation from
Daisytek.
We cannot assure you that the adjustments and allocations we made in
preparing our historical combined financial statements appropriately reflect our
operations during such periods as if we had, in fact, operated as a stand-alone
entity or what the actual effect of our separation from Daisytek will be.
Accordingly, we cannot assure you that our historical results of operations are
indicative of our future operating or financial performance.
RISKS RELATED TO OUR INDUSTRY
IF THE TREND TOWARD OUTSOURCING DOES NOT CONTINUE, OUR BUSINESS WILL BE
ADVERSELY AFFECTED.
Our business could be materially adversely affected if the trend toward
outsourcing declines or reverses, or if corporations bring previously outsourced
functions back in-house. Particularly during general economic downturns,
businesses may bring in-house previously outsourced functions in order to avoid
or delay layoffs.
OUR FUTURE GROWTH DEPENDS UPON AN INCREASE IN THE USE OF THE INTERNET AS A
MEDIUM FOR E-COMMERCE.
If the use of the Internet as a commercial marketplace does not continue to
grow, then our business could be materially adversely affected. The use of the
Internet as a commercial marketplace is at an early stage of development. Demand
and market acceptance for recently introduced products and services over the
Internet are still uncertain. We cannot predict whether customers will be
willing to shift their traditional activities on-line. In particular, sales of
goods and services over the Internet have developed more slowly outside of the
United States. The Internet may not prove to be a viable commercial marketplace
for a number of reasons, including:
- concerns about security;
- Internet network congestion;
- inconsistent quality of service; and
- lack of cost-effective, high-speed access.
GOVERNMENTAL REGULATIONS REGARDING THE INTERNET MAY BE ENACTED, WHICH COULD
IMPEDE OUR BUSINESS.
The legal and regulatory environment that pertains to the Internet is
uncertain and may change. Uncertainty and new regulations could increase our
costs of doing business. The growth of the Internet may also be significantly
slowed. This could delay growth in demand for our services and limit the growth
of our revenue. In addition to new regulations being adopted, existing laws may
be applied to the Internet.
OUR MARKET IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND TO COMPETE WE MUST
CONTINUALLY ENHANCE OUR SYSTEMS TO COMPLY WITH EVOLVING STANDARDS.
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our services and the underlying
network infrastructure. If we are unable to adapt to changing market conditions,
client requirements or emerging industry standards, our business could be
adversely affected. The Internet and e-commerce are characterized by rapid
12
16
technological change, changes in user requirements and preferences, frequent new
product and service introductions embodying new technologies and the emergence
of new industry standards and practices that could render our technology and
systems obsolete. Our success will depend, in part, on our ability to both
internally develop and license leading technologies to enhance our existing
services and develop new services. We must continue to address the increasingly
sophisticated and varied needs of our clients and respond to technological
advances and emerging industry standards and practices on a cost-effective and
timely basis. The development of proprietary technology involves significant
technical and business risks. We may fail to develop new technologies
effectively or to adapt our proprietary technology and systems to client
requirements or emerging industry standards.
RISKS RELATED TO THIS OFFERING
ABSENCE OF A PRIOR PUBLIC MARKET; MARKET VOLATILITY MAY AFFECT OUR STOCK PRICE.
Prior to this offering, there has been no public market for shares of our
common stock. The initial public offering price of the shares of our common
stock will be determined by negotiation between representatives of the
underwriters and us. This price will not necessarily reflect the market price of
the common stock following this offering and you may not be able to resell your
shares at or above the initial public offering price.
The market price for our common stock following this offering will be
affected by a number of factors, including the following:
- the announcement of new services or service enhancements by us or our
competitors;
- quarterly variations in our or our competitors' results of operations;
- changes in earnings estimates or recommendations by securities analysts;
- developments in our industry; and
- general market conditions and other factors, including factors unrelated
to our operating performance or the operating performance of our
competitors.
In addition, stock prices for many companies in the technology and emerging
growth sectors have experienced wide fluctuations that have often been unrelated
to their operating performance. These factors and fluctuations, as well as
general economic, political and market conditions, may materially adversely
affect the market price of our common stock.
THE SALE OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK AFTER THIS
OFFERING MAY AFFECT OUR STOCK PRICE.
The market price of our common stock could drop as a result of sales of
substantial amounts of common stock in the public market after the closing of
this offering or the perception that substantial sales could occur. After this
offering, Daisytek will own 14,305,000 shares of our common stock. If Daisytek
distributes these shares to its stockholders, they will be eligible for
immediate resale in the public market, other than any shares held by our
affiliates. In addition, upon completion of the spin-off, outstanding Daisytek
options held by our employees will be converted into options to purchase our
common stock. We cannot predict whether substantial amounts of our common stock
will be sold in the open market in anticipation of, or following, any
distribution of our shares by Daisytek to its stockholders. Daisytek has the
sole discretion to determine the timing, structure and all terms of its
distribution of our common stock, all of which may also affect the level of
market transactions in our common stock. In addition, these factors could make
it more difficult for us to raise funds through future offerings of our common
stock.
13
17
PURCHASERS OF OUR COMMON STOCK IN THIS OFFERING WILL EXPERIENCE IMMEDIATE AND
SUBSTANTIAL DILUTION.
The initial public offering price is substantially higher than the net
tangible book value per share of our outstanding common stock immediately after
this offering. Accordingly, purchasers of common stock will experience immediate
and substantial net tangible book value dilution of approximately $10.94 per
share, or approximately 84.2% of the offering price of $13.00 per share.
WE DO NOT EXPECT TO PAY DIVIDENDS TO OUR STOCKHOLDERS.
We have not paid any cash dividends on our common stock and anticipate for
the foreseeable future that any earnings will be retained for the operation and
expansion of our business.
OUR CERTIFICATE OF INCORPORATION, OUR BYLAWS AND DELAWARE LAW MAKE IT DIFFICULT
FOR A THIRD PARTY TO ACQUIRE US, DESPITE THE POSSIBLE BENEFIT TO OUR
STOCKHOLDERS.
Provisions of our certificate of incorporation, our bylaws and Delaware law
could make it more difficult for a third party to acquire us, even if doing so
would be beneficial to our stockholders. For example, our certificate of
incorporation provides for a classified board of directors, meaning that only
approximately one-third of our directors will be subject to re-election at each
annual stockholder meeting. Our certificate of incorporation also permits our
Board of Directors to issue one or more series of preferred stock which may have
rights and preferences superior to those of the common stock. The ability to
issue preferred stock could have the effect of delaying or preventing a third
party from acquiring us. These provisions could discourage takeover attempts and
could materially adversely affect the price of our stock.
FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this prospectus. 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" 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 prospectus, could cause our results to differ
materially from those expressed in our forward-looking statements. These factors
include:
- our reliance on the fees generated by the transaction volume or product
sales of our clients;
- trends in the market for our services;
- trends in e-commerce;
- whether we can continue and manage growth;
- changes in the trend toward outsourcing;
- increased competition;
- effects of changes in profit margins;
- the unknown effects of possible system failures and rapid changes in
technology;
- trends in government regulation; and
- our relationship with and separation from Daisytek.
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 evaluating these statements, you
should consider various factors, including the risks set forth in the section
entitled "Risk Factors" beginning on page 6. These factors may cause our actual
results to differ materially from any forward-looking statements.
14
18
PROPOSED SPIN-OFF
OUR HISTORY
Our business unit was formed in 1991 as a subsidiary of Daisytek named
"Working Capital of America" whose purpose was to provide inventory management,
drop-shipping and accounts receivable collections for Daisytek customers and
other third parties. Until 1996, our business unit was comprised of operations
both at Working Capital of America and at Daisytek. Our business gradually
developed as we recognized an opportunity to expand our business and capitalize
on Daisytek's strengths in customer service, order management, product
fulfillment and distribution, and provide these services on an outsourcing
basis. Since 1996, the operations of our business unit have been primarily
focused in PFS. We were formed in 1999 to be, upon completion of this offering,
a holding company for PFS and to facilitate this initial public offering and
spin-off from Daisytek.
SPIN-OFF FROM DAISYTEK
Daisytek's Plan to Spin-off PFSweb
After completion of this offering, Daisytek will own approximately 82.2% of
the outstanding shares of our common stock, or approximately 80.1% if the
underwriters exercise their over-allotment option in full. Daisytek has
announced that it plans to complete the spin-off of our company sometime in
mid-2000 (and within one year of the closing of this offering) by distributing
all of the shares of our common stock it then holds to its stockholders. We
refer to this distribution as the "spin-off."
Because there are certain conditions to effecting the spin-off, Daisytek
has advised us that it has not yet definitively determined whether and when it
expects to complete the spin-off. These conditions include:
- Receipt by Daisytek of a ruling by the Internal Revenue Service that,
among certain other tax consequences of the transaction, the spin-off
will qualify as a tax-free distribution for federal income tax purposes
and will not result in the recognition of taxable gain or loss for
federal income tax purposes to Daisytek or its shareholders. Daisytek
may, in its sole and absolute discretion, determine not to seek such a
ruling and instead proceed on the basis of an opinion from its
professional advisor, in form and substance reasonably satisfactory to
it, as to the qualification of the transaction for tax-free treatment.
- Obtaining any material consents necessary to consummate the spin-off
which shall be in full force and effect.
- No court orders, injunctions, decrees, regulations or other legal
restraint prohibiting or restricting the completion of the spin-off shall
exist.
- No events or developments shall have occurred subsequent to the closing
of this offering that, in the sole judgement of Daisytek, would result in
the spin-off having a materially adverse effect on Daisytek, PFSweb, or
their shareholders.
Benefits of the Spin-off
We believe we will realize certain benefits from our separation from
Daisytek. As an independent company, we expect to be better able to take
advantage of various benefits, including the ones discussed below.
- To Raise Equity Capital on a Substantially More Cost Effective Basis. We
believe that capital for PFSweb can be raised in a substantially more
cost effective basis through an offering of our stock, rather than
Daisytek stock. We also believe that we would be able to raise capital
15
19
on a substantially more effective basis if Daisytek announced its plan to
complete the spin-off of our company.
- Better Incentives for Employees and Greater Accountability. We expect
that the motivation of our employees and the focus of our management will
be strengthened by incentive compensation programs tied to the market
performance of stock representing an interest solely in our business
unit. The separation will allow better and more direct incentives for our
employees and management. As a separate, publicly traded company after
the spin-off, we will be able to implement stock-based compensation plans
for our employees and management, which will be focused entirely on the
successful results and achievements of our business. For example, as a
separate, publicly traded company, we will be able to tie incentive
compensation of our employees more closely to the results of our business
segment. We believe this will enhance our ability to attract and retain
qualified personnel.
- Competition. We believe that our ability to market our services to
certain manufacturers of certain products may be hampered by our
ownership by Daisytek. In particular, we believe that for certain
manufacturers, our separation from Daisytek would reduce or eliminate any
potential channel conflicts as well as any concern regarding the
potential disclosure of proprietary information.
- Greater Strategic Focus. As a result of having our own board of directors
and separate management team, we expect to have a sharper focus on our
business and strategic opportunities. We will also have greater ability
to modify business processes to better fit the needs of our customers,
business units and employees.
Separation, Transaction Management and Transitional Arrangements
Concurrently with the completion of this offering, we and Daisytek will
enter into certain agreements providing for the separation of our business from
Daisytek, including a master separation agreement. These agreements generally
provide for various interim and ongoing relationships between the parties. Under
these agreements, Daisytek will transfer to us assets, including all fixed
assets in the Memphis distribution facility as well as certain assets associated
with providing information technology services and the stock of several
subsidiaries of Daisytek representing the business operations of PFSweb, and we
will transfer to Daisytek $5.7 million in cash and assume $0.3 million of
capital lease obligations, as well as the operating lease obligations related to
these assets. In connection with this offering, we will also repay our payable
to Daisytek. In addition, we and Daisytek will enter into a transaction
management services agreement under which we will provide transaction management
services for Daisytek's U.S. wholesale consumable computer supplies business and
a transition services agreement under which Daisytek will provide us with
certain transitional services.
All of our agreements with Daisytek were made in the context of a
parent-subsidiary relationship and were negotiated in the overall context of our
separation from Daisytek. Although we generally believe that the terms of these
agreements are consistent with fair market values, we cannot assure you that the
prices charged to us, or by us, under these agreements are not higher or lower
than the prices that may be charged by, or to, unaffiliated third parties for
similar services.
For more information regarding the separation arrangements, see "Certain
Transactions."
16
20
USE OF PROCEEDS
Assuming an initial public offering price of $13.00 per share, we will
receive net proceeds of approximately $35.5 million from the sale of 3,100,000
shares of common stock in this offering ($41.1 million if the underwriters
exercise their over-allotment option in full). We intend to use the net proceeds
of this offering:
- to repay an intercompany payable to Daisytek ($ million as of October
31, 1999) which is payable on demand and accrues interest at a
fluctuating rate equal to Daisytek's cost of funds ( % as of October 31,
1999);
- to acquire certain assets from Daisytek of approximately $ million;
- for presently anticipated capital expenditures of approximately $
million; and
- for general working capital and possible acquisitions.
DIVIDEND POLICY
We have never declared or paid cash dividends on our common stock. We
currently intend to retain any future earnings to fund the development and
growth of our business. Therefore, we do not currently anticipate paying any
cash dividends in the foreseeable future.
17
21
CAPITALIZATION
The following table sets forth the Company's cash and capitalization as of
June 30, 1999:
- on an actual basis;
- on a pro forma basis after giving effect to the following:
-- the contribution from Daisytek of $20,000 for 14,305,000 shares of
our common stock;
-- the reclassification of Daisytek's net equity investment as common
stock and additional paid-in capital; and
-- the issuance of 3,100,000 shares of common stock in this offering,
assuming an initial public offering price of $13.00 per common share,
and the application of the estimated $35.5 million net proceeds to
reduce the payable to Daisytek; and
- on a supplemental pro forma basis after giving effect to the following:
-- as of October 1, 1999, we have restructured our agreements with IBM.
Under our prior agreements, our services for IBM included serving as
a master distributor and purchasing and reselling the product
inventory to IBM customers. Under our new agreements with IBM,
Daisytek will act as the master distributor (and be responsible for
the purchase and resale of the product inventory and retain the
customer revenue) and we will continue to perform most of the other
transaction management services we had provided previously. As part
of these new IBM agreements, we will receive service fees from
Daisytek for the transaction management services that we provide. In
connection with the restructuring of our IBM agreements, as of
October 1, 1999, we transferred to Daisytek the IBM-related product
inventory, customer accounts receivable and accounts payable that we
held under our prior agreements. In consideration of this transfer,
Daisytek will pay to us the net value of these assets and liabilities
(approximately $15.3 million as of June 30, 1999). From this amount,
we will pay to Daisytek the remaining balance of the payable to
Daisytek of approximately $1.9 million as of June 30, 1999); and
-- upon completion of this offering, Daisytek will transfer to us
assets, including all fixed assets in the Memphis distribution
facility as well as certain assets associated with providing
information technology services and the stock of several subsidiaries
of Daisytek representing the business operations of PFSweb, and we
will transfer to Daisytek $5.7 million in cash and assume $0.3
million of capital lease obligations, as well as the operating lease
obligations related to these assets.
18
22
This table should be read in conjunction with "Use of Proceeds," "Selected
Combined Historical and Pro Forma Financial and Other Data," the "Combined
Financial Statements" and related notes, the "Pro Forma and Supplemental Pro
Forma Combined Financial Statements" and related notes, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus.
AS OF JUNE 30, 1999
----------------------------------
SUPPLEMENTAL
ACTUAL PRO FORMA PRO FORMA
------ --------- ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Cash................................................... $ 2,408 $ 2,428 $10,088
======= ======= =======
Payable to Daisytek.................................... $37,349 $ 1,870 $ --
Capital Lease Obligation............................... -- -- 260
Shareholders' Equity:
Preferred stock, $1.00 par value; 1,000,000 shares
authorized, none issued and outstanding......... -- -- --
Common stock, no par value; 40,000,000 shares
authorized; 17,405,000 shares issued and
outstanding (pro forma and supplemental pro
forma).......................................... -- -- --
Additional paid-in capital........................ -- 36,153 36,153
Daisytek's net equity investment.................. 654 -- --
Accumulated other comprehensive income............ (188) (188) (188)
------- ------- -------
Total shareholders' equity................... 466 35,965 35,965
------- ------- -------
Total capitalization......................... $37,815 $37,835 $36,225
======= ======= =======
19
23
DILUTION
The net tangible book value of our common stock as of June 30, 1999 was
$0.3 million, or $0.02 per share of common stock. Net tangible book value per
share represents the amount of our total tangible assets less our total
liabilities, divided by the total number of shares of common stock outstanding
prior to this offering.
After giving effect to this offering and the receipt of $35.5 million of
net proceeds from this offering (based on an assumed initial public offering
price of $13.00 per share), the pro forma net tangible book value of the common
stock as of June 30, 1999 would have been approximately $35.8 million, or $2.06
per share. This amount represents an immediate increase in net tangible book
value of $2.04 per share to Daisytek, our existing stockholder, and an immediate
dilution in net tangible book value of $10.94 per share to purchasers of common
stock in this offering. Dilution is determined by subtracting pro forma net
tangible book value per share after this offering from the amount of cash paid
by a new investor for a share of common stock. The following table illustrates
such dilution:
Assumed initial public offering price per share............. $13.00
Net tangible book value per share at June 30, 1999........ $0.02
Increase in pro forma net tangible book value per share
attributable to new investors.......................... 2.04
-----
Pro forma net tangible book value per share after this
offering.................................................. 2.06
------
Dilution per share to new investors......................... $10.94
======
The following table sets forth, as of June 30, 1999, on the pro forma basis
described above, the number of shares of common stock purchased from us, the
total consideration paid to us and the average price per share paid by the
existing stockholder and by new investors who purchase shares of common stock in
this offering, before deducting the estimated underwriting discounts and
commissions and offering expenses.
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
Existing
Stockholder(1)(2)......... 14,305,000 82.2% $ 20,000 0.1% $ 0.01
New Investors(2)............ 3,100,000 17.8 40,300,000 99.9 13.00
---------- ----- ----------- -----
Total............. 17,405,000 100.0% $40,320,000 100.0%
========== ===== =========== =====
- -------------------------
(1) If the Underwriters' over-allotment option is exercised in full, sales in
this offering will reduce the number of shares of common stock held by the
existing stockholder to approximately 80.1% of the total shares of common
stock outstanding after the offering and will increase the number of shares
held by new investors to 3,565,000, or approximately 19.9% of the total
shares of common stock outstanding after the offering. See "Underwriting."
(2) The foregoing table excludes outstanding stock options to purchase an
aggregate of 1,376,500 shares of common stock at a weighted average exercise
price of $10.51 per share. In addition, upon completion of the spin-off,
stock options exercisable for shares of Daisytek common stock held by PFSweb
employees will be converted into stock options exercisable for shares of our
common stock. It is not possible to specify how many shares of our common
stock will be subject to such stock options, as it is not known how many
stock options to purchase Daisytek common stock held by PFSweb employees
will remain unexercised and outstanding by the record date for the spin-off.
However, based on the number of options to purchase Daisytek common stock
held by PFSweb employees outstanding on , 1999, options to
purchase shares of Daisytek common stock would become options to
purchase shares of PFSweb common stock at an estimated weighted average
exercise price
20
24
of $ per share, based on the three day average market price of Daisytek
common stock ending on , 1999 ($ ) and the mid-point
of the range of the estimated initial public offering price of our common
stock ($13.00). If these options are exercised, further dilution to new
investors will occur. We may also issue additional shares of common stock
upon exercise of future stock option grants or equity awards, which could
also result in additional dilution to then-existing stockholders.
21
25
SELECTED COMBINED HISTORICAL AND PRO FORMA FINANCIAL AND OTHER DATA
The following information sets forth our selected combined historical and
pro forma financial and other data as of the dates and for the periods
indicated. Because we believe that our historical financial statements may not
provide a meaningful basis for analyzing our business in the future, we have
presented our financial data in the following formats:
- Historical Presentation;
- Pro Forma and Supplemental Pro Forma Presentation; and
- Fee Equivalent Presentation.
HISTORICAL PRESENTATION
The selected combined historical statement of operations data and balance
sheet data for each of the fiscal years ended March 31, 1997 through 1999, have
been derived from our audited combined financial statements and should be read
in conjunction with those statements and notes included elsewhere in this
prospectus. The selected combined historical statement of operations data for
the fiscal years ended March 31, 1995 and 1996 and the three months ended June
30, 1998 and 1999 and the selected combined historical balance sheet data as of
March 31, 1995 and 1996 and June 30, 1999 have been derived from our unaudited
combined financial statements, and include, in our opinion, all normal,
recurring adjustments necessary for a fair presentation of the financial
position at such dates and the results of operations for such respective
periods. The financial information herein may not necessarily reflect our
results of operations, financial position and cash flows in the future or what
our results of operations, financial position and cash flows would have been had
we been a separate, stand-alone entity during the periods presented.
PRO FORMA AND SUPPLEMENTAL PRO FORMA PRESENTATION
The pro forma and supplemental pro forma financial data have been derived
from our unaudited pro forma and supplemental pro forma combined financial
statements which were prepared to illustrate the effects of certain transactions
and events and the application of the net offering proceeds. The unaudited pro
forma and supplemental pro forma combined statement of operations data have been
prepared as if the transactions and events described below had occurred as of
the beginning of the respective periods presented. The unaudited pro forma and
supplemental pro forma combined balance sheet data have been prepared as if
these transactions and events had occurred as of June 30, 1999. The unaudited
pro forma and supplemental pro forma combined financial data do not purport to
represent what our results of operations or financial position would actually
have been if this offering and the transactions and events had in fact occurred
on such dates or to project our results of operations or financial position for
any future date or period. For a more complete discussion, this data should be
read in conjunction with the "Combined Financial Statements and Related Notes,"
the "Unaudited Condensed Interim Combined Financial Statements and the Related
Notes," the "Pro Forma and Supplemental Pro Forma Combined Financial Statements
and the Related Notes," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this prospectus.
The unaudited pro forma financial data gives effect to the following
transactions and events:
- the contribution from Daisytek of $20,000 for 14,305,000 shares of our
common stock;
- the reclassification of Daisytek's net equity investment as common stock
and additional paid-in capital;
- the issuance of 3,100,000 shares of common stock in this offering,
assuming an initial public offering price of $13.00 per common share, and
the application of the estimated $35.5 million net proceeds to reduce the
payable to Daisytek and to reduce interest expense previously charged by
Daisytek; and
22
26
- the incremental costs we expect to incur as a stand-alone publicly traded
company.
The unaudited supplemental pro forma financial data gives effect to the
following transactions and events:
- as of October 1, 1999, we have restructured our agreements with IBM.
Under our prior agreements, our services for IBM included serving as a
master distributor and purchasing and reselling the product inventory to
IBM customers. Under our new agreements with IBM, Daisytek will act as
the master distributor (and be responsible for the purchase and resale of
the product inventory and retain the customer revenue) and we will
continue to perform most of the other transaction management services we
had provided previously. As part of these new IBM agreements, we will
receive service fees from Daisytek for the transaction management
services that we provide. In connection with the restructuring of our IBM
agreements, as of October 1, 1999, we transferred to Daisytek the IBM
related product inventory, customer accounts receivable and accounts
payable that we held under our prior agreements. In consideration of this
transfer, Daisytek will pay to us the net value of these assets and
liabilities (approximately $15.3 million as of June 30, 1999). From this
amount, we will repay to Daisytek the remaining balance of the payable to
Daisytek (approximately $1.9 million as of June 30, 1999);
- upon completion of this offering, we will enter into a transaction
management services agreement with Daisytek under which we will provide
transaction management services for Daisytek's U.S. wholesale consumable
computer supplies business; and
- upon completion of this offering, Daisytek will transfer to us assets,
including all fixed assets in the Memphis distribution facility as well
as certain assets associated with providing information technology
services and the stock of several subsidiaries of Daisytek representing
the business operations of PFSweb, and we will transfer to Daisytek $5.7
million in cash and assume $0.3 million of capital lease obligations, as
well as the operating lease obligations related to these assets.
We believe the estimates and assumptions used to prepare the unaudited pro
forma and supplemental pro forma combined financial data provide a reasonable
basis for presenting the significant effects of this offering and the
transactions discussed above, and that the pro forma and supplemental pro forma
adjustments give appropriate effect to the estimates and the assumptions and are
properly applied in the unaudited pro forma combined financial data.
FEE EQUIVALENT PRESENTATION
We have provided a "fee equivalent" presentation to show how we evaluate
our business internally and how we will present our financial statements in the
future because of our new arrangements with IBM and Daisytek. The "fee
equivalent" presentation reflects the gross profits that we generated from our
business with IBM as service fee revenue. We historically recorded the IBM
related revenue as product revenue and related product costs as costs of product
revenue because, under our prior agreements with IBM, our services included
acting as a master distributor and purchasing and reselling the IBM inventory to
customers. Under our new arrangements with IBM, we will record revenue generated
by our business with IBM and Daisytek as service fee revenue. In addition, this
presentation includes a reclassification of certain historically recognized
selling, general and administrative expenses to cost of service fee revenue. We
have excluded the following items from this fee equivalent presentation, which
are reflected in the supplemental pro forma financial data:
- the impact of our new transaction management services agreement with
Daisytek that will begin upon completion of this offering; and
23
27
- the reduction in service fee revenue and gross profit under our new
arrangements with IBM and Daisytek because certain services that we
currently provide to IBM will be provided by Daisytek.
HISTORICAL, PRO FORMA AND SUPPLEMENTAL PRO FORMA FINANCIAL DATA
FISCAL YEARS ENDED MARCH 31, FISCAL YEAR ENDED MARCH 31, 1999
--------------------------------------------- -----------------------------------
SUPPLEMENTAL
1995 1996 1997 1998 ACTUAL PRO FORMA PRO FORMA
----------- ----------- ------- ------- -------- --------- ------------
(IN THOUSANDS, (IN THOUSANDS,
EXCEPT PER SHARE DATA) EXCEPT PER SHARE DATA)
(UNAUDITED) (UNAUDITED)
COMBINED STATEMENT OF OPERATIONS DATA:
Revenues:
Product revenue................. $ -- $ -- $16,543 $45,804 $ 93,702 $ 93,702 $ --
Service fee revenue............. 65 111 1,034 3,539 7,547 7,547 31,510
------- ------- ------- ------- -------- -------- -------
Total revenues................ 65 111 17,577 49,343 101,249 101,249 31,510
------- ------- ------- ------- -------- -------- -------
Costs of revenues:
Cost of product revenue......... -- -- 15,768 43,392 88,335 88,335 --
Cost of service fee revenue..... 65 67 596 2,208 5,323 5,323 18,526
------- ------- ------- ------- -------- -------- -------
Total costs of revenues....... 65 67 16,364 45,600 93,658 93,658 18,526
------- ------- ------- ------- -------- -------- -------
Gross profit...................... -- 44 1,213 3,743 7,591 7,591 12,984
Percent of revenues............... --% 39.6% 6.9% 7.6% 7.5% 7.5% 41.2%
Selling, general and
administrative expenses......... -- -- 1,058 3,645 6,559 8,868 8,632
------- ------- ------- ------- -------- -------- -------
Income (loss) from operations..... -- 44 155 98 1,032 (1,277) 4,352
Percent of revenues............... -- 39.6% 0.9% 0.2% 1.0% (1.3)% 13.8%
Interest (income) expense, net.... 41 53 77 143 374 (665) (291)
------- ------- ------- ------- -------- -------- -------
Income (loss) before income
taxes........................... (41) (9) 78 (45) 658 (612) 4,643
Provision (benefit) for income
taxes........................... (16) (2) 44 (7) 273 (184) 1,700
------- ------- ------- ------- -------- -------- -------
Net income (loss)................. $ (25) $ (7) $ 34 $ (38) $ 385 $ (428) $ 2,943
======= ======= ======= ======= ======== ======== =======
PER SHARE DATA:
Net income (loss) per share:
Basic and diluted(a)............ $ (0.00) $ (0.00) $ 0.00 $(0.00) $ 0.03 $ (0.02) $ 0.17
======= ======= ======= ======= ======== ======== =======
Weighted average number of shares
outstanding:
Basic and diluted(a)............ 14,305 14,305 14,305 14,305 14,305 17,405 17,405
- -------------------------
(a) On an historical basis, reported basic and diluted net income per share was
determined based on net income divided by the 14,305,000 shares outstanding
prior to this offering. For purposes of the net income per share
calculation, the shares outstanding prior to this offering are treated as
outstanding for all historical periods presented. Basic and diluted pro
forma and supplemental pro forma net income per share are calculated based
on common stock outstanding of 17,405,000 shares upon completion of this
offering. It does not include up to 465,000 shares of common stock which
the underwriters have the option to exercise solely to cover
over-allotments. If the underwriters exercise their over-allotment option
in full, basic and diluted pro forma net loss per share would be ($0.02)
and basic and diluted supplemental pro forma net income per share would be
$0.16 for the fiscal year ended March 31, 1999 and basic and diluted pro
forma net loss per share would be ($0.02) and basic and diluted
supplemental pro forma net income per share would be $0.02 for the three
months ended June 30, 1999. There were no potentially dilutive securities
outstanding during the periods presented.
24
28
THREE MONTHS ENDED
THREE MONTHS JUNE 30, 1999
ENDED ----------------------------------
JUNE 30, SUPPLEMENTAL
1998 ACTUAL PRO FORMA PRO FORMA
------------ ------ --------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
COMBINED STATEMENT OF OPERATIONS DATA (CONTINUED):
Revenues:
Product revenue................................ $20,424 $32,620 $32,620 $ --
Service fee revenue............................ 1,004 3,191 3,191 9,250
------- ------- ------- -------
Total revenues.............................. 21,428 35,811 35,811 9,250
------- ------- ------- -------
Costs of revenues:
Cost of product revenue........................ 19,345 30,793 30,793 --
Cost of service fee revenue.................... 834 2,231 2,231 5,827
------- ------- ------- -------
Total costs of revenues..................... 20,179 33,024 33,024 5,827
------- ------- ------- -------
Gross profit..................................... 1,249 2,787 2,787 3,423
Percent of revenues.............................. 5.8% 7.8% 7.8% 37.0%
Selling, general and administrative expenses..... 1,154 2,788 3,384 3,116
------- ------- ------- -------
Income (loss) from operations.................... 95 (1) (597) 307
Percent of revenues.............................. 0.4% --% (1.7)% 3.3%
Interest (income) expense, net................... 53 326 (96) (141)
------- ------- ------- -------
Income (loss) before income taxes................ 42 (327) (501) 448
Provision (benefit) for income taxes............. 17 (129) (166) 177
------- ------- ------- -------
Net income (loss)................................ $ 25 $ (198) $ (335) $ 271
======= ======= ======= =======
PER SHARE DATA:
Net income (loss) per share:
Basic and diluted(a)........................... $ 0.00 $ (0.01) $ (0.02) $ 0.02
======= ======= ======= =======
Weighted average number of shares outstanding:
Basic and diluted(a)........................... 14,305 14,305 17,405 17,405
AS OF JUNE 30, 1999
AS OF MARCH 31, ----------------------------------
----------------------------------------- SUPPLEMENTAL
1995 1996 1997 1998 1999 ACTUAL PRO FORMA PRO FORMA
---- ---- ------- ------- ------- ------- --------- ------------
(IN THOUSANDS) (IN THOUSANDS)
(UNAUDITED) (UNAUDITED)
COMBINED BALANCE SHEET DATA:
Working capital.............. $507 $579 $ 5,757 $ 1,344 $14,636 $20,819 $20,839 $13,181
Total assets................. 524 591 15,614 20,911 69,057 67,967 67,987 39,455
Long-term obligations........ 550 629 5,851 1,780 28,889 37,349 1,870 260
Shareholders' equity
(deficit).................. (43) (49) 2 (108) 721 466 35,965 35,965
25
29
FEE EQUIVALENT FINANCIAL DATA
THREE MONTHS
ENDED
FISCAL YEARS ENDED MARCH 31, JUNE 30,
---------------------------------------------- ------------------
1995 1996 1997 1998 1999 1998 1999
------ ----- ------- -------- -------- ------- --------
(IN THOUSANDS) (IN THOUSANDS)
(UNAUDITED) (UNAUDITED)
OTHER OPERATIONS DATA:
Service fee revenues.............. $ 65 $ 111 $ 1,809 $ 5,951 $ 12,914 $ 2,083 $ 5,018
Cost of service fee revenues...... 65 67 787 3,075 6,881 1,183 2,895
------ ----- ------- -------- -------- ------- --------
Gross profit...................... -- 44 1,022 2,876 6,033 900 2,123
Percent of revenues............... --% 39.6% 56.5% 48.3% 46.7% 43.2% 42.3%
Selling, general and
administrative expenses......... -- -- 867 2,778 5,001 805 2,124
------ ----- ------- -------- -------- ------- --------
Income (loss) from operations..... -- 44 155 98 1,032 95 (1)
Percent of revenues............... --% 39.6% 8.6% 1.6% 8.0% 4.6% --%
Interest expense, net............. 41 53 77 143 374 53 326
------ ----- ------- -------- -------- ------- --------
Income (loss) before income
taxes........................... (41) (9) 78 (45) 658 42 (327)
Provision (benefit) for income
taxes........................... (16) (2) 44 (7) 273 17 (129)
------ ----- ------- -------- -------- ------- --------
Net income (loss)................. $ (25) $ (7) $ 34 $ (38) $ 385 $ 25 $ (198)
====== ===== ======= ======== ======== ======= ========
26
30
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 combined financial
statements and related notes thereto appearing elsewhere in this prospectus.
OVERVIEW
We are an international provider of transaction management services to both
traditional and e-commerce companies. We offer a comprehensive suite of
services, including order management, customer care services, billing services,
information management and distribution services. We offer our services as an
integrated solution, which enables our clients to outsource their complete
transaction management infrastructure requirements to a single source. We
currently provide transaction management services to over 30 clients that
operate in a range of vertical markets, including apparel, computer products,
printers, sporting goods and consumer electronics, among others. Our clients
include various divisions of IBM, Hewlett-Packard, Thomson Consumer Electronics,
Nokia, Tektronix, Global Sports Interactive, American Eagle Outfitters and ISA
International plc.
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 call
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
typically passed on to our clients (and, in many cases, our clients' customers)
and are generally not reflected in our revenue or expense. Historically, our
services have also included purchasing and reselling client product inventory.
In these arrangements, our product revenue was recognized at the time product
was shipped. As of October 1, 1999, our primary client agreement under which we
previously purchased and sold inventory will be restructured to provide
transaction management services only on a service fee basis.
Our expenses are comprised of:
- on an historical basis, cost of product revenue, which consists of the
purchase price of product sold and net freight costs;
- cost of service fee revenue, which consists primarily of compensation and
related expenses for our customer care and fulfillment centers and other
fixed and variable expenses directly related to providing services under
the terms of fee based contracts, including certain occupancy and
information technology costs and depreciation and amortization expenses;
and
- selling, general and administrative expenses, which consist primarily of
compensation and related expenses for sales and marketing staff,
executive, management and administrative personnel and other overhead
costs, including certain occupancy and information technology costs and
depreciation and amortization expenses. In addition, on an historical
basis, certain direct contract costs related to our IBM master
distributor agreements have been reflected as selling and administrative
expenses.
27
31
RESULTS OF OPERATIONS
Historical Presentation
The following table sets forth certain historical financial information
from our audited and unaudited combined statements of operations expressed as a
percent of revenues.
THREE MONTHS
FISCAL YEARS ENDED ENDED
MARCH 31, JUNE 30,
----------------------- --------------
1997 1998 1999 1998 1999
----- ----- ----- ----- -----
Product revenue............................... 94.1% 92.8% 92.5% 95.3% 91.1%
Service fee revenue........................... 5.9 7.2 7.5 4.7 8.9
----- ----- ----- ----- -----
Total revenues...................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Cost of product revenue (as % of product
revenue).................................... 95.3 94.7 94.3 94.7 94.4
Cost of service fee revenue (as % of service
fee revenue)................................ 57.6 62.4 70.5 83.1 69.9
----- ----- ----- ----- -----
Total costs of revenues............. 93.1 92.4 92.5 94.2 92.2
----- ----- ----- ----- -----
Gross profit.................................. 6.9 7.6 7.5 5.8 7.8
Selling, general and administrative
expenses.................................... 6.0 7.4 6.5 5.4 7.8
----- ----- ----- ----- -----
Income from operations........................ 0.9 0.2 1.0 0.4 --
Interest expense, net......................... 0.5 0.3 0.4 0.2 0.9
----- ----- ----- ----- -----
Income (loss) before income taxes............. 0.4 (0.1) 0.6 0.2 (0.9)
Provision (benefit) for income taxes.......... 0.2 0.0 0.2 0.1 (0.3)
----- ----- ----- ----- -----
Net income (loss)............................. 0.2% (0.1)% 0.4% 0.1% (0.6)%
===== ===== ===== ===== =====
Fee Equivalent Presentation
The following table sets forth certain financial information from our
unaudited combined statements of operations on a fee equivalent basis expressed
as a percent of revenues. (See "Selected Combined Historical and Pro Forma
Financial and Other Data" for further discussion.)
THREE MONTHS
FISCAL YEARS ENDED ENDED
MARCH 31, JUNE 30,
----------------------- --------------
1997 1998 1999 1998 1999
----- ----- ----- ----- -----
Service fee revenues.......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of service fee revenues.................. 43.5 51.7 53.3 56.8 57.7
----- ----- ----- ----- -----
Gross profit.................................. 56.5 48.3 46.7 43.2 42.3
Selling, general and administrative
expenses.................................... 47.9 46.7 38.7 38.6 42.3
----- ----- ----- ----- -----
Income from operations........................ 8.6 1.6 8.0 4.6 0.0
Interest expense, net......................... 4.3 2.3 2.9 2.6 6.5
----- ----- ----- ----- -----
Income (loss) before income taxes............. 4.3 (0.7) 5.1 2.0 (6.5)
Provision (benefit) for income taxes.......... 2.4 (0.1) 2.1 0.8 (2.6)
----- ----- ----- ----- -----
Net income (loss)............................. 1.9% (0.6)% 3.0% 1.2% (3.9)%
===== ===== ===== ===== =====
28
32
THREE MONTH PERIOD ENDED JUNE 30, 1999 COMPARED TO THREE MONTH PERIOD ENDED JUNE
30, 1998
Historical Comparison
Product Revenue. Product revenue was $32.6 million for the three months
ended June 30, 1999 as compared to $20.4 million for the three months ended June
30, 1998, an increase of $12.2 million or 59.7%. Product revenue increased as a
result of higher sales volumes under our North American IBM master distributor
agreements and the addition of new European IBM distributor agreements entered
into during December 1998.
Service Fee Revenue. Service fee revenue was $3.2 million during the three
months ended June 30, 1999 as compared to $1.0 million during the three months
ended June 30, 1998, an increase of $2.2 million or 217.8%. The increase in
service fee revenue was primarily due to growth in client orders processed under
both new and existing fee-based contracts.
Cost of Product Revenue. Cost of product revenue was $30.8 million during
the three months ended June 30, 1999 as compared to $19.3 million during the
three months ended June 30, 1998, an increase of $11.5 million or 59.2%. Cost of
product revenue as a percent of product revenue was 94.4% during the three
months ended June 30, 1999 and 94.7% during the three months ended June 30,
1998. The resulting product gross profit margin was 5.6% during the three months
ended June 30, 1999 and 5.3% during the three months ended June 30, 1998. The
increase in product gross profit margin was related to changes in customer and
product mix.
Cost of Service Fee Revenue. Cost of service fee revenue was $2.2 million
for the three months ended June 30, 1999 as compared to $0.8 million during the
three months ended June 30, 1998, an increase of $1.4 million or 167.5%. The
increase in cost of service fee revenue during the three months ended June 30,
1999 was due to increased activity from growth in existing contracts as well as
new client relationships. The resulting service fee gross profit margin was
30.1% during the three months ended June 30, 1999 and 16.9% during the three
months ended June 30, 1998. The increase in service fee gross profit margin was
due to certain initial incremental costs incurred to implement several new
contracts during the three months ended June 30, 1998.
Gross Profit. Gross profit was $2.8 million for the three months ended
June 30, 1999 or 7.8% of revenues as compared to $1.2 million or 5.8% of
revenues for the three months ended June 30, 1998. The increase in gross profit
margin resulted from increased service fee revenues, which typically earn higher
gross profit margins, during the three months ended June 30, 1999.
Selling, General and Administrative Expenses. SG&A expenses were $2.8
million for the three months ended June 30, 1999 or 7.8% of revenues as compared
to $1.2 million or 5.4% of revenues for the three months ended June 30, 1998.
SG&A expenses increased primarily as a result of costs incurred to support the
higher sales volumes under both new and existing contracts. Incremental
investments in resources and technology to support our continued growth also
contributed to increased SG&A expenses.
Interest Expense, Net. Interest expense was $0.3 million for the three
months ended June 30, 1999 as compared to $0.1 million for the three months
ended June 30, 1998. Interest expense increased as a result of an increase in
the average payable to Daisytek to support working capital requirements
applicable primarily to our master distributor agreements. The weighted average
interest rate was 6.11% during the three months ended June 30, 1999 and 7.15%
during the three months ended June 30, 1998.
Income Taxes. Our effective tax rate was 39.4% for the three months ended
June 30, 1999 and 40.5% for the three months ended June 30, 1998.
Fee Equivalent Comparison
Fee Equivalent Revenues. Fee equivalent revenues were $5.0 million for the
three months ended June 30, 1999 as compared to $2.1 million for the three
months ended June 30, 1998, an
29
33
increase of $2.9 million or 140.9%. Fee equivalent revenues increased primarily
due to growth in client orders processed under both existing and new client
relationships.
Fee Equivalent Gross Profit. Our fee equivalent gross profit was $2.1
million or 42.3% of fee equivalent revenues for the three months ended June 30,
1999 as compared to $0.9 million or 43.2% of fee equivalent revenues for the
three months ended June 30, 1998. Our IBM master distributor agreements have
historically earned a higher fee equivalent gross profit margin than our other
service fee contracts. As the overall fee equivalent revenues of these IBM
agreements have declined as a percent of total fee equivalent revenues, the
overall fee equivalent gross profit margin has declined.
Fee Equivalent Selling, General and Administrative Expenses. Fee
equivalent SG&A expenses were $2.1 million for the three months ended June 30,
1999 or 42.3% of fee equivalent revenues as compared to $0.8 million or 38.6% of
fee equivalent revenues for the three months ended June 30, 1998. The increase
in fee equivalent SG&A expenses was primarily a result of costs incurred to
support growth in client orders processed under both new and existing contracts.
Incremental investments in resources and technology to support our continued
growth also contributed to increased fee equivalent SG&A expenses.
FISCAL YEAR ENDED MARCH 31, 1999 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1998
Historical Comparison
Product Revenue. Product revenue was $93.7 million for fiscal 1999
compared to $45.8 million for fiscal 1998, an increase of $47.9 million or
104.6%. Product revenue increased as a result of higher sales volumes under our
North American IBM master distributor agreements and the addition of new
European IBM distributor agreements entered into in December 1998.
Service Fee Revenue. Service fee revenue was $7.5 million during fiscal
1999 as compared to $3.5 million during fiscal 1998, an increase of $4.0 million
or 113.3%. The increase in service fee revenue was primarily due to growth in
client orders processed under both new and existing fee-based contracts.
Cost of Product Revenue. Cost of product revenue was $88.3 million during
fiscal 1999 as compared to $43.4 million during fiscal 1998, an increase of
$44.9 million or 103.6%. Cost of product revenue as a percent of product revenue
was 94.3% for fiscal 1999 and 94.7% for fiscal 1998. The resulting product gross
profit margin was 5.7% for fiscal 1999 and 5.3% for fiscal 1998. The increase in
product gross profit margin was related to changes in customer and product mix.
Cost of Service Fee Revenue. Cost of service fee revenue was $5.3 million
for fiscal 1999 compared to $2.2 million during fiscal 1998, an increase of $3.1
million or 141.1%. The increase in cost of service fee revenue during fiscal
1999 was due to growth in client orders processed during the period. The
resulting service fee gross profit margin was 29.5% during fiscal 1999 and 37.6%
during fiscal 1998. The decrease in service fee gross profit margin was due to
the addition of certain large contracts at lower gross profit margins and
incremental costs related to implementing several new contracts during fiscal
1999.
Gross Profit. Our gross profit was $7.6 million or 7.5% of revenues for
fiscal 1999 as compared to $3.7 million or 7.6% of revenues for fiscal 1998.
Selling, General and Administrative Expenses. SG&A expenses for fiscal
1999 were $6.6 million or 6.5% of revenues as compared to $3.6 million or 7.4%
of revenues for fiscal 1998. The increase in SG&A expenses for fiscal 1999 was a
result of costs incurred to support the growth in client orders processed under
both new and existing contracts. Incremental investments in resources and
technology to support our continued growth also contributed to increased SG&A
expenses.
Interest Expense, Net. Interest expense was $0.4 million during fiscal
1999 and $0.1 million during fiscal 1998. Interest expense increased as a result
of an increase in the average payable to
30
34
Daisytek to support working capital requirements applicable primarily to our
master distributor agreements. The weighted average interest rate was 6.7%
during fiscal 1999 and 6.9% during fiscal 1998.
Income Taxes. Our effective tax rate was 41.5% for fiscal 1999 as compared
to an effective tax rate benefit of 15.6% for fiscal 1998. The change in the
effective tax rate was the result of an increase in earnings of our U.S.
operations relative to our international operations at a lower marginal tax rate
than our international operations combined with certain nondeductible expenses
in fiscal 1998.
Fee Equivalent Comparison
Fee Equivalent Revenues. Fee equivalent revenues were $12.9 million for
fiscal 1999 as compared to $6.0 million for fiscal 1998, an increase of $6.9
million or 117.0%. Fee equivalent revenues increased primarily due to growth in
client orders processed under both existing and new client relationships.
Fee Equivalent Gross Profit. Our fee equivalent gross profit was $6.0
million or 46.7% of fee equivalent revenues for fiscal 1999 as compared to $2.9
million or 48.3% of fee equivalent revenues for fiscal 1998. Our IBM master
distributor agreements have historically earned a higher fee equivalent gross
profit margin than our other service fee contracts. As the overall fee
equivalent revenues of these IBM agreements have declined as a percent of total
fee equivalent revenues, the overall fee equivalent gross profit margin has
declined.
Fee Equivalent Selling, General and Administrative Expenses. Fee
equivalent SG&A expenses were $5.0 million for fiscal 1999 or 38.7% of fee
equivalent revenues as compared to $2.8 million or 46.7% of fee equivalent
revenues for fiscal 1998. The increase in fee equivalent SG&A expenses for
fiscal 1999 was primarily the result of growth in client orders processed under
both new and existing contracts. Incremental investments in resources and
technology to support our continued growth also contributed to increased fee
equivalent SG&A expenses. The improvement in the fee equivalent SG&A percentage
was due to our ability to leverage existing infrastructure costs.
FISCAL YEAR ENDED MARCH 31, 1998 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1997
Historical Comparison
Product Revenue. Product revenue was $45.8 million for fiscal 1998 as
compared to $16.5 million for fiscal 1997, an increase of $29.3 million or
176.9%. Product revenue increased during fiscal 1998 as a result of higher sales
volumes of products under our IBM master distributor agreements.
Service Fee Revenue. Service fee revenue was $3.5 million during fiscal
1998 as compared to $1.0 million during fiscal 1997, an increase of $2.5 million
or 242.3%. The increase in service fee revenue was primarily due to growth in
client orders processed under both new and existing fee-based contracts.
Cost of Product Revenue. Cost of product revenue was $43.4 million during
fiscal 1998 as compared to $15.8 million during fiscal 1997, an increase of
$27.6 million or 175.2%. Cost of product revenue as a percent of product revenue
was 94.7% for fiscal 1998 and 95.3% for fiscal 1997. The resulting product gross
profit margin was 5.3% for fiscal 1998 and 4.7% for fiscal 1997. The increase in
product gross profit margin was related to changes in customer and product mix.
Cost of Service Fee Revenue. Cost of service fee revenue was $2.2 million
for fiscal 1998 as compared to $0.6 million for fiscal 1997, an increase of $1.6
million or 270.5%. The increase in cost of service fee revenue during fiscal
1998 was due to growth in client orders processed during the period. The
resulting service fee gross profit margin was 37.6% during fiscal 1998 and 42.4%
during
31
35
fiscal 1997. The decrease in service fee gross profit margin was due to the
addition of certain large contracts at lower gross profit margins.
Gross Profit. Our gross profit was $3.7 million or 7.6% of revenues for
fiscal 1998 as compared to $1.2 million or 6.9% of revenues for fiscal 1997. The
increase in our gross profit for fiscal 1998 was primarily the result of
increased product revenue. The increase in our gross profit margin resulted from
increased service fee revenues, which typically earn higher gross profit
margins, during fiscal 1998.
Selling, General and Administrative Expenses. SG&A expenses were $3.6
million for fiscal 1998 or 7.4% of revenues as compared to $1.1 million or 6.0%
of revenues for fiscal 1997. The increase in SG&A expenses for fiscal 1998 was
primarily the result of higher sales volumes under both new and existing
contracts. Incremental investments in resources and technology to support our
continued growth also contributed to increased SG&A expenses.
Interest Expense, Net. Interest expense was $0.1 million during each of
fiscal 1998 and fiscal 1997. Interest expense increased slightly as a result of
an increase in the average payable to Daisytek to support our working capital
requirements applicable primarily to its master distributor agreements. The
weighted average interest rate was 6.9% during fiscal 1998 and 6.1% during
fiscal 1997.
Income Taxes. Our effective tax rate benefit was 15.6% for fiscal 1998
compared to an effective tax rate of 56.4% for fiscal 1997. The change in the
effective tax rate was the result of an increase in earnings of our U.S.
operations relative to our international operations at a lower marginal tax rate
than our international operations combined with certain nondeductible expenses
in fiscal 1998.
Fee Equivalent Comparison
Fee Equivalent Revenues. Fee equivalent revenues were $6.0 million for
fiscal 1998 as compared to $1.8 million for fiscal 1997, an increase of $4.2
million or 229.0%. Fee equivalent revenues increased due to growth in client
orders processed under existing and new client relationships.
Fee Equivalent Gross Profit. Our fee equivalent gross profit was $2.9
million or 48.3% of fee equivalent revenues for fiscal 1998 as compared to $1.0
million or 56.5% of fee equivalent revenues for fiscal 1997. Our IBM master
distributor agreements have historically earned a higher fee equivalent gross
profit margin than our other service fee contracts. As the overall fee
equivalent revenues of these IBM agreements have declined as a percent of total
fee equivalent revenues, the overall gross profit margin has declined.
Fee Equivalent Selling, General and Administrative Expenses. Fee
equivalent SG&A expenses were $2.8 million for fiscal 1998 or 46.7% of fee
equivalent revenues as compared to $0.9 million or 47.9% of fee equivalent
revenues for fiscal 1997. The increase in fee equivalent SG&A expenses for
fiscal 1998 was primarily the result of growth in client orders processed.
Incremental investments in resources and technology to support our continued
growth also contributed to increased fee equivalent SG&A expenses. The
improvement in the fee equivalent SG&A percentage was due to our ability to
leverage existing infrastructure costs.
LIQUIDITY AND CAPITAL RESOURCES
As a subsidiary of Daisytek, we have historically funded our business
through intercompany borrowings from Daisytek. The net proceeds of this offering
will be used to repay our intercompany borrowings from Daisytek. We currently
believe that the net available proceeds from this offering, the effect of the
restructuring of our IBM agreements discussed below and funds generated from
operations will satisfy our working capital and capital expenditure requirements
for the next twelve months. Because we will be restricted from borrowing from
Daisytek following the spin-off, we also plan to seek our own credit facility.
32
36
Net cash provided by financing activities was $8.5 million for the three
months ended June 30, 1999, as compared to $5.6 million for the three months
ended June 30, 1998. Net cash provided by financing activities was $27.6 million
for fiscal 1999 and $5.2 million for fiscal 1997. Net cash used in financing
activities was $4.1 million in fiscal 1998, representing a repayment to
Daisytek. Additionally, during fiscal 1999, Daisytek made a capital contribution
of $0.5 million to its PFSweb Canadian subsidiary.
Cash flows used in operating activities totaled $4.4 million during the
three months ended June 30, 1999 as compared to $1.3 million during the three
months ended June 30, 1998. For the three months ended June 30, 1999, the net
cash used in operating activities primarily reflected a reduction in accounts
payable and accrued expenses of $9.3 million and an increase in accounts
receivable of $0.6 million, which was partially offset by a reduction in
inventory of $5.3 million. For the three months ended June 30, 1998, the net
cash used in operating activities was primarily due to an increase in inventory
of $0.7 million and accounts receivable of $2.2 million, which were partially
offset by a reduction in accounts payable and accrued expenses of $1.5 million.
Net cash used in operating activities was $12.1 million for fiscal 1999 and
$5.1 million for fiscal 1997. Net cash provided by operating activities was $4.6
million for fiscal 1998. Working capital requirements increased in fiscal 1999
compared to fiscal 1998 primarily due to product revenue growth under our North
American IBM master distributor agreements. We also entered into new master
distributor agreements in December 1998 to provide services for IBM in Europe.
Our North American revenue growth, as well as the new European contracts,
resulted in significant increases in IBM contract related accounts receivable,
inventory and accounts payable.
Working capital increased to $20.8 million at June 30, 1999 from $14.6
million at March 31, 1999, and from $1.3 million at March 31, 1998. A
significant portion of our working capital needs has historically been related
to our master distributor agreements with IBM which required us to purchase and
resell the product inventory to IBM customers. Under our new agreements with
IBM, Daisytek will act as the master distributor (and be responsible for the
purchase and resale of the product inventory and retain the customer revenue),
and we will continue to perform most of the other transaction management
services we had provided previously. As part of these new IBM agreements, we
will receive service fees from Daisytek for the transaction management services
that we provide. In connection with the restructuring of our IBM agreements, as
of October 1, 1999, we transferred to Daisytek the IBM-related product
inventory, customer accounts receivable and accounts payable that we held under
our prior agreements. In consideration of this transfer, Daisytek will pay to us
the net value of these assets and liabilities (approximately $15.3 million as of
June 30, 1999). From this amount, we will pay to Daisytek the remaining balance
of the payable owed to Daisytek of approximately $1.9 million as of June 30,
1999). As a result of these transactions, our historical working capital
requirements may not be indicative of our future needs.
Our principal use of funds for investing activities was capital
expenditures of $2.1 million for the first three months of fiscal 2000 as
compared to $0.3 million for the first three months of fiscal 1999. Capital
expenditures were $2.7 million for fiscal 1999, $0.3 million for fiscal 1998 and
$0.1 million for fiscal 1997. In addition, we have entered into a long-term
contractual agreement with one of our clients pursuant to which, as part of the
services that we provide, we finance certain of the client's inventory. This
amount was $12.2 million at June 30, 1999 and $12.1 million at March 31, 1999
(see Note 2 of Notes to Combined Financial Statements). Capital expenditures
have 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 fiscal 2000 will be approximately $13.0 to $15.0
million. This amount includes the transfer to us of certain assets from Daisytek
for approximately $6.0 million ($5.7 million in cash and the assumption of $0.3
million of capital lease obligations) plus the assumption of certain lease
obligations. The increase in
33
37
anticipated capital expenditures over fiscal 1999 relates primarily to our asset
purchase from Daisytek and capital expenditures applicable to our new Belgium
distribution facility, combined with expansion of our U.S. sales and
distribution facilities. Some of these expenditures may be financed through
operating or capital leases.
We believe that international markets represent further opportunities for
growth. We may consider entering into forward exchange contracts in order to
hedge our net investment in our Canadian or European operations or in other
international countries in which we establish a presence, although no assurance
can be given that we will be able to do so on acceptable terms.
In the future, we may attempt to acquire other businesses to expand our
services or capabilities in connection with our efforts to grow our business. We
currently have no binding agreements to acquire any such businesses. Should we
be successful in acquiring other businesses, we may require additional
financing. Acquisitions involve certain risks and uncertainties. Therefore, we
can give no assurance with respect to whether we will be successful in
identifying businesses to acquire, whether we will be able to obtain financing
to complete an acquisition, or whether we will be successful in operating the
acquired business.
YEAR 2000 ISSUE
We utilize a significant number of computer software programs and
information systems in our operations ("IT systems"). The mission-critical IT
systems include our operating, Web hosting, accounting and telecommunications
systems, such as IT software applications that allow us to maintain inventory
and customer information and to communicate with our suppliers, clients and
customers. We also make use of a variety of machinery and equipment in our
business which are operated by or reliant upon non-information technology
systems ("non-IT systems"), such as equipment or mechanical systems which
contain embedded technology such as micro-controllers. To the extent that the
source code of the software applications of these IT systems or the embedded
technologies of these non-IT systems are unable to appropriately interpret and
process the upcoming calendar year 2000, some level of modification, or possible
replacement of such applications, would be necessary for the proper continuous
performance of these systems. Without such modification or replacement, the
normal course of our business could be disrupted or otherwise adversely
impacted. This potential problem is commonly referred to as the year 2000
compliance issue ("Y2K").
In fiscal 1997, Daisytek began to address Y2K. Daisytek has formed a Y2K
task force under its Chief Information Officer to coordinate and implement
measures designed to prevent disruption in its business operations, including
PFSweb, related to Y2K. Daisytek and PFSweb have successfully completed the
remediation of their mission-critical IT applications software and are scheduled
to complete remediation of their non-mission critical applications software by
November 1999. Daisytek and PFSweb are assessing the effect of Y2K on their
non-IT systems and intend to modify or replace non-IT systems as necessary to
insure Y2K readiness by November 1999. We believe that, as of September 1, 1999,
we have completed approximately 90% of the initiatives that we believe are
necessary to fully address potential Y2K issues relating to our systems and
operations. The projects comprising the remaining 10% of the initiatives are in
process and expected to be completed by November 30, 1999. We believe that other
IT projects not related to the Y2K issue
34
38
have not been delayed or negatively affected by the initiatives addressing the
Y2K issue. The following table represents our schedule and status of our Y2K
initiatives:
YEAR 2000 INITIATIVE TIME FRAME % COMPLETE
- -------------------- ---------- ----------
Initial IT systems identification and assessment............ 4/97 - 6/97 100%
Remediation and testing regarding core distribution
systems................................................... 7/97 - 11/98 100%
Remediation and testing regarding purchased software
systems................................................... 7/97 - 10/99 95%
Upgrades to telecommunications systems...................... 9/97 - 4/99 100%
Desktop systems identification and remediation.............. 7/97 - 11/99 90%
Remediation and testing for automated warehouse equipment
systems................................................... 7/99 - 11/99 50%
Service provider assessment................................. 1/99 - 8/99 100%
We have initiated communications with our clients to determine the extent
to which our revenues may be vulnerable due to our clients' failure to
re-mediate Y2K and not be able to conduct business with us. We are satisfied
that our major clients are either appropriately prepared for the Y2K issue or
our engagement with them will not be adversely affected by the Y2K issue.
However, there can be no guarantee that the systems of our clients, will be
timely or properly converted, or that a failure to convert by another company,
or a conversion that is incompatible with our systems, would not have a material
adverse effect on our business.
We conduct electronic data interchange (EDI) with some of our clients.
Approximately half of the clients that we conduct EDI with have converted their
EDI transaction sets to Y2K compliant versions. We believe that we will be able
to conduct business with all of our partners whether they convert to Y2K
compliant versions or not. We believe that the EDI transactions that we use with
our clients are not significantly dependent on Y2K compliance and that we will
be able to accept transactions as well as send transactions to clients whether
they are compliant or not.
We utilize a significant amount of automation technology in our
distribution centers. This year, we undertook an upgrade project to strengthen
the reliability of certain components of the automation network in our Memphis
distribution facility. We expect this upgrade to be completed by November 1999.
This project will also make this network Y2K compliant. All of our other
distribution automation has been certified as Y2K compliant by our service
providers.
We, in conjunction with Daisytek, have initiated formal communications with
our significant service providers to determine the extent to which we are
vulnerable to those third parties' failure to remediate Y2K. However, there can
be no guarantee that the systems of our service providers, on which our
operations rely, will be timely converted, or that a failure to convert by
another company, or a conversion that is incompatible with our operations, would
not have a material adverse effect on our business. We are developing
contingency plans to address the risks created by third parties' failure to
re-mediate Y2K. These plans include procuring alternative sources of services
such as telecommunications and transportation when we are able to conclude that
an existing supplier of services will not be Y2K ready. We are scheduled to
complete these contingency plans by November 1999.
The expenses incurred by Daisytek and its subsidiaries (including PFSweb)
related to Y2K was approximately $0.5 million during fiscal year 1999 and $0.1
million during the three months ended June 30, 1999. In total, Daisytek's
assessment and remediation of Y2K has a budget of approximately $0.8 million,
which includes both external costs, such as outside consultants, software and
hardware applications, as well as internal costs, primarily payroll related,
which are not reported separately.
There can be no assurance that Y2K remediation by PFSweb, in conjunction
with Daisytek, or third parties will be properly and timely completed and
failure to do so could have a material adverse effect on PFSweb's financial
condition. We cannot predict the actual effects of Y2K, which depend on numerous
uncertainties, such as whether major third parties address this issue properly
and timely and whether broad-based or systemic economic failures may occur. We
are currently
35
39
unaware of any events, trends, or conditions regarding this issue that may have
a material effect on our results of operations, liquidity, and financial
position. If Y2K is not resolved by January 1, 2000, our results of operations
or financial condition could be materially adversely affected.
INVENTORY MANAGEMENT
Prior to October 1, 1999, our agreements with IBM were structured as master
distributor agreements. The transaction management services we provided for IBM
under these agreements included purchasing and reselling IBM product inventory
to IBM customers. As of October 1, 1999, we have restructured our agreements
with IBM so that we will no longer be purchasing or reselling the IBM product
inventory. In addition, as of October 1, 1999, we have transferred to Daisytek
the IBM-related customer accounts receivables, inventory and accounts payable.
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 as our business grows with consumer product
clients, our business activity will be more significant in the quarter ended
December 31.
We believe that results of operations for a quarterly period may not be
indicative of the results for any other quarter or for the full year.
INFLATION
Management believes that inflation has not had a material effect on our
operations.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires that an entity
recognize all derivative financial instruments as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. If certain conditions are met, a derivative may be used to hedge certain
types of transactions, including foreign currency exposures of a net investment
in a foreign operation. Our foreign currency exposure has been primarily related
to our Canadian operations. Beginning in the year ended March 31, 1999, the
foreign currency risks of PFSweb were considered in Daisytek's corporate risk
management program, which included entering into certain forward currency
exchange contracts. We did not enter into any such contracts on our own. SFAS
No. 133 requires gains or losses on derivatives and hedging instruments to be
recorded in other comprehensive income as a part of the cumulative translation
adjustment. We are currently evaluating the provisions of SFAS No. 133 and its
effect on the accounting treatment of these financial instruments. SFAS No. 133
is effective for fiscal years beginning after June 15, 2000, with initial
application as of the beginning of an entity's fiscal quarter. Early adoption of
the standard is allowed; however, the statement cannot be applied retroactively
to financial statements of prior periods.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are subject to market risk associated with changes in interest rates and
foreign currency exchange rates. Interest rate exposure is primarily related to
our payable to Daisytek, which amounted to $37.3 million at June 30, 1999. Our
effective rate is equal to Daisytek's effective rate on its revolving lines of
credit. The interest rates on these revolving lines of credit float with the
market. A 50 basis point movement in interest rates would result in an
approximately $187,000 annualized increase or decrease in interest expense based
on the outstanding balance of our payable to Daisytek at June 30, 1999. A
portion of the net proceeds from this offering will be used to repay our payable
due to Daisytek. Following our spin-off from Daisytek, we may manage the
36
40
exposure to interest rate risk through the use of derivative instruments
designed to manage risk and minimize interest expense.
We are subject to market risk associated with changes in foreign currency
exchange rates. In order to manage these risks, beginning in the year ended
March 31, 1999, our risks were considered in Daisytek's corporate risk
management program, which included entering into certain forward currency
exchange contracts. We did not enter into any such contracts on our own.
Currently, our foreign currency exchange rate risk is primarily limited to
Canadian dollars. In the future, we believe our foreign currency exchange risk
will also include other currencies applicable to certain of our international
operations, including the Euro. In order to mitigate foreign currency rate risk,
we will consider entering into forward currency exchange contracts to hedge our
net investment and long-term intercompany payable balances.
37
41
BUSINESS
PFSweb is an international provider of transaction management services to
both traditional and e-commerce companies. Our integrated solutions enable our
clients to focus on their core business, products and services instead of making
substantial investments in necessary transaction management infrastructure. We
offer a comprehensive suite of services such as:
- order management, including Internet shopping cart and on-line order
management;
- customer care services, including Web-enabled customer care centers
integrating voice, e-mail, data and chat communications;
- billing services, including secure on-line credit card processing,
invoicing, credit management and collection;
- information management, including real-time data interfaces, data
exchange services and data mining; and
- distribution services, including inventory management, product
warehousing, order picking and packing, transportation management and
product return administration.
We enable our clients to implement their e-commerce strategies and
introduce new products and business programs by providing a complete transaction
management infrastructure, which is seamlessly integrated with our clients'
systems and transparent to our clients' customers. Our ability to integrate a
broad range of services makes it easier for our clients to outsource these
functions to us and provides a faster time to market for their e-commerce
business.
INDUSTRY OVERVIEW
Businesses today operate in an environment of rapid technological
advancements, increasing competition and continuous pressure to improve
operating efficiency. In response to these developments, two significant trends
have emerged. The first is the accelerating use of the Internet to conduct
e-commerce in both business-to-business and business-to-consumer applications.
The second is the strategic decision of a growing number of companies, in a
variety of industries, to outsource one or more business functions that are not
within their core business competencies.
E-COMMERCE TREND
As the Internet has become an increasingly important communications medium,
businesses and consumers alike have begun to use the Internet to buy and sell
goods and services. According to International Data Corporation, or IDC, the
number of users who make purchases over the Web will jump from nearly 31 million
in 1998 to more than 182 million in 2003 and the amount of worldwide
business-to-business and business-to-consumer commerce conducted over the Web
will increase from approximately $50 billion in 1998 to approximately $1.3
trillion in 2003.
For the manufacturer, e-commerce creates multiple opportunities. The first
is the opportunity to sell directly to the end-user customer, bypassing the
traditional model of selling to wholesalers and distributors who then resell to
mass merchants and other retailers. By selling directly to the end-user
customer, the manufacturer can retain a portion of its product revenue which
otherwise would have been paid to middlemen in the traditional distribution
channel. Direct sales can also provide the manufacturer with valuable end-user
customer information, including buying patterns, feature and function
preferences and customer support requirements. This information can be used by
the manufacturer to design better products, tailor production schedules to meet
projected demand and improve overall customer satisfaction. Another opportunity
is to use e-commerce to facilitate business-to-business transactions and improve
operating efficiencies. Business-to-business e-commerce has the potential to
significantly reduce time consuming paperwork and manual procedures, which can
eliminate errors and reduce investments in working capital.
38
42
For the traditional retailer, e-commerce offers the opportunity to attract
new customers and introduce new merchandise while avoiding substantial
investment in physical retail locations. At the same time, consumer preferences
and customer data can be compiled and analyzed to spot trends and demographic
shifts.
The development of e-commerce is also giving rise to the "virtual company",
a business model which focuses its energies entirely on creative design and
sales and marketing by contracting out all other necessary business functions to
outsiders. The benefits of e-commerce are leading to rapid growth in the number
of Internet commerce sites as well as the rapid development and deployment of
new technologies.
To succeed on-line, companies need an array of capabilities to support
their on-line business. Designing an attractive Web page is only the beginning.
In order to retain and satisfy their on-line customers, businesses must be able
to:
- accept and process customer orders 24 hours a day, seven days a week;
- provide a rapidly scalable and flexible infrastructure;
- administer, on a secure basis, credit card payments and collections;
- calculate applicable sales tax for numerous taxing authorities and
various product types;
- quickly and courteously respond to customer inquiries by e-mail, phone or
fax;
- pick, pack and ship customer orders promptly and accurately; and
- process product returns and customer refunds.
Traditional manufacturers and retailers entering the e-commerce arena must
be able to satisfy the expanding needs of on-line customers, which differ from
their traditional commerce customers. The efficiency and quality of the on-line
shopping experience from accessing product information, ordering and paying for
the product to receiving the product and, if necessary, returning the product,
are critical elements in successfully implementing e-commerce initiatives.
These challenges are particularly difficult for the traditional
manufacturer whose distribution infrastructure is designed for large pallet
sized orders to regional retailer distribution centers, and is not generally
equipped to handle high-volume package distribution to individual customers.
Similarly, retailers must ensure that their electronic shopping customer is not
disappointed by experiencing product distribution problems and delays. Virtual
companies, as well, are dependent upon an efficient order processing and
distribution system to deliver their products to customers.
OUTSOURCING TREND
In response to growing competitive pressures and the rate of technological
innovations, many companies are focusing their critical resources on the core
competencies of their business. This focus typically results in these companies
turning to outsourcing for business functions that are not core competencies.
Outsourcing provides many key benefits, including the ability to:
- capitalize on skills, expertise and technology infrastructure that would
otherwise be unavailable or expensive given the scale of the business;
- reduce capital and personnel investments and convert fixed investments to
variable costs;
- increase flexibility to meet changing business conditions and demand for
products and services;
- enhance customer satisfaction and gain competitive advantage;
- improve operating performance and efficiency; and
- rapidly enter new business markets or geographic areas
39
43
As a result, the market for outsourcing services has experienced significant
growth. IDC expects that worldwide spending on outsourcing services will grow
from nearly $100 billion in 1998 to more than $151 billion in 2003.
Typically, outsourcing service providers are focused on a single function,
such as information technology, call center management, credit card processing,
warehousing or package delivery. This focus creates several challenges for
companies looking to outsource more than one of these functions, including the
need to manage multiple outsourcing service providers, sharing information with
service providers and integrating that information into their internal systems.
Additionally, the delivery of these multiple services must be transparent to the
customer and enable the client to maintain brand recognition and customer
loyalty.
THE PFSWEB SOLUTION
We act as a virtual infrastructure for our clients, which helps them
enhance their traditional commerce operations and meet the operational
challenges associated with the deployment of their e-commerce initiatives. We
believe we offer a unique comprehensive integrated solution which handles the
lifecycle of the transaction "from the click of a mouse, to the knock at the
house" (SM). This solution enables our clients to focus on their core business,
products and services while at the same time quickly and efficiently
implementing traditional and e-commerce business initiatives. By utilizing our
services, our clients are able to:
Quickly Capitalize on E-commerce Market Opportunities. Our services enable
our clients to rapidly implement their e-commerce strategies and take advantage
of e-commerce opportunities without lengthy start-up and integration efforts.
Our services allow our clients to deliver consistent quality of service as
transaction volumes grow and to handle daily and seasonal peak periods. Through
our international locations and capabilities, we enable our clients to use the
broad reach of the Internet and e-commerce to sell their products almost
anywhere in the world.
Improve the Customer Experience. We enable our clients to provide their
customers with a positive buying experience thereby maintaining and promoting
brand loyalty. Through our use of advanced technology, we can respond directly
to customer inquiries by e-mail, voice or data communication and assist them
with on-line ordering and product information. We believe we offer our clients a
"world class" level of service, including 24 hour, seven day a week customer
care service centers and nearly 100% order accuracy.
Minimize Investment and Improve Operating Efficiencies. We provide our
clients with access to a wide array of services that cover a broad spectrum of
e-commerce transaction management issues, eliminating their need to expend
management time and resources to coordinate these services from different
providers. By utilizing our services, our clients can capitalize on our
economies of scale and expertise to grow their e-commerce business without
incurring the substantial fixed costs necessary to create and maintain their own
transaction management infrastructure. Our clients also have the flexibility to
purchase any or all of our offered services according to their transaction
volume and existing transaction management infrastructure so that they do not
have to invest scarce capital resources as their business grows.
Access a Sophisticated Technology Infrastructure. We provide our clients
with ready access to a sophisticated technology infrastructure, which is
designed to interface seamlessly with their systems. We provide our clients with
vital product and customer information which can be immediately available to
them on their own systems for use in data mining, analyzing sales and marketing
trends, monitoring inventory levels and performing other transaction management
functions.
40
44
THE PFSWEB STRATEGY
Our objective is to grow rapidly by being an international provider of
business-to-business and business-to-consumer transaction management services
for both traditional and e-commerce businesses. The key elements of our business
strategy are to:
Target Clients with Major Brand Names. We intend to aggressively expand our
business by targeting brand names who are seeking to enter the e-commerce
marketplace or introduce new products or business programs. We believe that the
electronic commerce marketplace will be led by companies with major brand names
and our focus on these companies will provide us with meaningful opportunities
to grow along with our clients' e-commerce initiatives.
Expand Existing Client Relationships. By providing superior operating
results, we believe we can expand relationships with existing clients to serve
additional products and business segments and to provide additional services.
Our objective is to integrate ourselves as our clients' "virtual infrastructure"
so that we become a critical component of their transaction management process
across the enterprise. Based upon our clients' needs, we plan to introduce new
services to solve e-commerce transaction processing problems as they emerge. We
also intend to continue our commitment to invest in state-of-the-art technology,
equipment and systems to provide new, high-quality, innovative services to our
existing clients and to attract new clients.
Promote Our PFSweb Brand. We intend to build PFSweb brand awareness by
expanding the number of satisfied clients, increasing our advertising in trade
journals and other print media and by further participation in trade shows and
similar expositions. We also intend to increase our Internet advertising and
search engine presence.
Seek Strategic Alliances and Acquisitions. We intend to pursue strategic
alliances with Web site designers, Web hosting services, e-commerce software
companies and other providers of Internet related services to assist in
developing relationships with major brand names that are entering the e-commerce
marketplace. We may also consider acquisitions of synergistic e-commerce
businesses in order to offer a complete Internet implementation solution to
clients looking to introduce the sale of their products over the Internet.
Expand Our International Presence. We intend to expand the availability of
our services throughout the world so that we can enhance our international
e-commerce transaction processing solutions. For example, in response to market
opportunities, we intend to expand our multi-lingual call center services and
foreign currency order processing.
PFSWEB SERVICES
We offer a wide range of transaction management services that are tailored
to our clients' specific needs to enable them to quickly and efficiently
implement their e-commerce and traditional business initiatives. Our services
include:
Order Management. Our order management services include handling the
complete shopping cart check-out process for Internet orders as well as phone,
fax, e-mail, mail and other order receipt methods. Our systems provide the
ability for both our clients and their customers to track the status of orders
at any time. Our services are transparent to our clients' customers and are
seamlessly integrated with our clients' internal systems and Web sites. By
synchronizing our order management technology with our clients' internal systems
and Web sites, we can capture and provide critical customer information,
including:
- statistical measurements critical to creating a quality customer
experience, including real-time order status, order exceptions, back
order tracking, the ratio of customer inquiries to purchases, average
order sizes and order response time;
- detailed marketing information about what was sold and to whom it was
sold, including by location and preference; and
41
45
- Web traffic reporting of the number of visits ("hits") received, what
areas of the Web site were visited, and what customers asked for on the
Web site.
Customer Care Services. Our customer care services utilize Web-enabled
features that integrate voice, e-mail, data and chat communications to respond
to and handle customer inquiries. Our customer care representatives answer
questions in our clients' name regarding orders, shipping, billing, returns and
product information as well as a variety of other questions. Our customer care
center automatically identifies each customer request and routes it to the
available customer care representative who is specially trained in the client's
business and products. Our customer care centers are designed so that our
customer care representatives can handle many different clients and products,
thereby creating economy of scale benefits for our clients. Our advanced
technology also enables our representatives to inform customers of other
products and sales opportunities for our clients.
Billing Services. We offer secure credit card processing for our clients,
both directly on-line from their Web site as well as through our customer care
center. Our credit card processing services offer real-time confirmation of
credit card authorization while the customer is in the shopping-cart checkout
process or talking to a customer care representative. We are able to calculate
sales tax, if applicable, for numerous taxing authorities and on a variety of
products. We provide customized computer generated invoices in our clients'
names so that our services remain transparent to the customer. We also assist
our clients in business-to-business accounts receivable management and
collection in accordance with their procedures and guidelines.
Information Management. We have the ability to communicate with and
transfer information to and from our clients through a wide variety of
technologies, including real-time data interfaces, file transferring and
electronic data interchange. Our systems are designed to capture, store and
electronically forward to our clients critical information regarding customer
inquiries and orders, product shipments, inventory levels, product returns and
other information. We maintain for our clients detailed product master files
that can be seamlessly integrated with their Web sites. Our systems are capable
of providing our clients with customer and order information for use in
analyzing sales and marketing trends and introducing new products. We also offer
customized reports or data analyses based upon specific client needs to assist
them in their budgeting and business decision process.
Distribution Services. An integral part of our transaction management
services is the warehousing and distribution of inventory owned by our clients.
We currently have over one million square feet of warehouse space to store and
process our clients' inventory. We receive client inventory in our distribution
center, verify shipment accuracy, unpack, inspect for damage and generally stock
for sale the same day. On behalf of our clients, we pick, pack and ship their
customer orders and can provide customized packaging, inserts and promotional
literature for distribution with customer orders. Based upon our clients' needs,
we are able to take advantage of a variety of shipping and delivery options,
including next day service. Our extensive use of advanced technology and
equipment in our distribution centers enable us to generally maintain an order
accuracy rate of nearly 100% and, similarly, ship nearly 100% of in-stock orders
the same day. In addition, an increasingly important function that we provide
for our clients is product return administration. We offer a wide array of
product return services for our clients, including issuing return
authorizations, receipt of product, crediting credit card accounts, and
disposition of returned product.
CLIENTS AND MARKETING
Our target clients include traditional manufacturers of brand name products
looking to quickly and efficiently implement e-commerce initiatives or introduce
new products or programs, without the burden of modifying or expanding their
order processing and distribution infrastructure. We also target retailers
seeking to open Web sites to expand their sales without opening new brick and
42
46
mortar stores and distributors seeking to reduce costs. Our services are
available for a variety of industries, including:
- MANUFACTURERS such as IBM (printer and media supplies), Emtec (formerly
BASF Magnetics) (data media and audio visual products), Tektronix
(printers and printer supplies), Thomson Consumer Electronics
(televisions and consumer electronics), Hewlett-Packard (computer
networking equipment) and Nokia (cell phone accessories);
- RETAILERS such as American Eagle Outfitters (fashion apparel) and Global
Sports Interactive (a sporting goods distributor for SportsAuthority.com,
AthletesFoot.com, MCSports.com, Sportchalet.com, Sportsandrec.com and
other retailers);
- DISTRIBUTORS such as Daisytek (consumable computer supplies), ISA Ltd.
(computer and office supplies in Western Europe); and
- INTERNET COMMERCE SITES such as RCA.com (television sets and consumer
electronics), Lyrazone.com (MP3 players), NokiaUSA.com (cell phone
accessories), BargainBid.com (on-line auction) and YardMart.com (lawn and
garden products).
We reach these clients through a direct sales force, telemarketing, trade
shows, trade journal advertising, our Web site and direct mail programs. We also
pursue strategic marketing alliances with Web design firms and e-commerce
consultants to provide referrals and customer leads.
Our direct sales force is comprised of dedicated sales professionals whose
compensation is tied to their ability to expand our relationships with existing
clients and attract new clients. We also employ highly trained implementation
managers whose responsibilities include the oversight and supervision of client
projects and maintaining high levels of client satisfaction.
All of our product revenue for fiscal 1999 was generated by sales of
product purchased under master distributor agreements with IBM. On an historical
basis, Daisytek accounted for 13% of our total revenues in fiscal 1999. On a
supplemental pro forma basis, during the three months ended June 30, 1999,
Daisytek accounted for approximately 67% of total service fee revenues, and
Tektronix accounted for approximately 10%. As we develop new customer
relationships, we expect the percent of business related to Daisytek to decline
significantly.
TECHNOLOGY
We maintain advanced management information systems and have automated most
key business functions using on-line, real time systems. These systems enable us
to provide our clients with information concerning sales, inventory levels,
customer payments and other operations that are essential for our clients to
efficiently manage their electronic commerce business programs. Our systems are
designed to scale rapidly to handle the transaction processing demands of our
clients.
We employ technology from a selected group of partners. For example, we use
IBM AS/400 and Netfinity servers to run both Web site functions as well as order
management and distribution functions, and we use Lucent Technologies for
telephone switch and call center management functions. We also use Lucent
Technologies for our Web enabled customer care center to interact with customers
with voice, e-mail or chat and to communicate with the customer by sharing Web
pages between the customer and our customer service representative. Our
sophisticated computer-telephony integration has been accomplished by combining
systems software from IBM and Lucent Technologies together with our own
application development. We use AT&T for our private enterprise network and long
distance carrier. We use J.D. Edwards as the software provider for the primary
applications that we use in our operational areas and financial areas. We use
Rapistan/ Demag for our warehouse management, automated conveyor and
"pick-to-light" (inventory retrieval) systems and Telxor for our warehouse radio
frequency (RF) applications.
We have developed proprietary technology that is specifically targeted at
quickly integrating and synchronizing our systems with those of our clients with
a high degree of accuracy and
43
47
reliability. We can track information sent to us by the client as it moves
through our systems in the same manner a package would be tracked by a carrier
throughout the delivery process. Our systems enable us to trace at a detailed
level what information was received, when it was received, any errors or special
handling that had to take place to process it and what was sent back to the
client. We have also developed proprietary electronic interfaces that we provide
to the client or their selected Web developer to easily integrate their Web site
with our systems. These tools allow for efficient customized integration with
our client and powerful real-time Web site transaction processing. The
implementation of these systems allows us to offer an advanced suite of
electronic commerce tools to our clients so that we can communicate with their
computer systems and automatically process, send and receive orders, customer
data and other information.
We have also invested in advanced telecommunications, computer telephony,
electronic mail and messaging, automated fax technology, barcode scanning,
wireless technology, fiber optic network communications and automated inventory
management systems. We have also developed and utilize telecommunications
technology that provides for automatic customer call recognition and customer
profile recall for inbound customer service representatives.
Our systems development team consists of over 35 information technology
professionals whose primary responsibility is directed at implementing custom
solutions for new clients and maintaining existing client relationships. Our
development team can also produce proprietary systems infrastructure to expand
our capabilities in circumstances where we cannot purchase standard solutions
from commercial providers. We also utilize temporary resources when needed for
additional capacity.
Our information technology operations and infrastructure are built on the
premise of reliability and scalability. We maintain diesel generators and
uninterruptable power supply equipment to provide constant availability to
computer rooms, call centers and warehouses. Multiple Internet service providers
and redundant Web servers provide for a high degree of availability to Web sites
that interface with our systems. Capacity planning and upgrading is performed
regularly to allow for quick implementation of new clients and avoid
time-consuming infrastructure upgrades that could slow growth rates. We also
have a disaster recovery plan for our information systems and maintain a "hot
site" under contract with a major provider.
COMPETITION
Many companies offer, on an individual basis, one or more of the same
services as we do, and many of our competitors have greater financial,
distribution and marketing resources than we do. These competitors could
potentially use their greater resources to expand their sales efforts, lower
prices or increase their range of services to include all the services we offer.
In many instances, our competition is the in-house operations of our clients
themselves.
Although many of our competitors can offer one or more of our services, we
believe our primary competitive advantage is our ability to offer a wide array
of services that cover a broad spectrum of electronic commerce transaction
management functions, including order processing and shipment, credit card
payment and customer service, thereby eliminating any need for our clients to
coordinate these services from different providers. We believe we are unique in
offering our clients a "virtual infrastructure" to handle all of their order
processing, customer care service, billing, information management and product
warehousing and distribution needs.
We also compete on the basis of certain additional factors, including:
- operating performance and reliability;
- ease of implementation and integration; and
- price.
44
48
We believe that we presently compete favorably with respect to each of
these factors. However, the market for our services is becoming more competitive
and still evolving, and we may not be able to compete successfully against
current and future competitors.
FACILITIES
In the U.S., we operate a nearly one million square foot central
distribution complex in Memphis, Tennessee. This complex is located
approximately four miles from the Memphis International Airport, where both
Federal Express and United Parcel Service operate large hub facilities. This
complex contains computerized sorting equipment, powered material handling
equipment, scanning and bar-coding systems and automated conveyors, in-line
scales and digital cameras to photograph shipment contents for automatic
accuracy checking. Our Memphis facility was recently showcased as the
Distribution Center of the Month by a leading trade journal for the distribution
and material handling industry.
Our receiving and material handling system in our Memphis distribution
complex includes several advanced technology enhancements, including radio
frequency technology in product receiving processing to ensure accuracy, an
automated package routing system and a "pick to light" paperless order picking
system. Our advanced distribution systems provide us with the capability to
currently warehouse an extensive number of stock keeping units (SKUs) for our
clients ranging from high-end laser printers to wide-leg blue jeans, while at
the same time retaining the ability to pick, pack and ship single SKUs to
individual customers in fulfillment of customer orders.
We currently are operating a distribution center in Aachen, Germany, until
we complete a new 150,000 square foot distribution center in Liege, Belgium. We
currently expect this new facility to be operational prior to 1999 calendar
year-end. This new facility will have many of the same advanced distribution
systems and equipment as in our Memphis complex.
Our transitional agreement with Daisytek will provide for our use of its
regional customer service, warehouse and distribution facilities in Toronto and
Vancouver, Canada; Mexico City, Mexico; Sydney, Australia; and Singapore. We
presently plan to establish our own customer service and warehouse and
distribution facility in Toronto.
We operate customer service centers in Memphis, Tennessee; Plano, Texas;
Toronto, Canada; and Maastricht, The Netherlands. Our call center technology
permits the automatic routing of calls to available customer service
representatives in several of our call centers.
All of our facilities are leased and the material lease agreements contain
one or more renewal options.
PERSONNEL AND TRAINING
Our success in recruiting, hiring and training large numbers of skilled
employees and obtaining large numbers of hourly employees during peak periods
for distribution and call center operations is critical to our ability to
provide high quality distribution and support services. Call center
representatives and distribution personnel receive feedback on their performance
on a regular basis and, as appropriate, are recognized for superior performance
or given additional training. Generally, our clients provide specific product
training for our customer service representatives and, in certain instances,
on-site client personnel to provide specific technical support. To maintain good
employee relations and to minimize employee turnover, we offer competitive pay,
hire primarily full-time employees who are eligible to receive a full range of
employee benefits, and provide employees with clear, visible career paths.
As of August 31, 1999, we had 314 employees. We currently anticipate that,
upon completion of this offering, approximately Daisytek employees will be
transferred to us. We are not a party to any collective bargaining agreements,
and we have never suffered an interruption of business as a result of a labor
dispute. We consider our relationship with our employees to be good.
45
49
REGULATION
Our business may be affected by current and future governmental regulation.
For example, the Internet Tax Freedom Act bars state and local governments from
imposing taxes on Internet access or that would subject buyers and sellers of
electronic commerce to taxation in multiple states. This act is in effect
through October 2000. When the act expires or if the act is repealed, Internet
access and sales across the Internet may be subject to additional taxation by
state and local governments, thereby discouraging purchases over the Internet
and adversely affecting the market for our services.
46
50
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below are the names and positions of our executive officers and
directors. We currently expect to appoint additional directors following the
spin-off.
NAME AGE POSITION
---- --- --------
Mark C. Layton....................................... 39 Chairman of the Board, President and
Chief Executive Officer
Christopher Yates.................................... 44 Executive Vice President, Chief Sales and
Marketing Officer and Director
Steven S. Graham..................................... 47 Executive Vice President, Chief
Information Officer
Thomas J. Madden..................................... 38 Executive Vice President, Treasurer,
Chief Financial and Accounting Officer
C. Clifford Defee.................................... 40 Vice President -- Operations and Client
Solutions, Chief Operating Officer
Martin L. Anderson................................... 34 Vice President -- Customer Satisfaction
Lindsley D. Medlin Jr. .............................. 35 Vice President, Managing Director (PFS
Europe)
Scott R. Talley...................................... 35 Vice President -- International
Distribution
Harvey H. Achatz..................................... 58 Vice President -- Administration and
Secretary
James R. Powell...................................... 38 Director
Timothy M. Murray.................................... 47 Director
Peter P. J. Vikanis.................................. 48 Director
James F. Reilly...................................... 40 Director
Mark C. Layton, has served as Chairman of the Board, President and Chief
Executive Officer of PFSweb since its inception. Mr. Layton also serves as
President, Chief Executive Officer and Chief Operating Officer of Daisytek,
positions he has held since 1997, and as a Director, a position he has held
since 1988. Mr. Layton was recently appointed as Chairman of the Board of
Daisytek. Mr. Layton served as President, Chief Operating Officer and Chief
Financial Officer of Daisytek from 1993 to April 1997, as Executive Vice
President from 1990 to 1993 and as Vice President -- Operations from 1988 to
1990. Prior to joining Daisytek, Mr. Layton served as a management consultant
with Arthur Andersen & Co., S.C. for six years through 1988 specializing in
wholesale and retail distribution and technology. Mr. Layton also serves as a
Director of ISA International plc ("ISA"), a distributor of computer supplies in
Western Europe, and uBid, Inc., an Internet auction company. Mr. Layton is the
author of .coms or .bombs...Strategies for Profit in E-Business and maintains a
Web site at www.profits-in-e-business.com. Neither Mr. Layton's book nor his Web
site is part of this prospectus, and the information contained in them is not
incorporated into this prospectus.
Christopher Yates has served as Executive Vice President, Chief Sales and
Marketing Officer and Director of PFSweb since its inception. Mr. Yates also
serves as Senior Vice President -- Business Development of Daisytek, a position
he has held since 1996, with primary responsibility for PFS. Mr. Yates also
serves as a Director of Daisytek, a position he has held since 1995. Mr. Yates
served as Vice President -- Business Development of Daisytek from November 1995
to February 1996, as Vice President -- Marketing from January 1994 to November
1995, as Vice President -- Sales from 1988 to 1994 and in various other sales
capacities for Daisytek since 1982.
Steven S. Graham has served as Executive Vice President and Chief
Information Officer of PFSweb since its inception. Mr. Graham also serves as
Senior Vice President of Information Technologies and Chief Information Officer
of Daisytek, a position he has held since 1996. Prior to
47
51
joining Daisytek, Mr. Graham was employed by Ingram Micro, a major microcomputer
distributor. Mr. Graham has over 26 years of experience in the
information-technology field.
Thomas J. Madden has served as Executive Vice President, Treasurer, Chief
Financial Officer and Chief Accounting Officer of PFSweb since its inception.
Mr. Madden also serves as Chief Financial Officer of Daisytek, a position he has
held since July 1997 and serves as Vice President -- Finance, Treasurer and as
Chief Accounting Officer of Daisytek, positions he has held since November 1994,
March 1994 and 1992, respectively. From 1992 to 1994 he also served as
Controller of Daisytek. From 1983 to 1992, Mr. Madden served in various
capacities with Arthur Andersen & Co., S.C., including financial consulting and
audit manager.
C. Clifford Defee has served as Vice President -- Operations and Client
Solutions and Chief Operating Officer of PFSweb since its inception. Mr. Defee
also serves as Vice President -- Operations of PFS, a position he has held since
January 1997. From 1984 to 1997, Mr. Defee served as a management consultant
with Andersen Consulting, LLP specializing in retail distribution.
Martin L. Anderson has served as Vice President -- Customer Satisfaction of
PFSweb since its inception. Mr. Anderson also serves as Vice President -- Call
Center Operations of PFS, a position he has held since March 1998, and has
served in various other capacities for Daisytek since 1990.
Lindsley D. Medlin Jr. has served as Vice President and Managing Director
(PFS Europe) of PFSweb since its inception. Mr. Medlin also serves as Director
and Managing Director of PFS Europe, a position he has held since December 1998,
and has served in various other capacities for Daisytek since 1988.
Scott R. Talley has served as Vice President -- International Distribution
for PFSweb since its inception. Mr. Talley also serves as Vice
President -- Distribution of PFS, a position he has held since April 1999, and
has served in various other capacities for Daisytek since 1991.
Harvey H. Achatz has served as Vice President -- Administration and
Secretary of PFSweb since its inception. Mr. Achatz also serves as Vice
President -- Administration and Secretary of Daisytek, positions he has held
since 1993 and 1984, respectively, and served as Vice President -- Finance from
1985 to 1993, as Controller from 1981 to 1985 and as a Director from 1984 to
1990.
James R. Powell has served as a Director of PFSweb since its inception. Mr.
Powell also serves as a Director and Senior Vice President -- Sales and
Marketing of Daisytek, a position he has held since 1996. Mr. Powell has served
as Vice President -- Sales of Daisytek from 1992 to 1996 and in various other
sales capacities from 1988 to 1992. Prior to joining Daisytek, Mr. Powell was
engaged in various sales and marketing activities. Mr. Powell is a non-employee
director.
Timothy M. Murray has served as a Director of PFSweb since its inception.
Mr. Murray also serves as a Director of Daisytek, a position he has held since
1991. Mr. Murray is a Principal of William Blair & Company, L.L.C., an
investment banking firm he joined in 1979. Mr. Murray is also a director of MedE
America Corporation, a healthcare transaction processor, and several privately
held corporations. Mr. Murray is a non-employee Director.
Peter P. J. Vikanis has served as a Director of PFSweb since its inception.
Mr. Vikanis also serves as a Director of Daisytek, a position he has held since
1996. Mr. Vikanis served as Chief Operating Officer of ISA from 1991 to 1995, as
a director of ISA from 1979 to 1995, and also served in various management
capacities at ISA from 1971 to 1991. Mr. Vikanis presently serves as a
non-Executive Director of ISA. Mr. Vikanis is a non-employee Director.
James F. Reilly has served as a Director of PFSweb since its inception. Mr.
Reilly also serves as a Director of Daisytek, a position he has held since
October 1998. Mr. Reilly is a Managing Director in the Technology Group of
Warburg Dillon Read, the global investment banking division of UBS AG. Mr.
Reilly has been with Warburg Dillon Read or one of its predecessor companies
since 1983 and specializes in corporate finance advisory work for a broad range
of technology companies, including distribution companies. Mr. Reilly is a
non-employee Director.
48
52
We currently expect that, upon completion of the spin-off, our executive
officers will no longer serve as officers of Daisytek, although we currently
expect that Messrs. Layton and Yates will remain as directors of Daisytek.
BOARD STRUCTURE AND COMMITTEES
Our Board is divided into three classes serving staggered terms. After an
initial transition period, directors in each class will be elected to serve for
three-year terms and until their successors are elected and qualified. Each
year, the directors of one class will stand for election as their terms of
office expire. Presently, Messrs. Reilly and Vikanis are designated as Class I
directors, with their terms of office expiring in 2000; Messrs. Powell and Yates
are designated as Class II directors, with their terms of office expiring in
2001; and Messrs. Murray and Layton are designated as Class III directors, with
their terms of office expiring in 2002. We presently expect that, prior to or
following the spin-off, our Board may appoint as Class II or Class III directors
one or more additional outside directors who are not employed by Daisytek.
We have two standing committees: an Audit Committee and a Compensation
Committee. Messrs. Murray and Vikanis have been appointed as the initial members
of the Audit Committee, and Messrs. Reilly and Murray have been appointed as the
initial members of the Compensation Committee. As additional persons join our
Board following the spin-off, it is possible that membership on some of these
committees may be modified.
The Audit Committee will select the independent public accountants to audit
our annual financial statements and will establish the scope and oversee the
annual audit. The Compensation Committee will determine the compensation for
employee directors and, after receiving and considering the recommendation of
our Chief Executive Officer and the President, all officers of the company and
any other employee that the Compensation Committee may designate from time to
time and will approve and administer employee stock option and incentive plans.
Our Board may establish other committees from time to time to facilitate the
management of the business and affairs of our company.
NON-EMPLOYEE DIRECTOR COMPENSATION; STOCK OPTION AND RETAINER PLAN
Each non-employee director receives an annual director's fee of $20,000 for
each year in which he or she serves as a director. Non-employee directors do not
receive additional Board or Committee meeting fees.
We have also adopted a Non-Employee Director Stock Option and Retainer Plan
to help attract and retain non-employee directors. There are 250,000 shares of
our common stock reserved for issuance under the Plan. The Plan is administered
by our Board of Directors or a committee appointed by the Board. Under the Plan,
following the completion of the spin-off and subject to certain conditions, each
non-employee director may elect to receive payment of his or her director's fees
in shares of common stock in lieu of cash. In addition, under the Plan, each
non-employee director received, as of the date of the adoption of the Plan, an
option to purchase 35,000 shares of common stock with an exercise price of
$10.45 per share. The Plan also provides for the future issuance to each
non-employee director of options to purchase 10,000 shares of common stock as of
the date of each annual meeting of stockholders.
All options issued under the Plan are non-qualified options for federal
income tax purposes and have an exercise price equal to the fair market value of
a share of common stock as of the date of grant. All options have a ten year
term and are subject to a one year vesting schedule, except that any options
issued prior to the effective date of the spin-off, including the initial option
grant, have no vesting for three years, subject to acceleration, in part, upon
completion of the spin-off. Generally, unless the Plan administrator otherwise
provides, options are non-transferable other than by will or the laws of descent
and distribution. At the time of any merger, consolidation, reorganization,
recapitalization, stock dividend, stock split, or other change in the corporate
49
53
structure or capitalization affecting our common stock, the Plan administrator
will make appropriate adjustments to the exercise price, number and kind of
shares to be issued under the Plan and any outstanding options. Unless
terminated earlier, the Plan will terminate ten years from its adoption, and no
stock options will be granted after the Plan terminates. Our board of directors
has the authority to amend, modify, suspend or terminate the Plan at any time.
Directors who are also employees of PFSweb receive no remuneration for
serving as directors or committee members.
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
All of our stock is currently owned by Daisytek, and, thus, none of our
officers or directors own any of our common stock. To the extent any of our
directors and officers own shares of Daisytek common stock at the time of the
spin-off, they will participate in the spin-off on the same terms as other
holders of Daisytek common stock. We have adopted the stock option plans
described in this prospectus and certain of our officers and directors hold
options to purchase shares of our common stock.
The following table sets forth the number of shares of Daisytek common
stock beneficially owned on September 15, 1999 by each director and executive
officer and all directors and executive officers of PFSweb as a group.
Applicable percentage ownership is based on 17,171,452 shares of Daisytek common
stock outstanding on September 15, 1999.
Beneficial ownership is determined in accordance with the rules and
regulations of the Securities and Exchange Commission. In computing the number
of shares beneficially owned by a person and the percentage ownership of that
person, shares of common stock subject to options held by that person that are
currently exercisable or exercisable within 60 days of September 15, 1999 are
deemed outstanding. These shares, however, are not deemed outstanding for the
purposes of computing the percentage ownership of any other person. Except as
indicated in the footnotes to this table and pursuant to applicable community
property laws, each stockholder named in the table has sole voting and
investment power with respect to the shares set forth opposite such
stockholder's name. Except as otherwise noted, the individual director or
executive officer or their family members had sole voting and investment power
with respect to such securities.
NUMBER OF
NAME SHARES PERCENT
---- --------- -------
Mark C. Layton(1)........................................... 333,038 1.9%
Christopher Yates(2)........................................ 89,951 *
Steven S. Graham(3)......................................... 38,445 *
Thomas J. Madden(4)......................................... 88,154 *
C. Clifford Defee(5)........................................ 6,121 *
James R. Powell(6).......................................... 37,620 *
Timothy M. Murray(7)........................................ 83,401 *
Peter P.J. Vikanis(8)....................................... 9,347 *
James F. Reilly............................................. 7,111 *
Martin L. Anderson(9)....................................... 17,130 *
Lindsley D. Medlin Jr.(10).................................. 36,700 *
Scott R. Talley(11)......................................... 9,163 *
Harvey H. Achatz(12)........................................ 64,427 *
------- -----
All directors and executive officers as a group (13
persons)(13).............................................. 820,608 4.8%
50
54
- -------------------------
* Represents less than 1%
(1) Includes outstanding options to purchase 116,864 shares of common stock,
which are fully vested and exercisable. Does not include outstanding
options to purchase 465,686 shares of common stock, which are not vested or
exercisable.
(2) Includes outstanding options to purchase 88,951 shares of common stock,
which are fully vested and exercisable. Does not include outstanding
options to purchase 258,093 shares of common stock, which are not vested or
exercisable.
(3) Includes outstanding options to purchase 35,445 shares of common stock,
which are fully vested and exercisable. Does not include outstanding
options to purchase 210,857 shares of common stock, which are not vested or
exercisable.
(4) Includes outstanding options to purchase 64,978 shares of common stock,
which are fully vested and exercisable. Does not include outstanding
options to purchase 210,758 shares of common stock, which are not vested or
exercisable.
(5) Includes outstanding options to purchase 6,121 shares of common stock,
which are fully vested and exercisable. Does not include outstanding
options to purchase 111,118 shares of common stock, which are not vested or
exercisable.
(6) Includes outstanding options to purchase 37,620 shares of common stock,
which are fully vested and exercisable. Does not include outstanding
options to purchase 362,213 shares of common stock, which are not vested or
exercisable.
(7) Includes outstanding options to purchase 2,690 shares of common stock,
which are fully vested and exercisable. Does not include outstanding
options to purchase 4,788 shares of common stock, which are not vested or
exercisable.
(8) Includes outstanding options to purchase 2,690 shares of common stock,
which are fully vested and exercisable. Does not include outstanding
options to purchase 4,788 shares of common stock, which are not vested or
exercisable.
(9) Includes outstanding options to purchase 16,380 shares of common stock,
which are fully vested and exercisable. Does not include outstanding
options to purchase 87,267 shares of common stock, which are not vested or
exercisable.
(10) Includes outstanding options to purchase 27,887 shares of common stock,
which are fully vested and exercisable. Does not include outstanding
options to purchase 82,663 shares of common stock, which are not vested or
exercisable.
(11) Includes outstanding options to purchase 9,163 shares of common stock,
which are fully vested and exercisable. Does not include outstanding
options to purchase 73,125 shares of common stock, which are not vested or
exercisable.
(12) Includes outstanding options to purchase 8,649 shares of common stock,
which are fully vested and exercisable. Does not include outstanding
options to purchase 11,215 shares of common stock, which are not vested or
exercisable.
(13) Includes outstanding options to purchase an aggregate of 417,438 shares of
common stock, which are fully vested and exercisable. Does not include
outstanding options to purchase an aggregate of 1,882,571 shares of common
stock, which are not vested or exercisable.
51
55
EXECUTIVE COMPENSATION
The following table sets forth certain compensation information for the
chief executive officer and the four other executive officers of PFSweb who,
based on salary and bonus compensation from Daisytek and its subsidiaries, were
the most highly compensated officers of PFSweb for fiscal year 1999. All
information set forth in this table reflects compensation earned by such
individuals for services with Daisytek and its subsidiaries for fiscal 1999.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
AWARDS
------------
NUMBER OF
ANNUAL COMPENSATION SECURITIES
NAME AND POSITION WITH -------------------------- UNDERLYING ALL OTHER
DAISYTEK YEAR SALARY BONUS OPTIONS COMPENSATION(1)
- ---------------------- ---- -------- -------- ------------ ---------------
Mark C. Layton................ 1999 $337,819 $175,160 412,080 $18,063
President, Chief Executive 1998 319,599 269,196 122,836 9,731
and Operating Officer 1997 299,013 222,900 69,832 8,458
Christopher Yates............. 1999 263,361 57,803 222,026 9,534
Senior Vice President -- 1998 248,454 88,835 84,742 6,088
Business Development 1997 232,200 73,557 41,120 5,004
Steven S. Graham.............. 1999 200,950 57,803 186,302 9,489
Senior Vice President -- 1998 189,491 88,835 60,000 37,829
Information Technologies 1997 78,268 32,439 50,000 5,610
and Chief Information
Officer
Thomas J. Madden.............. 1999 124,000 35,032 185,980 5,638
Vice President -- Finance, 1998 124,000 53,839 60,350 5,569
Chief Financial and 1997 118,000 22,900 33,174 4,618
Accounting Officer
C. Clifford Defee............. 1999 175,926 -- 110,139 344
Vice President -- PFS 1998 146,091 -- 8,000 165
- -------------------------
(1) Represents compensation in respect of one or more of the following: personal
use of automobiles; life insurance premiums paid for the benefit of the
named executive officer; tax return preparation services; personal travel
expenses and relocation costs.
52
56
GRANT OF DAISYTEK STOCK OPTIONS IN FISCAL 1999
The following table sets forth information with respect to grants of stock
options to purchase shares of Daisytek common stock during fiscal 1999 to the
named executive officers reflected in the Summary Compensation Table. Unless
exercised prior thereto, the options to purchase Daisytek common stock reflected
below will be replaced with options to purchase PFSweb common stock in
connection with the completion of the spin-off. See "Substitute Stock Options."
INDIVIDUAL GRANTS
------------------------------------------------ POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERMS(2)
OPTIONS IN FISCAL PRICE PER EXPIRATION -------------------------
NAME GRANTED YEAR SHARE DATE(1) 5% 10%
- ---- ---------- ---------- --------- ---------- ---------- ----------
Mark C. Layton....... 52,080 1.9% $22.88 6-18-08 $ 749,221 $1,898,673
360,000 13.0 12.88 12-15-08 2,914,927 7,386,996
Christopher Yates.... 42,026 1.5 22.88 6-18-08 604,585 1,532,136
180,000 6.5 12.88 12-15-08 1,457,463 3,693,498
Steven S. Graham..... 36,302 1.3 22.88 6-18-08 522,239 1,323,457
150,000 5.4 12.88 12-15-08 1,214,553 3,077,915
Thomas J. Madden..... 35,980 1.3 22.88 6-18-08 517,607 1,311,718
150,000 5.4 12.88 12-15-08 1,214,553 3,077,915
C. Clifford Defee.... 20,139 0.7 22.88 6-18-08 289,719 734,205
90,000 3.2 12.88 12-15-08 728,732 1,846,749
- -------------------------
(1) Options expiring in June 2008 are subject to a three year cumulative vesting
and options expiring in December 2008 are subject to a four or five year
cumulative vesting schedule.
(2) These are hypothetical values using assumed annual rates of stock price
appreciation as prescribed by the rules of the SEC.
EXERCISES OF DAISYTEK STOCK OPTIONS AND FISCAL YEAR-END OPTION VALUES
The following table shows aggregate exercises of options to purchase
Daisytek common stock in fiscal 1999 by the executive officers named in the
Summary Compensation Table above. Unless exercised prior thereto, the
unexercised options reflected below will be replaced with options to purchase
PFSweb common stock in connection with the completion of the spin-off. See
"Substitute Stock Options."
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT FISCAL YEAR END AT FISCAL YEAR END(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE RECEIVED(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
Mark C. Layton........... -- -- 66,060 516,490 $403,491 $1,780,691
Christopher Yates........ -- -- 52,987 294,057 329,330 972,128
Steven S. Graham......... -- -- 9,000 237,302 37,125 772,875
Thomas J. Madden......... 20,726 $440,285 38,458 237,278 239,506 774,104
C. Clifford Defee........ 900 11,700 300 116,939 1,238 365,550
- -------------------------
(1) Calculated by determining the difference between $16 5/8 (the last sale
price of the Daisytek common stock on March 31, 1999 as reported by the
Nasdaq National Market) and the exercise price of the shares of Daisytek
common stock underlying the options.
53
57
(2) Calculated by determining the difference between the last sale price of the
Daisytek common stock on the date of exercise as reported by the Nasdaq
National Market and the exercise price.
PFSWEB STOCK OPTION AND INCENTIVE PLANS
We have adopted, with the approval of Daisytek in its capacity as the sole
stockholder of PFSweb, the PFSweb Employee Stock Option Plan and the PFSweb
Annual Incentive Plan. These plans will be administered by the Compensation
Committee.
Employee Stock Option Plan
The Employee Stock Option Plan provides for the grant of stock options to
all officers and full-time employees of PFSweb who are eligible to participate.
The purpose of the Plan is to further our growth, development and financial
success by providing incentives to our officers and employees by assisting them
to become owners of our common stock. An aggregate of 5,750,000 shares of common
stock are reserved for issuance to employees under the Plan, which includes
substitute stock options which will be issued in replacement of outstanding
Daisytek stock options. See "Substitute Stock Options."
The Plan is administered by a committee of the Board of Directors (the
"Stock Option Committee"). The Stock Option Committee consists of two or more
Directors, appointed by and holding office at the pleasure of the Board of
Directors. The Board may, and currently intends, to limit the members of the
Stock Option Committee to Directors who are both "non-employee directors", as
defined in Rule 16b-3 under the Securities Exchange Act of 1934, and "outside
directors", as defined in Section 162(m) of the Internal Revenue Code. The Stock
Option Committee has complete authority and discretion to determine from among
eligible persons those to whom options will be granted and the number and terms
of such options. The Board has authorized the Compensation Committee to serve as
the Stock Option Committee.
The Plan provides for the granting of both incentive stock options and
non-qualified stock options under the Code. The exercise price of options
granted under the Plan may not be less than 100% of the fair market value on the
date of the grant, except that incentive stock options granted to individuals
owning more than ten percent of the total combined voting power of PFSweb may
not have an exercise price less than 110% of the fair market value on the date
of grant. The Plan gives the Stock Option Committee complete discretion as to
the times at which the options are exercisable, provided that such options must
expire no later than ten years from the date of grant.
Options are exercisable at such times and in such installments (which may
be cumulative) as the Stock Option Committee may provide in the terms of each
individual option. Generally, options granted under the Plan are expected to be
subject to multi-year cumulative vesting schedules as shall be determined by the
Stock Option Committee, in its discretion.
The Plan permits the Stock Option Committee to authorize and approve the
issuance of immediately exercisable options to purchase restricted stock subject
to restrictions on transfer and forfeiture, and, subject to such terms and
conditions as the Stock Option Committee shall determine in its sole discretion,
the acceptance of promissory notes and/or shares of our common stock (whether
issued upon exercise of outstanding options or otherwise) in payment of the
option exercise price (or applicable taxes arising in connection therewith).
Generally, options issued under the Plan are non-transferable other than by will
or the laws of descent and distribution, except that the Stock Option Committee
may approve the transferability of non-qualified options to family members and
family trusts of option holders or other transferees.
At the time of any merger, consolidation, reorganization, recapitalization,
stock dividend, stock split, or other change in the corporate structure or
capitalization affecting our common stock, the Stock Option Committee will make
appropriate adjustments to the exercise price, number and kind
54
58
of shares to be issued under the Plan and any outstanding options. Unless
terminated earlier, the Plan will terminate ten years from its adoption, and no
stock options will be granted after the Plan terminates. Our board of directors
or the Stock Option Committee has the authority to amend, modify, suspend or
terminate the Plan at any time, subject to any requirement of stockholder
approval under the Code or other applicable law.
There are currently an aggregate of 1,201,500 options outstanding under the
Employee Stock Option Plan that are held by an aggregate of 193 officers and
employees. All of these options have a weighted average exercise price of $10.52
per share and are subject to a three year vesting schedule, under which no
options vest for three years, subject to acceleration, in part, upon completion
of the spin-off. The following table sets forth information with respect to
grants of stock options under the Employee Stock Option Plan to the named
executive officers reflected in the Summary Compensation Table.
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------ VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SECURITIES GRANTED TO APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERMS(1)
OPTIONS IN FISCAL PRICE PER EXPIRATION ---------------------
NAME GRANTED YEAR SHARE DATE 5% 10%
- ---- ---------- ---------- --------- ---------- -------- ----------
Mark C. Layton....... 90,000 7.5% $10.45 7-1-09 $591,475 $1,498,915
Christopher Yates.... 85,000 7.1 10.45 7-1-09 558,616 1,415,642
Steven S. Graham..... 75,000 6.2 10.45 7-1-09 492,896 1,249,096
Thomas J. Madden..... 85,000 7.1 10.45 7-1-09 558,616 1,415,642
C. Clifford Defee.... 80,000 6.7 10.45 7-1-09 525,756 1,332,369
- -------------------------
(1) These are hypothetical values using assumed annual rates of stock price
appreciation as prescribed by the rules of the SEC.
Substitute Stock Options
In connection with the completion of the spin-off, all Daisytek stock
options held by Daisytek employees who are transferred to PFSweb will be
replaced with options to acquire a number of shares of our common stock equal to
the number of shares of Daisytek common stock subject to such Daisytek stock
option as of the date of the completion of the spin-off, multiplied by the Ratio
described below, rounded down to the nearest whole share. The per share exercise
price of such replaced stock option will equal the per share exercise price of
such Daisytek stock option divided by the Ratio.
The "Ratio" means the amount determined by dividing:
- the average of the daily high and low per share prices of the Daisytek
common stock, as reported in The Wall Street Journal, during the three
trading days ending on the record date established by the Daisytek Board
of Directors for the spin-off; by
- the average of the daily high and low per share prices of the PFSweb
common stock, as reported by The Wall Street Journal, for the three
trading days commencing on the day after such record date.
Substantially all of the other terms and conditions of each substitute
stock option, including the time or times when, and the manner in which, each
option will be exercisable, the duration of the exercise period, the permitted
method of exercise, settlement and payment, the rules that will apply in the
event of the termination of employment of the employee, the events, if any, that
may give rise to an employee's right to accelerate the vesting or the time or
exercise thereof and the vesting provisions, will be the same as those of the
replaced Daisytek stock option.
55
59
It is not possible at this time to specify how many shares of our common
stock will be subject to substitute stock options in replacement of Daisytek
stock options. We expect that some Daisytek stock options may be exercised, some
will vest and other Daisytek stock options could be terminated, prior to the
date of the completion of the spin-off. In addition, the Ratio will not be known
until the time of the spin-off. Our stockholders, are, however, likely to
experience some dilutive impact from the above-described adjustments.
As of , 1999, there were shares of Daisytek common stock
subject to Daisytek stock options that will be replaced upon completion of the
spin-off, and these options had a weighted average exercise price of $ per
share. If the Ratio were determined as of such date, then based on a price of
$ per share for the Daisytek common stock and a price of $13.00 per share
for our common stock (the mid-point of the range set forth on the cover page of
this prospectus), the foregoing number of shares of Daisytek common stock
subject to Daisytek stock options would be replaced with options for shares
of our common stock at a weighted average exercise price of $ per share.
Annual Incentive Plan
Officers and certain other key employees of PFSweb will be eligible to
participate in the Annual Incentive Plan. The Compensation Committee may
delegate authority to the PFSweb Board to determine individual awards to key
employees who are not officers of PFSweb. The Plan provides for the opportunity
to grant cash awards based upon the achievement of certain target levels of
performance.
Under the Plan, at the beginning of each year, the Compensation Committee
is authorized, but not required, to establish a targeted performance level at
which a target performance award may be earned, with a threshold or minimum
performance level below which no award will be paid, and a maximum level beyond
which no additional amounts will be paid, and to establish the corresponding
minimum and maximum awards. In determining the performance criteria applicable
to any grant of awards, the Compensation Committee may use one or more business
criteria it deems appropriate. The Plan is discretionary, and the Compensation
Committee or the Board may elect not to grant any awards in any year.
The percentage of each target performance award which will become a final
award and be paid to the employee will be determined by the Compensation
Committee on the basis of the performance goals established and the related
performance achieved, as well as the employee's individual performance during
the period. Final awards actually paid to an employee may be less than or
greater than 100% of the target award. Final awards may be subject to a vesting
schedule established by the Compensation Committee. The Compensation Committee
may delegate authority to the PFSweb Board to determine individual final awards
for employees who are not officers, subject to a maximum amount approved by the
Compensation Committee.
Subject to certain exceptions, the Compensation Committee generally has the
power and authority to amend, modify, suspend or terminate the Plan.
No awards have been granted under the Plan, nor has the Compensation
Committee established any targeted performance levels for 1999 or for any year
thereafter.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.
The members of our Compensation Committee are Messrs. Reilly and Murray,
who also serve as the members of the Compensation Committee of Daisytek.
56
60
CERTAIN TRANSACTIONS
The separation of PFSweb from Daisytek will be effected pursuant to a
Master Separation Agreement and other ancillary agreements that will govern
various interim and ongoing relationships between us and Daisytek. These
agreements relate to this offering and the spin-off, our provision of
transaction management services to Daisytek, tax matters and the provision of
certain interim services. These agreements also require us to cooperate with
Daisytek to complete the spin-off and provide for registration rights for
Daisytek in the event the spin-off is not completed or is completed without
Daisytek divesting itself of all of its PFSweb common stock.
All of our agreements with Daisytek were made in the context of a
parent-subsidiary relationship and were negotiated in the overall context of our
spin-off from Daisytek. Although we generally believe that the terms of these
agreements are consistent with fair market values, we cannot assure you that the
prices charged to us, or by us, under these agreements are not higher or lower
than the prices that may be charged by, or to, unaffiliated third parties for
similar services.
We have set forth below a summary description of the Master Separation
Agreement and certain of the ancillary agreements. This description, which
summarizes the material terms of such agreements, is not complete. You should
read the full text of these agreements, which have been filed with the SEC as
exhibits to the registration statement of which this prospectus is a part.
MASTER SEPARATION AGREEMENT
The Master Separation Agreement sets forth our agreements with Daisytek
with respect to the principal corporate transactions required to effect the
transfers of assets and assumptions of liabilities necessary to separate our
company from Daisytek and certain other agreements governing our relationship
thereafter.
Transfer of Assets and Liabilities. Upon completion of this offering,
Daisytek will transfer to us assets, including all fixed assets in the Memphis
distribution facility as well as certain assets associated with providing
information technology services and the stock of several subsidiaries of
Daisytek representing the business operations of PFSweb, and we will transfer to
Daisytek $5.7 million in cash and assume $0.3 million of capital lease
obligations, as well as the operating lease obligations related to these assets.
We will also repay to Daisytek, from the net proceeds of this offering, the then
outstanding balance of our payable to Daisytek ($ million at October 31, 1999).
Daisytek is not making any representation or warranty with respect to any asset
being transferred to us.
Indemnification. We have agreed to indemnify Daisytek against any losses,
claims, damages or liabilities arising from the liabilities transferred to us
and the conduct of our business after the completion of this offering. Daisytek
has agreed to retain and indemnify us against any losses, claims, damages or
liabilities arising from the conduct of our business prior to the completion of
this offering.
INITIAL PUBLIC OFFERING AND DISTRIBUTION AGREEMENT
General. We will enter into an Initial Public Offering and Distribution
Agreement with Daisytek which governs our respective rights and duties with
respect to this offering and the spin-off, and sets forth certain covenants to
which we will be bound for various periods following the offering and the
spin-off. Although Daisytek has announced that it plans to complete the
spin-off, and we have agreed to cooperate with Daisytek to complete the
spin-off, there are various conditions to the completion of the spin-off.
Consequently, we cannot assure you as to whether or when the spin-off will
occur.
The Spin-off. The completion of the spin-off is subject to the
satisfaction, or waiver by Daisytek in its sole discretion, of various
conditions, including the following:
57
61
- Receipt by Daisytek of a ruling by the Internal Revenue Service that,
among certain other tax consequences of the transaction, the spin-off
will qualify as a tax-free distribution for federal income tax purposes
and will not result in the recognition of taxable gain or loss for
federal income tax purposes to Daisytek or its shareholders. Daisytek
may, in its sole and absolute discretion, determine not to seek such a
ruling and instead proceed on the basis of an opinion from its
professional advisor, in form and substance reasonably satisfactory to
it, as to the qualification of the transaction for tax-free treatment.
- Obtaining any material consents necessary to consummate the spin-off
which shall be in full force and effect.
- No court orders, injunctions, decrees, regulations or other legal
restraint prohibiting or restricting the completion of the spin-off shall
exist.
- No events or developments shall have occurred subsequent to the closing
of this offering that, in the sole judgement of Daisytek, would result in
the spin-off having a materially adverse effect on Daisytek, PFSweb, or
their shareholders.
We have agreed to cooperate with Daisytek to accomplish the spin-off and,
at Daisytek's direction, promptly take all actions necessary or desirable to
effect the spin-off. In the event that any of these conditions are not
satisfied, or waived by Daisytek in its sole discretion, Daisytek's rights and
our obligations under the Registration Rights Agreement described below will
become immediately effective.
Substitute Stock Options. In connection with the completion of the
spin-off, all Daisytek stock options held by Daisytek employees who are
transferred to PFSweb will be replaced with options to acquire shares of our
common stock. See "Substitute Stock Options."
Preservation of the Tax-free Status of the Spin-off. Daisytek intends for
the spin-off to qualify as a tax-free distribution under Section 355 of the Code
to Daisytek and its stockholders. Daisytek intends to seek either a private
letter ruling (the "IRS Ruling") from the Internal Revenue Service or an opinion
from its professional tax adviser (the "Tax Opinion") to such effect. In either
case, we will be required to make certain representations and warranties
regarding our company and our business and Daisytek will be required to make
certain representations and warranties regarding it and its business. We have
also agreed to certain covenants that are intended to preserve the tax-free
status of the spin-off. We may take any action otherwise prohibited by these
covenants only if Daisytek has determined, in its sole and absolute discretion,
that such action would not jeopardize the tax-free status of the spin-off. These
covenants include:
- Stock Issuance. Prior to the completion of the spin-off, we have agreed
not to issue shares of our capital stock in an amount that would result
in Daisytek owning less than 80% of the total combined voting power of
all outstanding shares of our voting stock and/or less than 80% of any
other class and/or series of PFSweb capital stock (or otherwise cause
Daisytek not to be in control of PFSweb immediately prior to the
spin-off, within the meaning of Section 368(c) of the Code). This
covenant will not prohibit us from issuing stock options to our employees
or outside directors so long as such options will not vest or be
exercisable prior to the effective date of the spin-off or we repurchase
sufficient shares of our capital stock prior to the date when such
options become exercisable to ensure that Daisytek's ownership remains at
or higher than 80% and Daisytek approves of our procedures to comply with
this covenant.
- Certain Acquisition Transactions. Until two years after the completion of
the spin-off, we have agreed not to enter into or permit any transaction
or series of transactions that would result in a person or persons
acquiring or having the right to acquire shares of our capital stock that
would comprise 50% or more of either the value of all outstanding shares
of our capital stock or the total combined voting power of our
outstanding voting stock.
58
62
- Continuation of Active Trade or Business. Until two years after the
completion of the spin-off, we have agreed to continue to conduct the
active trade or business (within the meaning of Section 355 of the Code)
of our company as we conducted it immediately prior to the completion of
the spin-off. During such time, we have agreed not to:
- liquidate, dispose of or otherwise discontinue the conduct of any
substantial portion of our active trade or business; or
- dispose of any business or assets that would cause our company to be
operated in a manner inconsistent in any material respect with the
business purposes for the spin-off as described in our
representations made in connection with Daisytek's request for the
IRS Ruling or Tax Opinion.
- Continuity of Business. Until two years after the completion of the
spin-off, we have agreed that we will not voluntarily dissolve or
liquidate; and, except in the ordinary course of business, neither we nor
any of our direct or indirect subsidiaries will sell, transfer, or
otherwise dispose of or agree to dispose of assets (including any shares
of capital stock of our subsidiaries) that, in the aggregate, constitute
more than 60% of our assets.
- Discharge of Intracompany Debt. Prior to the first date on which Daisytek
distributes any PFSweb common stock in connection with the spin-off, we
have agreed to fully discharge and satisfy all debt that we owe Daisytek
(for such purpose, debt does not include payables arising in the ordinary
course of business). Until two years after the completion of the spin-
off, we will not be able to have any such indebtedness with Daisytek.
These covenants will not prohibit us from implementing or complying with
any transaction permitted by an IRS ruling or a tax opinion. In the event that
Daisytek notifies us that it no longer intends to proceed with or complete the
spin-off and Daisytek has not yet distributed any of its PFSweb common stock,
these covenants to preserve the tax-free status of the spin-off will terminate.
Other Covenants Regarding Tax Treatment of the Transactions. Daisytek
intends the transfer of assets and liabilities from Daisytek to our company as
provided by the master separation agreement (the "Contribution") to qualify as a
reorganization under Section 368(a)(1)(D) of the Code (a "D Reorganization").
Until two years after the completion of the spin-off, we have agreed not to
take, or permit any of our subsidiaries to take, any actions or enter into any
transaction or series of transactions that would be reasonably likely to
jeopardize the tax-free status of the spin-off or the qualification of the
Contribution as a D Reorganization, including any action or transaction that
would be reasonably likely to be inconsistent with any representation made in
connection with Daisytek's request for the IRS Ruling or Tax Opinion. We have
also agreed to take any reasonable actions necessary for the Contribution and
the spin-off to qualify as a D Reorganization. We may take any action that would
otherwise violate this covenant only if Daisytek determines, in its sole and
absolute discretion, that such action or transaction would not jeopardize the
tax-free status of the spin-off or the qualification of the Contribution as a D
Reorganization.
Cooperation on Tax Matters. We and Daisytek have agreed to various
procedures with respect to the tax-related covenants described above, and we are
required to notify Daisytek if we desire to take any action prohibited by these
covenants. Upon such notification, if Daisytek determines that such action might
jeopardize the tax-free status of the spin-off or the qualification of the
Contribution as a D Reorganization, Daisytek will either use all commercially
reasonable efforts to obtain a private letter ruling from the IRS or a tax
opinion that would permit us to take the desired action or provide all
reasonable cooperation to us in connection with our obtaining such an IRS ruling
or tax opinion. In either case, Daisytek has agreed to bear the reasonable costs
and expenses of obtaining the IRS ruling or tax opinion, unless it is determined
that our proposed action will jeopardize the tax-free status of the spin-off or
the qualification of the Contribution as a D Reorganization, in which event we
will be responsible for such costs and expenses.
59
63
Indemnification for Tax Liabilities. We have generally agreed to indemnify
Daisytek and its affiliates against any and all tax-related losses incurred by
Daisytek in connection with any proposed tax assessment or tax controversy with
respect to the spin-off or the Contribution to the extent caused by any breach
by us of any of our representations, warranties or covenants. This
indemnification does not apply to actions that Daisytek permits us to take as a
result of a determination under the tax-related covenants as described above.
Similarly, Daisytek has agreed to indemnify us and our affiliates against any
and all tax-related losses incurred by us in connection with any proposed tax
assessment or tax controversy with respect to the spin-off or the Contribution
to the extent caused by any breach by Daisytek of any of its representations,
warranties or covenants.
Other covenants. After the offering, Daisytek will continue to own a
significant portion of our common stock. As a result, Daisytek will continue to
include us as a "subsidiary" for various financial reporting, accounting and
other purposes. Accordingly, for so long as Daisytek continues to own at least
50% of our outstanding common stock, we have agreed that:
- we will not, without Daisytek's prior written consent (which it may
withhold in its sole and absolute discretion), take any action which has
the effect of limiting Daisytek's ability to freely sell, pledge or
otherwise dispose of shares of our common stock or limiting the legal
rights of or denying any benefit to Daisytek as a stockholder in a manner
not applicable to stockholders generally;
- we will not, without Daisytek's prior written consent (which it may
withhold in its sole and absolute discretion), issue any shares of common
stock or any rights, warrants or options to acquire our common stock, if,
after giving effect to such issuance, Daisytek would own less than 50% of
the then outstanding shares of our common stock, except that this will
not restrict us from issuing options that will not vest or become
exercisable prior to the effective date of the spin-off; and
- to the extent that Daisytek is a party to, or enters into, any agreements
that provide that certain actions of Daisytek's subsidiaries may result
in Daisytek being in breach or default under such agreements (and we have
been advised of the existence of such agreements), we will not take any
actions that may result in Daisytek being in breach or default under any
such agreement.
Financial Information. We have agreed that, for so long as Daisytek is
required to consolidate our results of operations and financial position or
account for its investment in our company, we will provide Daisytek certain
financial information regarding our company and our subsidiaries, including
copies of all quarterly and annual financial information and other reports and
documents we intend to file with the SEC prior to such filings (as well as final
copies upon filing) and copies of our budgets and financial projections (as well
as the opportunity to meet with our management to discuss such budgets and
projections). We have also agreed to consult with Daisytek regarding the timing
and content of earnings releases and cooperate fully (and cause our accountants
to cooperate fully) with Daisytek in connection with any of its public filings.
This covenant is subject to appropriate confidentiality provisions to protect
the confidentiality commitments we have made to our customers.
Auditors and Audits; Annual Statements and Accounting. We have agreed that,
for so long as Daisytek is required to consolidate our results of operations and
financial position or account for its investment in our company, we will not
change our auditors (which currently are the same auditors as those retained by
Daisytek) without Daisytek's prior written consent (which will not be
unreasonably withheld) and will use our best efforts to enable our auditors to
complete their audit of our financial statements so that they will date their
opinion the same date that they date their opinion on Daisytek's financial
statements. We have also agreed to provide to Daisytek and its auditors all
information required for Daisytek to meet its schedule for the filing and
distribution of its financial statements and to make available to Daisytek and
its auditors all work papers related to
60
64
the annual audit of our company as well as access to the personnel who perform
the annual audit and our and our subsidiaries' books and records so that
Daisytek and its auditors may conduct reasonable audits relating to our
financial statements. We have also agreed to adhere to certain specified
accounting standards and to notify and consult with Daisytek regarding any
changes to our accounting principles and make any changes to our accounting
estimates and principles requested by Daisytek.
Indemnification. We have generally agreed to indemnify Daisytek and its
affiliates against all liabilities arising out of any material untrue statements
and omissions in this prospectus and the registration statement of which it is a
part and in any and all registration statements, information statements and/or
other documents filed with the SEC in connection with the spin-off or otherwise.
However, our indemnification of Daisytek does not apply to information relating
to Daisytek. Daisytek has agreed to indemnify us for this information.
Expenses. In general, we have agreed to pay all costs and expenses relating
to this offering, including the underwriting discounts and commissions, and
Daisytek has agreed to pay all costs and expenses relating to the spin-off.
REGISTRATION RIGHTS AGREEMENT
In the event the spin-off is not completed and Daisytek does not divest
itself of all of its shares of PFSweb common stock, Daisytek could not freely
sell all of such shares without registration under the Securities Act.
Accordingly, we will enter into a registration rights agreement with Daisytek to
provide it with certain registration rights relating to the shares of our common
stock which it holds. These registration rights generally become effective at
such time as Daisytek informs us that it no longer intends to or complete the
spin-off.
Shares Covered. The registration rights agreement covers those shares of
our common stock that are held by Daisytek immediately following this offering
and continue to be held by Daisytek on the date on which Daisytek notifies us
that it no longer intends to complete the spin-off.
Demand Registrations. Daisytek may request registration (each, a "Demand
Registration") under the Securities Act of all or any portion of our shares
covered by the registration rights agreement and we will be obligated to
register such shares as requested by Daisytek. There is no limit to the number
of Demand Registrations that Daisytek may request, except that the number of
shares to be registered must have an aggregate expected offering price of at
least $10 million.
Terms of Each Offering. Daisytek will designate the terms of each offering
effected pursuant to a Demand Registration, which may take any form, including
an underwritten public offering, a shelf registration, or a registration in
connection with an exchange offer or other distribution.
Timing of Demand Registrations. We are not required to undertake a Demand
Registration within 90 days of the effective date of a previous Demand
Registration, other than a Demand Registration that was effected as a shelf
registration. Also, we have the right to postpone the filing or effectiveness of
any Demand Registration for up to 90 days if in the reasonable judgment of our
counsel such registration would reasonably be expected to have a material
adverse effect on any of our existing proposals or plans to engage in certain
material transactions; provided, however, that we may exercise this right only
once in any 12-month period.
Priority on Demand Registrations. We and other parties can participate in
any Demand Registration only if all of the securities Daisytek proposes to
include in such registration are so included.
Piggyback Registrations. The registration rights agreement also provides
for "piggyback" registration rights for Daisytek. Whenever we propose to
register any of our securities under the Securities Act for ourselves or others,
subject to certain customary exceptions, we must provide
61
65
prompt notice to Daisytek and include in such registration all shares of our
stock which Daisytek requests to be included (each, a "Piggyback Registration").
Priority on Piggyback Registrations. If a Piggyback Registration is being
made on our behalf and the underwriters advise us that a reduction in the number
of shares to be sold is necessary, we must include in such registration: first,
the securities we propose to offer; second, the securities requested to be
included by Daisytek; and third, any other securities requested to be included
in such registration. If a Piggyback Registration is being made on behalf of
other holders of our securities and the underwriters advise us that a reduction
in the number of shares to be sold is necessary, we must include in such
registration: first, the securities requested to be included therein by the
holders requesting such registration and the securities requested to be included
therein by Daisytek, pro rata among such holders and Daisytek on the basis of
the number of securities owned by each such holder; and second, any other
securities requested to be included in such registration.
Registration Procedures and Expenses. The registration rights agreement
sets forth various registration procedures, including a covenant by us to make
available our senior management for road show presentations. All registration
expenses incurred in connection with the registration rights agreement,
including all filing fees, fees and expenses of compliance with securities
and/or blue sky laws, financial printing expenses, fees and disbursements of
custodians, transfer agents, exchange agents and/or information agents, and fees
and disbursements of counsel and all independent certified public accountants,
underwriters (excluding discounts and commissions) and other persons retained by
us will be paid by us. In addition, we must reimburse Daisytek for the fees and
disbursements of its outside counsel as well as out-of-pocket expenses incurred
in connection with any such registration.
Indemnification. The registration rights agreement contains indemnification
and contribution provisions by us for the benefit of Daisytek and any
underwriters and by Daisytek for the benefit of us and any underwriters with
respect to information provided by Daisytek.
Transfer. Daisytek may transfer shares covered by the registration rights
agreement and the holders of such transferred shares will be entitled to the
benefits of the registration rights agreement; provided that each such
transferee agrees to be bound by the terms of the registration rights agreement.
Duration. The registration rights under the registration rights agreement
will remain in effect with respect to any shares of our common stock until:
- such shares have been sold pursuant to an effective registration
statement under the Securities Act;
- such shares have been sold to the public pursuant to Rule 144 under the
Securities Act (or any successor provision);
- such shares have been otherwise transferred, new certificates for them
not bearing a legend restricting further transfer shall have been
delivered by the company and subsequent public distribution of them shall
not require registration of them under the Securities Act or any similar
state law;
- such shares have ceased to be outstanding; or
- in the case of shares held by a transferee of Daisytek, when such shares
become eligible for sale pursuant to Rule 144(k) under the Securities Act
(or any successor provision).
TAX MATTERS
We will enter into a tax allocation agreement with Daisytek to govern the
allocation of tax liabilities and to set forth agreements with respect to
certain other tax matters. Generally, under
62
66
the Code, we will cease to be a member of the Daisytek consolidated group upon
the completion of the spin-off or if Daisytek owns less than 80% of our
outstanding capital stock.
Daisytek generally will pay all taxes attributable to PFSweb and its
subsidiaries for tax periods or portions thereof ending on or before the
effective date of this offering, except to the extent of any accruals therefor
on the books and records of PFSweb or its subsidiaries for such taxes under
generally accepted accounting principles. Thereafter, for tax periods or
portions thereof during which we are a member of the Daisytek consolidated,
combined or unitary group, we will be apportioned our share of the group's
income tax liability based on our taxable income determined separately from
Daisytek's taxable income, and we will pay our calculated taxes to Daisytek,
which will then file a consolidated, combined or unitary return with the
appropriate tax authorities. There may be certain U.S. state or local
jurisdictions in which we will file separate income tax returns, not combined or
consolidated with Daisytek, for such tax periods. In that circumstance, we would
file a tax return with the appropriate tax authorities, and pay all taxes
directly to the tax authority. We will be compensated for tax benefits generated
by our company before tax deconsolidation and used by the Daisytek consolidated
group. We will prepare and file all tax returns, and pay all income taxes due
with respect to all tax returns required to be filed by us for all tax periods
after we cease to be a member of the Daisytek consolidated, combined or unitary
group.
Daisytek is responsible for most U.S. tax adjustments related to PFSweb for
all periods or portions thereof ending on or before the effective date of the
offering. In addition, we and Daisytek have agreed to cooperate in any tax
audits, litigation or appeals that involve, directly or indirectly, periods
prior to the time that we cease to be a member of the Daisytek consolidated
group. We and Daisytek have agreed to indemnify each other for tax liabilities
resulting from the failure to cooperate in such audits, litigation or appeals,
and for any tax liability resulting from the failure to maintain adequate
records.
Notwithstanding the tax allocation agreement, for all periods in which
Daisytek owns or owned 80% or more of our capital stock, we are included in
Daisytek's consolidated group for federal income tax purposes. If Daisytek or
other members of the consolidated group fail to make any federal income tax
payments, we would be liable for the shortfall since each member of a
consolidated group is liable for the group's entire tax obligation.
TRANSACTION MANAGEMENT SERVICES AGREEMENT
We will enter into a transaction management services agreement with
Daisytek which will set forth the transaction management services that we will
provide for Daisytek in connection with its U.S. wholesale consumable supplies
business. Under this agreement, we will provide a wide range of transaction
management services, including order fulfillment and distribution, product
warehousing, inbound call center services, product return administration and
other services.
The agreement has an initial term of five years from the completion of this
offering, although either party has the right to terminate the agreement at any
time, without cause. If Daisytek terminates the agreement without cause,
Daisytek must provide us with at least 180 days' prior notice and pay us a
termination fee. The termination fee is based upon the net value of the assets
being transferred to us by Daisytek which are primarily used in servicing the
Daisytek business. The termination fee declines over the five year term of the
agreement. If we terminate the agreement without cause, we must provide Daisytek
with at least 365 days' prior notice and Daisytek does not have to pay any
termination fee. In addition, if there is a change in control of Daisytek, we
may terminate the agreement upon 90 days' prior notice and Daisytek does not
have to pay the termination fee. During the term of this agreement, Daisytek
will pay us service fees based upon a percent of shipped revenue. We and
Daisytek have agreed that these fees are based upon certain assumptions
regarding the nature, cost and scope of the services we will be providing under
the agreement. If these assumptions should prove to be materially incorrect, we
and Daisytek
63
67
have agreed to negotiate in good faith an adjustment to the fees payable to us
under the agreement.
During the term of the agreement, we have agreed not to engage, on our own
behalf, in the business of selling or distributing, on a wholesale basis, any
Daisytek products. This will not restrict us, however, from providing
transaction management services to third parties who may be engaged in the
business of selling or distributing, on a wholesale basis, the same or competing
products.
As part of the restructuring of our arrangements with IBM, we have also
entered into transaction management agreements with Daisytek to provide
transaction management services, on a worldwide basis, in connection with their
distribution of various IBM products. Under these agreements, we will receive
service fees based upon a variable percent of shipped revenue. These agreements
are coterminous with our IBM agreements which, generally, have terms of one to
two years, although IBM may terminate these agreements at any time.
TRANSITION SERVICES AGREEMENT
Upon completion of this offering, we will enter into a transition services
agreement with Daisytek. Under this agreement, Daisytek will provide us with
various services relating to employee payroll and benefits, use of facilities,
certain management information systems, insurance coverage and other
administrative services. Daisytek will provide us with these services until the
completion of the spin-off (the "Transition Period"), except that, with respect
to any particular service, we may, upon notice to Daisytek, either terminate the
Transition Period as of an earlier date or extend the Transition Period for up
to one year from the completion of this offering.
The agreement requires us to use all commercially reasonable efforts to
obtain these transition services from a source other than Daisytek prior to the
conclusion of the Transition Period. If, however, we cannot obtain any
transition service from a source other than Daisytek and the transition service
is necessary for us to continue to operate our business, then, we may require
Daisytek to continue to provide the transition service for an additional period
not to exceed six months.
Generally, we will pay Daisytek for these transition services an amount
equal to the cost historically allocated by Daisytek to our business, adjusted
to reflect any changes in the nature, cost or level of the services so provided.
If we require Daisytek to provide us with any transition service after the
expiration of the Transition Period, we will pay Daisytek the fair market value
of these services.
PRINCIPAL STOCKHOLDER
Prior to this offering, all of the outstanding shares of our common stock
are owned by Daisytek. After this offering, Daisytek will own approximately
82.2% (or approximately 80.1% if the underwriters exercise their over-allotment
option in full) of our outstanding common stock. Except for Daisytek, we are not
aware of any person or group that will beneficially own more than 5% of the
outstanding shares of our common stock following this offering. Daisytek's
principal executive offices are located at 500 North Central Expressway, Plano,
Texas 75074.
64
68
DESCRIPTION OF CAPITAL STOCK
Under our Amended and Restated Certificate of Incorporation, our authorized
capital stock consists of 41,000,000 shares, of which 40,000,000 shares are
common stock, no par value per share, and 1,000,000 shares are preferred stock,
par value $1.00 per share. Immediately following this offering, 17,405,000
shares of common stock, or 17,870,000 shares if the underwriters exercise their
over-allotment option in full, will be outstanding. The following description of
our capital stock is not complete and is qualified in its entirety by our
Amended and Restated Certificate of Incorporation and Bylaws, both of which are
included as exhibits to the registration statement of which this prospectus
forms a part.
COMMON STOCK
Holders of common stock will be entitled to one vote per share with respect
to each matter presented to our stockholders on which the holders of common
stock are entitled to vote. Except as may be provided in connection with any
preferred stock in a certificate of designation filed pursuant to the Delaware
General Corporation Law ("DGCL"), or as may otherwise be required by law or the
Amended and Restated Certificate of Incorporation, the common stock will be the
only capital stock of PFSweb entitled to vote in the election of directors and
on all other matters presented to the stockholders of PFSweb; provided that
holders of common stock, as such, will not be entitled to vote on any matter
that solely relates to the terms of any outstanding series of preferred stock or
the number of shares of such series and does not affect the number of authorized
shares of preferred stock or the powers, privileges and rights pertaining to the
common stock. The common stock will not have cumulative voting rights.
Subject to the prior rights of holders of preferred stock, if any, holders
of common stock are entitled to receive such dividends as may be lawfully
declared from time to time by the Board of Directors of PFSweb. Upon any
liquidation, dissolution or winding up of PFSweb, whether voluntary or
involuntary, holders of common stock will be entitled to receive such assets as
are available for distribution to stockholders after there shall have been paid
or set apart for payment the full amounts necessary to satisfy any preferential
or participating rights to which the holders of each outstanding series of
preferred stock are entitled by the express terms of such series.
The outstanding shares of our common stock are, and the shares of common
stock being offered hereby will be, upon payment therefor, validly issued, fully
paid and nonassessable. The common stock sold in this offering will not have any
preemptive, subscription or conversion rights. Additional shares of authorized
common stock may be issued, as determined by the PFSweb Board from time to time,
without stockholder approval, except as may be required by applicable law or
stock exchange requirements.
PREFERRED STOCK
Our Board is empowered, without approval of the stockholders, to cause
shares of preferred stock to be issued from time to time in one or more series,
with the numbers of shares of each series and the designation, powers,
privileges, preferences and rights of the shares of each such series and the
qualifications, limitations and restrictions thereof as fixed by our Board.
Among the specific matters that may be determined by the Board are:
- the designation of each series;
- the number of shares of each series;
- the rate of dividends, if any;
- whether dividends, if any, shall be cumulative or non-cumulative;
- the terms of redemption, if any;
65
69
- the amount payable in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of PFSweb;
- rights and terms of conversion or exchange, if any;
- restrictions on the issuance of shares of the same series or any other
series, if any; and
- voting rights, if any.
Although no shares of preferred stock are currently outstanding and we have
no current plans to issue preferred stock, the issuance of shares of preferred
stock, or the issuance of rights to purchase such shares, could be used to
discourage an unsolicited acquisition proposal. For example, a business
combination could be impeded by the issuance of a series of preferred stock
containing class voting rights that would enable the holder or holders of such
series to block any such transaction. Alternatively, a business combination
could be facilitated by the issuance of a series of preferred stock having
sufficient voting rights to provide a required percentage vote of the
stockholders. In addition, under certain circumstances, the issuance of
preferred stock could adversely affect the voting power and other rights of the
holders of the common stock. Although PFSweb's Board is required to make any
determination to issue any such stock based on its judgment as to the best
interests of the stockholders of PFSweb, it could act in a manner that would
discourage an acquisition attempt or other transaction that some, or a majority,
of the stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over prevailing market
prices of such stock. PFSweb's Board does not at present intend to seek
stockholder approval prior to any issuance of currently authorized stock, unless
otherwise required by law or applicable stock exchange requirements.
LIMITATION ON LIABILITY OF DIRECTORS
Our Amended and Restated Certificate of Incorporation provides, as
authorized by Section 102(b)(7) of the DGCL, that a director of PFSweb will not
be personally liable to PFSweb or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability imposed by law (as
in effect from time to time):
- for any breach of the director's duty of loyalty to PFSweb or its
stockholders;
- for any act or omission not in good faith or which involved intentional
misconduct or a knowing violation of law;
- for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the DGCL; or
- for any transaction from which the director derived an improper personal
benefit.
The inclusion of this provision in the Amended and Restated Certificate of
Incorporation may have the effect of reducing the likelihood of derivative
litigation against directors, and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their duty of
care, even though such an action, if successful, might otherwise have benefited
PFSweb and its stockholders.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
PFSweb is a Delaware corporation and subject to Section 203 of the DGCL.
Generally, Section 203 prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the time such stockholder became an interested
stockholder unless certain conditions are satisfied. Thus, it may
66
70
make acquisition of control of our company more difficult. The prohibitions in
Section 203 of the DGCL do not apply if:
- prior to the time the stockholder became an interested stockholder, the
board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming
an interested stockholder;
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced; or
- at or subsequent to the time the stockholder became an interested
stockholder, the business combination is approved by the board of
directors and authorized by the affirmative vote of at least 66 2/3% of
the outstanding voting stock that is not owned by the interested
stockholder.
Under Section 203 of the DGCL, a "business combination" includes:
- any merger or consolidation of the corporation with the interested
stockholder;
- any sale, lease, exchange or other disposition, except proportionately as
a stockholder of such corporation, to or with the interested stockholder
of assets of the corporation having an aggregate market value equal to
10% or more of either the aggregate market value of all the assets of the
corporation or the aggregate market value of all the outstanding stock of
the corporation;
- certain transactions resulting in the issuance or transfer by the
corporation of stock of the corporation to the interested stockholder;
- certain transactions involving the corporation which have the effect of
increasing the proportionate share of the stock of any class or series of
the corporation which is owned by the interested stockholder; or
- certain transactions in which the interested stockholder receives
financial benefits provided by the corporation.
Under Section 203 of the DGCL, an "interested stockholder" generally is:
- any person that owns 15% or more of the outstanding voting stock of the
corporation;
- any person that is an affiliate or associate of the corporation and was
the owner of 15% or more of the outstanding voting stock of the
corporation at any time within the three-year period prior to the date on
which it is sought to be determined whether such person is an interested
stockholder; and
- the affiliates or associates of any such person.
Because Daisytek owned more than 15% of our voting stock before we became a
public company in this offering, Section 203 of the DGCL by its terms is
currently not applicable to business combinations with us even though Daisytek
owns 15% or more of our outstanding stock. If any other person acquires 15% or
more of our outstanding stock, such person will be subject to the provisions of
Section 203 of the DGCL.
CERTAIN PROVISIONS OF OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND
BYLAWS
Our Bylaws contain provisions requiring that advance notice be delivered to
PFSweb of any business to be brought by a stockholder before an annual or
special meeting of stockholders and providing for certain procedures to be
followed by stockholders in nominating persons for election to the PFSweb Board.
Generally, only such business may be conducted at a special meeting of
stockholders as is set forth in the notice for such meeting.
Our Bylaws provide that except as may be provided in connection with the
issuance of any series of preferred stock, the number of directors shall be
fixed from time to time pursuant to a
67
71
resolution adopted by our Board of Directors. PFSweb's Amended and Restated
Certificate of Incorporation provides for a classified Board of Directors,
consisting of three classes as nearly equal in size as practicable. Each class
holds office until the third annual stockholders' meeting for election of
directors following the most recent election of such class, except that the
initial terms of the three classes expire in 2000, 2001 and 2002, respectively.
LISTING
Application will be made for quotation of our common stock on the Nasdaq
National Market under the symbol "PFSW."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, LLC. Its address is 85 Challenger Road, Ridgefield Park,
New Jersey 07660.
SHARES ELIGIBLE FOR FUTURE SALE
GENERAL
The 3,100,000 shares of our common stock sold in this offering, or
3,565,000 shares if the underwriters exercise their over-allotment option in
full, will be freely tradable without restriction under the Securities Act,
except for any such shares which may be acquired by an "affiliate" of PFSweb (an
"Affiliate") as that term is defined in Rule 144 promulgated under the
Securities Act, which shares will remain subject to the resale limitations of
Rule 144.
The 14,305,000 shares of our common stock that will continue to be held by
Daisytek after this offering constitute "restricted securities" within the
meaning of Rule 144, and will be eligible for sale by Daisytek in the open
market after this offering, subject to certain contractual lockup provisions and
the applicable requirements of Rule 144, both of which are described below.
PFSweb has granted certain registration rights to Daisytek. See "-- Registration
Rights."
Generally, Rule 144 provides that a person who has beneficially owned
"restricted" shares for at least one year will be entitled to sell on the open
market in brokers' transactions within any three month period a number of shares
that does not exceed the greater of:
- 1% of the then outstanding shares of common stock; and
- the average weekly trading volume in the common stock on the open market
during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain post-sale notice
requirements and the availability of current public information about PFSweb.
In the event that any person other than Daisytek who is deemed to be an
Affiliate purchases shares of our common stock pursuant to this offering or
acquires shares of our common stock pursuant to an employee benefit plan of
PFSweb, the shares held by such person are required under Rule 144 to be sold in
brokers' transactions, subject to the volume limitations described above. Shares
properly sold in reliance upon Rule 144 to persons who are not Affiliates are
thereafter freely tradable without restriction.
Sales of substantial amounts of our common stock in the open market, or the
availability of such shares for sale, could adversely affect the price of our
common stock. Daisytek has announced that it plans to complete its spin-off of
PFSweb by distributing all of the shares of PFSweb common stock that it owns to
the holders of Daisytek's common stock. Any shares distributed by Daisytek will
be eligible for immediate resale in the public market without restrictions by
persons other than
68
72
Affiliates of PFSweb. Affiliates of PFSweb would be subject to the restrictions
of Rule 144 described above other than the one-year holding period requirement.
Each of PFSweb, Daisytek and the directors and executive officers of PFSweb
and Daisytek have agreed that, without the prior written consent of Hambrecht &
Quist on behalf of the underwriters, they will not, during the period ending 180
days after the date of this prospectus, sell or otherwise dispose of any shares
of our common stock, subject to certain exceptions. The spin-off is specifically
not exempted from this agreement. See "Underwriters."
An aggregate of 6,000,000 shares of our common stock are reserved for
issuance under our stock option plans. We intend to file a registration
statement on Form S-8 covering the issuance of shares of our common stock
pursuant to these plans. Accordingly, the shares issued pursuant to these stock
option plans will be freely tradable, subject to the restrictions on resale by
Affiliates under Rule 144.
REGISTRATION RIGHTS OF DAISYTEK
Pursuant to the Registration Rights Agreement we will enter into with
Daisytek, at any time after Daisytek informs us that it no longer intends to
complete the spin-off or that the spin-off was completed without Daisytek
divesting itself of 100% of our common stock that it held, Daisytek may require
us to register under the Securities Act all or any portion of our common stock
that it holds. Any of Daisytek's shares of our common stock registered pursuant
to the Registration Rights Agreement would be eligible for immediate resale in
the public market without restrictions by persons other than Affiliates of
PFSweb. For more information regarding the Registration Rights Agreement, see
"Registration Rights Agreement."
Any sales of substantial amounts of our common stock in the public market,
or the perception that such sales might occur (whether as a result of the
spin-off, Daisytek's registration rights or otherwise), could have a material
adverse effect on the market price of our common stock. See "Risk Factors."
UNDERWRITING
PFSweb has entered into an underwriting agreement with the underwriters
named below. Hambrecht & Quist LLC, Dain Rauscher Wessels, a division of Dain
Rauscher Incorporated, William Blair & Company, LLC and Jefferies & Company,
Inc. are acting as representatives of the underwriters.
The underwriting agreement provides for the purchase of a specific number
of shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specified number of shares, but is not responsible for the commitment
of any other underwriter to purchase shares. Subject to the terms and conditions
of the underwriting agreement, each underwriter has severally agreed to purchase
the number of shares of common stock set forth opposite its name below.
NUMBER
UNDERWRITERS OF SHARES
- ------------ ---------
Hambrecht & Quist LLC.......................................
Dain Rauscher Wessels.......................................
William Blair & Company, LLC................................
Jefferies & Company, Inc. ..................................
Total.......................................................
This is a firm commitment underwriting. This means that the underwriters
have agreed to purchase all of the shares offered by this prospectus, other than
those covered by the over-allotment option described below, if any are
purchased. Under the underwriting agreement, if an
69
73
underwriter defaults in its commitment to purchase shares, the commitments of
non-defaulting underwriters may be increased or the underwriting agreement may
be terminated, depending on the circumstances.
The representatives have advised PFSweb that the underwriters propose to
offer the shares directly to the public at the public offering price that
appears on the cover page of this prospectus. In addition, the representatives
may offer some of the shares to certain securities dealers at such price less a
concession of $ per share. The underwriters may also allow to dealers, and
such dealers may reallow, a concession not in excess of $ per share to
certain other dealers. After the shares are released for sale to the public, the
representatives may change the offering price and other selling terms at various
times.
The underwriters have informed PFSweb that the underwriters do not intend
to confirm discretionary sales of the shares of common stock offered by this
prospectus.
PFSweb has granted the underwriters an over-allotment option. This option,
which is exercisable for up to 30 days after the date of this prospectus,
permits the underwriters to purchase a maximum of 465,000 additional shares from
PFSweb to cover over-allotments. If the underwriters exercise all or part of
this option, they will purchase shares covered by the option at the public
offering price that appears on the cover page of this prospectus, less the
underwriting discount. If this option is exercised in full, the total price to
public will be $46.3 million and the net proceeds to PFSweb will be
approximately $41.1 million. The underwriters have severally agreed that, to the
extent the over-allotment option is exercised, they will each purchase a number
of additional shares proportionate to the underwriter's initial amount reflected
in the above table.
The following table provides information regarding the amount of the
discount to be paid to the underwriters by PFSweb. Such amount is shown assuming
both no exercise and full exercise of the underwriters' option to purchase
additional shares.
PAID BY PFSWEB
---------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
Per Share.......................................... $ $
Total.............................................. $ $
PFSweb estimates that the total expenses of the offering, excluding the
underwriting discount, will be approximately $ .
PFSweb and Daisytek have agreed to indemnify the underwriters against
certain liabilities, including liabilities under the Securities Act, and to
contribute to payments the underwriters may be required to make for certain
liabilities.
PFSweb, its executive officers and directors, and Daisytek have agreed to a
180-day lock up with respect to 14,305,000 shares of common stock that they
beneficially own, including securities that are convertible into shares of
common stock and securities that are exchangeable or exercisable for shares of
common stock. This means that, subject to certain exceptions, for a period of
180 days following the date of this prospectus, PFSweb, Daisytek and such
persons may not offer, sell, pledge or otherwise dispose of PFSweb securities
without the prior written consent of Hambrecht & Quist.
The underwriters have reserved for sale up to shares for employees,
directors and certain other persons associated with PFSweb. These reserved
shares will be sold at the public offering price that appears on the cover of
this prospectus. The number of shares available for sale to the general public
in the offering will be reduced to the extent reserved shares are purchased by
these persons. The underwriters will offer to the general public, on the same
terms as other shares offered by this prospectus, any reserved shares that are
not purchased by these persons.
70
74
Prior to this offering, there has been no public market for the common
stock. Consequently, the offering price for the common stock has been determined
by negotiations between PFSweb and the underwriters and is not necessarily
related to PFSweb's asset value, net worth or other established criteria of
value. The factors considered in such negotiations, in addition to prevailing
market conditions, included the history of and prospects for the industry in
which PFSweb competes, an assessment of PFSweb's management, PFSweb's prospects,
its capital structure, prevailing market conditions, its results of operations
in recent periods and certain other factors as were deemed relevant.
Rules of the SEC may limit the ability of the underwriters to bid for or
purchase shares before the distribution of the shares is completed. However, the
underwriters may engage in the following activities in accordance with the
rules:
- Stabilizing transactions. The representatives may make bids or purchases
for the purpose of pegging, fixing or maintaining the price of the
shares, so long as stabilizing bids do not exceed a specified maximum.
- Over-allotments and syndicate covering transactions. The underwriters may
create a short position in the shares by selling more shares than are set
forth on the cover page of this prospectus. If a short position is
created in connection with the offering, the representatives may engage
in syndicate covering transactions by purchasing shares in the open
market. The representatives may also elect to reduce any short position
by exercising all or part of the over-allotment option.
- Penalty bids. If the representatives purchase shares in the open market
in a stabilizing transaction or syndicate covering transaction, they may
reclaim a selling concession from the underwriters and selling group
members who sold those shares as part of this offering.
Stabilization and syndicate covering transactions may cause the price of
the shares to be higher than it would be in the absence of such transactions.
The imposition of a penalty bid might also have an effect on the price of the
shares if it discourages resales of the shares.
Neither PFSweb nor the underwriters makes any representation or prediction
as to the effect that the transactions described above may have on the price of
the shares. These transactions may occur on the Nasdaq National Market or
otherwise. If such transactions are commenced, they may be discontinued without
notice at any time.
Timothy M. Murray, a director of PFSweb, is a Principal of William Blair &
Company, LLC.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
PFSweb by Wolff & Samson P.A., Roseland, New Jersey. Legal matters in connection
with this offering will be passed upon for the underwriters by Gibson, Dunn &
Crutcher LLP, New York, New York.
EXPERTS
The financial statements and schedule included in this prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
71
75
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a Registration Statement on Form S-1 under the Securities Act of 1933, as
amended, with respect to the Common Stock offered hereby. This prospectus does
not contain all of the information set forth in the Registration Statement and
the exhibits and schedules thereto. Items are omitted in accordance with the
rules and regulations of the Commission. For further information with respect to
PFSweb and our common stock offered hereby, reference is made to the
Registration Statement and the exhibits and schedules filed as a part thereof.
Statements contained in this prospectus as to the contents of any contract or
any other document referred to are not necessarily complete, and, in each
instance, if such contract or document is filed as an exhibit, reference is made
to the copy of such contract or document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such reference
to such exhibit. The Registration Statement, including exhibits and schedules
thereto, may be inspected without charge at the public reference facilities
maintained by the Commission in Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices located at the North
Western Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661 and Seven World Trade Center, 13th Floor, New York, NY 10048, and copies
of all or any part thereof may be obtained from such office after payment of
fees prescribed by the Commission. The Commission maintains a Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
As a result of this offering, we will become subject to the full
informational requirements of the Securities Exchange Act of 1934, as amended.
We will fulfill our obligations with respect to such requirements by filing
periodic reports and other information with the SEC. We intend to furnish our
shareholders with annual reports containing consolidated financial statements
certified by an independent public accounting firm. We also maintain an Internet
site at http://www.pfsweb.com. Our website and the information contained therein
or connected thereto shall not be deemed to be incorporated into this prospectus
or the registration statement of which it forms a part.
72
76
INDEX TO FINANCIALS
PAGE
----
Report of Independent Public Accountants.................... F-2
Combined Balance Sheets..................................... F-3
Combined Statements of Operations........................... F-4
Combined Statements of Shareholder's Equity................. F-5
Combined Statements of Cash Flows........................... F-6
Notes to Combined Financial Statements...................... F-7
Interim Condensed Combined Balance Sheets (unaudited)....... F-16
Interim Condensed Combined Statements of Operations
(unaudited)............................................... F-17
Interim Condensed Combined Statements of Cash Flows
(unaudited)............................................... F-18
Notes to Unaudited Interim Condensed Combined Financial
Statements (unaudited).................................... F-19
Pro Forma and Supplemental Pro Forma Combined Balance Sheets
(unaudited)............................................... F-22
Pro Forma and Supplemental Pro Forma Combined Statements of
Operations (unaudited).................................... F-23
Notes to Pro Forma and Supplemental Pro Forma Combined
Financial Statements (unaudited).......................... F-25
F-1
77
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Daisytek International Corporation and PFSweb, Inc.:
We have audited the accompanying combined balance sheets of PFSweb
(representing the business operations of certain subsidiaries of Daisytek
International Corporation -- see Note 1) as of March 31, 1999 and 1998, and the
related combined statements of operations, shareholder's equity and cash flows
for each of the three years in the period ended March 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PFSweb as of March 31, 1999
and 1998, and the results of its operations and its cash flows for each of the
three years in the period ended March 31, 1999, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
September 22, 1999
F-2
78
PFSWEB
COMBINED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
MARCH 31,
-----------------
1998 1999
------- -------
CURRENT ASSETS:
Cash...................................................... $ 113 $ 587
Accounts receivable, net of allowance for doubtful
accounts of $318 and $635 at March 31, 1998 and 1999,
respectively........................................... 8,946 22,190
Inventories, net.......................................... 11,263 29,856
Prepaid expenses and other current assets................. -- 997
Deferred tax asset........................................ 261 453
------- -------
Total current assets.............................. 20,583 54,083
------- -------
PROPERTY AND EQUIPMENT, at cost:
Furniture, fixtures and equipment......................... 393 3,009
Leasehold improvements.................................... 2 32
------- -------
395 3,041
Less -- Accumulated depreciation and amortization........... (67) (330)
------- -------
Net property and equipment........................ 328 2,711
OTHER ASSETS................................................ -- 12,263
------- -------
Total assets...................................... $20,911 $69,057
======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Trade accounts payable.................................... $18,725 $38,329
Accrued expenses.......................................... 514 1,118
------- -------
Total current liabilities......................... 19,239 39,447
------- -------
PAYABLE TO DAISYTEK......................................... 1,780 28,889
------- -------
COMMITMENTS AND CONTINGENCIES (Notes 4 and 8)
SHAREHOLDER'S EQUITY:
Daisytek's net equity investment.......................... (53) 852
Accumulated other comprehensive loss...................... (55) (131)
------- -------
Total shareholder's equity........................ (108) 721
------- -------
Total liabilities and shareholder's equity........ $20,911 $69,057
======= =======
The accompanying notes are an integral part of these combined statements.
F-3
79
PFSWEB
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEARS ENDED MARCH 31,
----------------------------
1997 1998 1999
------- ------- --------
REVENUES:
Product revenue........................................... $16,543 $45,804 $ 93,702
Service fee revenue....................................... 1,034 3,539 7,547
------- ------- --------
Total revenues.................................... 17,577 49,343 101,249
------- ------- --------
COSTS OF REVENUES:
Cost of product revenue................................... 15,768 43,392 88,335
Cost of service fee revenue............................... 596 2,208 5,323
------- ------- --------
Total costs of revenues........................... 16,364 45,600 93,658
------- ------- --------
Gross profit...................................... 1,213 3,743 7,591
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 1,058 3,645 6,559
------- ------- --------
Income from operations............................ 155 98 1,032
INTEREST EXPENSE, net....................................... 77 143 374
------- ------- --------
Income (loss) before income taxes................. 78 (45) 658
PROVISION (BENEFIT) FOR INCOME TAXES........................ 44 (7) 273
------- ------- --------
NET INCOME (LOSS)........................................... $ 34 $ (38) $ 385
======= ======= ========
NET INCOME (LOSS) PER SHARE:
Basic and diluted......................................... $ 0.00 $ (0.00) $ 0.03
======= ======= ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic and diluted......................................... 14,305 14,305 14,305
======= ======= ========
The accompanying notes are an integral part of these combined statements.
F-4
80
PFSWEB
COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY
(IN THOUSANDS)
ACCUMULATED
DAISYTEK'S OTHER TOTAL
NET EQUITY COMPREHENSIVE SHAREHOLDER'S COMPREHENSIVE
INVESTMENT INCOME (LOSS) EQUITY INCOME (LOSS)
---------- ------------- ------------- -------------
BALANCE, March 31, 1996............ $(49) $ -- $ (49)
Net income....................... 34 -- 34 $ 34
Other comprehensive income --
foreign currency translation
adjustment.................... -- 17 17 17
---- ----- ----- -----
Comprehensive income............. $ 51
=====
BALANCE, March 31, 1997............ (15) 17 2
Net loss......................... (38) -- (38) $ (38)
Other comprehensive loss --
foreign currency translation
adjustment.................... -- (72) (72) (72)
---- ----- ----- -----
Comprehensive loss............... $(110)
=====
BALANCE, March 31, 1998............ (53) (55) (108)
Net income....................... 385 -- 385 $ 385
Contributed capital.............. 520 -- 520
Other comprehensive loss --
foreign currency translation
adjustment.................... -- (76) (76) (76)
---- ----- ----- -----
Comprehensive income............. $ 309
=====
BALANCE, March 31, 1999............ $852 $(131) $ 721
==== ===== =====
The accompanying notes are an integral part of these combined statements.
F-5
81
PFSWEB
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FISCAL YEARS ENDED MARCH 31,
-----------------------------
1997 1998 1999
-------- ------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 34 $ (38) $ 385
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................ 3 63 275
Provision for doubtful accounts...................... 122 299 344
Deferred income tax benefit.......................... (41) (222) (192)
Changes in operating assets and liabilities:
Accounts receivable............................... (5,138) (3,622) (13,561)
Inventories, net.................................. (9,856) (1,393) (18,556)
Prepaid expenses and other current assets......... -- -- (993)
Trade accounts payable and accrued expenses....... 9,743 9,471 20,185
-------- ------- --------
Net cash provided by (used in) operating activities.... (5,133) 4,558 (12,113)
-------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (100) (294) (2,656)
Increase in other assets.................................. -- -- (12,264)
-------- ------- --------
Net cash used in investing activities.................. (100) (294) (14,920)
-------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution...................................... -- -- 520
Increase (decrease) in payable to Daisytek................ 5,222 (4,072) 27,109
-------- ------- --------
Net cash provided by (used in) financing activities.... 5,222 (4,072) 27,629
-------- ------- --------
EFFECT OF EXCHANGE RATES ON CASH............................ 15 (83) (122)
-------- ------- --------
NET INCREASE IN CASH........................................ 4 109 474
CASH, beginning of period................................... -- 4 113
-------- ------- --------
CASH, end of period......................................... $ 4 $ 113 $ 587
======== ======= ========
The accompanying notes are an integral part of these combined statements.
F-6
82
PFSWEB
NOTES TO COMBINED FINANCIAL STATEMENTS
1. OVERVIEW AND BASIS OF PRESENTATION:
PFSweb (the "Company") reflects the business operations of certain
wholly-owned subsidiaries of Daisytek International Corporation ("Daisytek").
PFSweb's business unit was formed in 1991 and expanded in 1996 under the name
"Priority Fulfillment Services." The Company is currently wholly-owned by
Daisytek. Accordingly, Daisytek exerts substantial influence over, and has the
ability to direct all operations of, the Company. The Company is an
international provider of transaction management services to both traditional
and e-commerce companies and sells products and services primarily in the United
States, Canada and Europe. The Company offers such services as order management,
customer care, billing, credit management and collection, information
management, and distribution. The Company provides its services under fee-based
contracts (where service fee revenue is based on either the sales value of the
products or service activity volume) and under master distributor agreements
(where the Company takes title to and resells the product).
In June 1999, Daisytek created a separate wholly-owned subsidiary named
PFSweb, Inc., a Delaware corporation, to become a holding Company for PFSweb
upon completion of an initial public offering (the "Offering"). Daisytek has
contributed $20,000 for 14,305,000 shares of PFSweb, Inc. Simultaneous with the
effective date of this Offering, the assets, liabilities and equity which
currently comprise PFSweb will be contributed to PFSweb, Inc. No separate
financial statements of PFSweb, Inc. have been provided because it is a holding
company and they only reflect cash and equity of $20,000.
Daisytek plans to divest PFSweb, Inc. in two stages. The first stage
involves the sale and issuance of common stock of PFSweb, Inc. in this Offering.
The second stage, planned to occur in the year 2000, involves Daisytek
distributing to holders of its common stock all of its interest in PFSweb, Inc.
through a spin-off transaction in which the shares of PFSweb, Inc. would be
distributed to Daisytek common stockholders on a pro-rata basis. Daisytek,
however, is not obligated to effect the spin-off through the distribution of its
interest and the Company cannot provide assurance as to whether or when it will
occur.
The accompanying combined financial statements are presented on a carve-out
basis and reflect the combined historical results of operations, financial
position and cash flows of the Company. For all periods presented, certain
expenses reflected in the combined financial statements include an allocation of
certain Daisytek corporate expenses and infrastructure costs (see Note 6).
Management believes that the method used to allocate expenses is reasonable,
although the cost of services could be higher if obtained from other sources. In
addition, certain service fee revenue and cost of service fee revenue have been
reflected by PFSweb for services subcontracted to PFSweb by Daisytek. The
service fee revenue, cost of service fee revenue and allocated expenses have
been reflected on bases that Daisytek and PFSweb consider to be a reasonable
reflection of the services provided and revenue earned by PFSweb and the
utilization of services provided by Daisytek and the benefit received by PFSweb.
However, an allocation of the salaries and benefits of Daisytek corporate
executives have not been allocated or reflected in the combined financial
statements of PFSweb because management believes that the services provided by
these executives were related to corporate level activities. The financial
information included herein may not reflect the combined financial position,
operating results, changes in Daisytek's net investment and cash flows of PFSweb
in the future or what it would have been had PFSweb been a separate, stand-
alone entity during the periods presented.
F-7
83
PFSWEB
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF COMBINATION
The combined financial statements include the accounts and the historical
results of operations and cash flows of PFSweb during each respective period.
All significant PFSweb intercompany accounts and transactions have been
eliminated.
USE OF ESTIMATES
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses. The allocation of certain expenses (see Notes 1 and 6) in
these financial statements required management estimates and assumptions. Actual
results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes product revenue upon shipment of product to
customers and provides for estimated returns and allowances. The Company's
service fee revenues are recognized at the time the service is provided to its
client. Certain contracts involve third-party vendors who provide services such
as package delivery. The costs incurred by the Company related to such
third-party services are typically passed on to clients and are generally not
reflected in revenue or expense.
COSTS OF REVENUES
The Company recognizes cost of product revenue upon shipment of product to
customers. The Company's cost of service fee revenue is recognized as incurred
and represents costs incurred to provide services under fee-based contracts,
including salaries, shipping, supplies, and facility costs.
CONCENTRATION OF BUSINESS AND CREDIT RISK
All of the Company's product revenue for the fiscal years ended March 31,
1997, 1998 and 1999, was generated by sales of product purchased under master
distributor agreements with one supplier. Sales to Daisytek accounted for
approximately 44%, 22% and 13% of the Company's revenue for the fiscal years
ended March 31, 1997, 1998 and 1999, respectively. No other client accounted for
10% or more of the Company's revenue during such periods. As of March 31, 1998
and 1999, one customer accounted for approximately 39% and 23% of accounts
receivable, respectively.
CASH AND CASH EQUIVALENTS
Cash equivalents are defined as short-term highly liquid investments with
original maturities of three months or less.
ACCOUNTS RECEIVABLE
Accounts receivable include outstanding trade accounts receivables as well
as certain unbilled amounts owed to PFSweb by clients in accordance with
contracts. The amount of unbilled receivables at March 31, 1998 and 1999 was
approximately $726,000 and $2,709,000, respectively.
F-8
84
PFSWEB
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
INVENTORIES
Inventories (merchandise held for resale, all of which are finished goods)
are stated at the lower of weighted average cost or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the respective assets
which range from three to ten years.
The Company periodically evaluates whether events or circumstances have
occurred that indicate that long-lived assets may not be recoverable or that the
remaining useful life may warrant revision. When such events or circumstances
are present, the Company assesses the recoverability of long-lived assets by
determining whether the carrying value will be recovered through the expected
undiscounted future cash flows. In the event the sum of the expected
undiscounted future cash flows resulting from the use of the asset is less than
the carrying value of the asset, an impairment loss equal to the excess of the
asset's carrying value over its fair value is recorded. To date, no such
impairment has been recognized.
OTHER ASSETS
Other assets includes approximately $12.1 million related to a non-current
receivable from a client of the Company. During fiscal 1999, the Company entered
into a long-term contractual agreement whereby the Company finances certain
inventory owned by the client. The Company warehouses this client inventory and
distributes it upon the sale to third parties by the client, who controls the
disposition of this inventory. The Company has the contractual right to collect
the receivable in full at the conclusion of the contract. In addition to service
fees, the Company charges the client an asset management fee, a portion of which
results in interest income.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
For the Company's Canadian operations, the local currency is the functional
currency. All assets and liabilities are translated at exchange rates in effect
at the end of the period, and income and expense items are translated at the
average exchange rates for the period. Translation adjustments are reported as a
separate component of shareholder's equity.
For the Company's European operations, the U.S. dollar is the functional
currency. Monetary assets and liabilities are translated at the rates of
exchange on the balance sheet date and certain assets (notably inventory, and
property and equipment) are translated at historical rates. Income and expense
items are translated at average rates of exchange for the period except for
those items of expense, which relate to assets, which are translated at
historical rates. The gains and losses from foreign currency transactions and
translation related to these subsidiaries are included in net income and have
not been material.
INCOME TAXES
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
109 "Accounting for Income Taxes", deferred taxes reflect the impact of
temporary differences between the amount of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws and regulations.
These differences relate primarily to provisions for doubtful accounts, reserves
for inventory, book versus tax depreciation differences, and certain accrued
expenses deducted for book purposes but not yet deductible for tax purposes.
(See Note 7.)
F-9
85
PFSWEB
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates fair value based on market information and
appropriate valuation methodologies. Fair value is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation. The fair values of all financial
instruments approximate their carrying amounts in the accompanying combined
balance sheets.
NET INCOME (LOSS) PER COMMON SHARE
The Company computed net income (loss) per share in accordance with SFAS
No. 128 "Earnings Per Share." Basic and diluted net income (loss) per share
attributable to PFSweb was determined based on net income (loss) divided by the
14,305,000 shares of PFSweb, Inc. (see Note 1) outstanding prior to this
Offering. For purposes of the net income (loss) per share calculation, the
shares outstanding prior to this Offering are treated as outstanding for all
periods presented. There were no potentially dilutive securities outstanding of
PFSweb, Inc. during the periods presented.
ADOPTION OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires that an entity recognize all derivative financial instruments as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
used to hedge certain types of transactions, including foreign currency
exposures of a net investment in a foreign operation. SFAS No. 133 is effective
for fiscal years beginning after June 15, 2000, with initial application as of
the beginning of an entity's fiscal quarter. SFAS No. 133 is not expected to
have a significant effect on the financial condition or operations of the
Company.
CASH PAID DURING YEAR
The Company made payments for interest of approximately $16,000, $0, and
$0, and income taxes of approximately $0, $139,000, $269,000 during the fiscal
years ended March 31, 1997, 1998 and 1999, respectively (see Notes 3 and 7).
Unpaid taxes payable and intercompany accrued interest are included in the
payable to Daisytek.
3. PAYABLE TO DAISYTEK:
Funds advanced by Daisytek to fund the Company's working capital
requirements and certain investment activities have been reflected as an
intercompany payable. This intercompany payable will be repaid by the Company
upon the closing of the Offering. Interest expense charged by Daisytek was based
on its weighted average interest rates of 6.1%, 6.9%, and 6.7% and approximated
$279,000, $497,000, and $1,039,000 for the fiscal years ended March 31, 1997,
1998 and 1999, respectively.
Daisytek is not required to provide PFSweb with funding in the future and
PFSweb will be restricted from borrowing from Daisytek following the spin-off.
F-10
86
PFSWEB
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. GUARANTEE OF DAISYTEK DEBT
PFSweb, along with several other Daisytek subsidiaries, has guaranteed an
unsecured revolving line of credit with commercial banks of Daisytek (the
"Facility"). As of March 31, 1999, Daisytek had borrowed $29.8 million and has a
maximum borrowing availability of $85.0 million under the Facility, leaving
approximately $55.2 million available under the Facility. The Facility, and
PFSweb's guarantee thereon, expires on December 31, 2000.
5. STOCK OPTIONS:
Certain of the Company's employees, and individuals that are expected to
become Company employees upon this Offering and/or spin-off transaction
described in Note 1, have been granted Daisytek stock options under Daisytek's
stock option compensation plans (the "Plans"). The purpose of the Plans is to
benefit and advance the interests of Daisytek by rewarding officers and certain
key employees for their contributions to the financial success of Daisytek and
thereby motivating them to continue to make such contributions in the future.
The Plans provide for fixed grants of both incentive stock options and
nonqualified stock options. The stock options generally vest over a three to
five year period from the date of grant and expire 10 years after the date of
grant.
The Company has adopted the disclosure-only provisions of SFAS 123,
"Accounting for Stock-Based Compensation." In accordance with the provisions of
SFAS 123, the Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for the Plans and accordingly, does not recognize compensation
expense for its stock option plans because Daisytek typically does not issue
options at exercise prices below the market value at date of grant. Had
compensation expense for Daisytek's stock option plans applicable to the
Company's employees been determined based upon the fair value at the grant date
for awards consistent with the methodology prescribed by SFAS 123, the Company's
combined pretax income would have decreased by $943,000, $787,000 and $2,531,000
in fiscal years ended March 31, 1997, 1998 and 1999, respectively. These pro
forma effects may not be representative of expense in future periods since the
estimated fair value of stock options on the date of grant is amortized to
expense over the vesting period. Additional options may be granted in future
years. Options issued prior to April 1, 1995 were excluded from the computation.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used for
grants in fiscal year 1997: no dividends, expected volatility ranging between
39.25% and 39.50%; risk-free interest rate ranging between 5.9% and 6.6%; and
expected life of 6 years. The following assumptions were used for grants during
the fiscal year 1998: no dividends, expected volatility ranging between 40.97%
and 41.40%; risk-free interest rate ranging between 5.6% and 6.8%; and expected
life of 6 years. The following assumptions were used for grants during the
fiscal year 1999: no dividends, expected volatility ranging between 41.42% and
47.92%; risk-free interest rate ranging between 4.6% and 5.5%; and expected life
of 6 years.
F-11
87
PFSWEB
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes stock option activity under various Daisytek
plans as it relates to PFSweb employees:
WEIGHTED AVERAGE
SHARES PRICE PER SHARE EXERCISE PRICE
--------- --------------- ----------------
Outstanding, March 31, 1996....................... 561,470 $ 0.64 - $ 9.75 $ 4.88
Granted......................................... 275,266 $15.50 - $16.25 $16.11
Exercised....................................... (34,052) $ 2.65 - $ 9.75 $ 5.16
Canceled........................................ -- $ -- - $ -- $ --
---------
Outstanding, March 31, 1997....................... 802,684 $ 0.64 - $16.25 $ 8.72
Granted......................................... 570,370 $12.50 - $19.63 $12.87
Exercised....................................... (252,436) $ 0.64 - $ 9.75 $ 2.47
Canceled........................................ (296,442) $ 9.75 - $16.25 $15.80
---------
Outstanding, March 31, 1998....................... 824,176 $ 0.64 - $19.63 $10.96
Granted......................................... 1,807,886 $12.88 - $22.88 $15.13
Exercised....................................... (108,832) $ 0.64 - $12.50 $ 3.41
Canceled........................................ (146,739) $ 9.75 - $22.88 $16.05
---------
Outstanding, March 31, 1999....................... 2,376,491 $ 2.65 - $22.88 $14.16
=========
The weighted average fair values of options granted during each of the
years ended March 31, 1997, 1998 and 1999, were $8.03, $7.05 and $7.68,
respectively. As of March 31, 1997, 1998 and 1999, 358,982, 183,956 and 243,747,
respectively, of options outstanding were exercisable. The weighted average
exercise price of exercisable options outstanding at March 31, 1997, 1998 and
1999, were $2.56, $5.74 and $10.44, respectively. The remaining options will
become exercisable over the next three to five years based on vesting
percentages.
The following table summarizes information concerning currently outstanding
and exercisable Daisytek stock options issued to PFSweb employees at March 31,
1999:
OPTIONS OUTSTANDING
- ---------------------------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ----------------------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF OUTSTANDING AS OF REMAINING AVERAGE EXERCISABLE AS OF AVERAGE
EXERCISE PRICES MARCH 31, 1999 CONTRACTUAL LIFE EXERCISE PRICE MARCH 31, 1999 EXERCISE PRICE
- --------------- ----------------- ---------------- -------------- ----------------- --------------
$ 2.65 5,613 3.0 $ 2.65 5,613 $ 2.65
$ 9.75 - $14.06 1,963,631 8.7 $12.52 237,884 $10.62
$15.50 - $22.88 407,247 9.3 $22.22 250 $16.25
6. TRANSACTIONS WITH DAISYTEK AND OTHER RELATED PARTIES:
The Company's product revenue from sales to Daisytek was $7.5 million,
$10.7 million, and $12.4 million in 1997, 1998, and 1999, respectively.
The Company's costs and expenses include allocations from Daisytek for
certain general administrative services including information technology,
financial, treasury, legal, insurance and other corporate functions as well as
certain costs of operations including facility charges. These allocations have
been estimated on bases that Daisytek and the Company consider to be a
reasonable reflection of the utilization of services provided or the benefit
received by the Company. However, these allocations of costs and expenses do not
necessarily indicate the costs and expenses that would have been or will be
incurred by the Company on a stand-alone basis.
F-12
88
PFSWEB
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In addition, included in the combined financial statements are service fee
revenue and cost of service fee revenue which have been reflected by PFSweb for
certain services subcontracted to PFSweb by Daisytek under Daisytek's
contractual agreements. Service fee revenue applicable to these contracts were
$230,000, $467,000 and $804,000 in 1997, 1998, and 1999, respectively.
In May 1999, the Company entered into an agreement to provide services to a
certain company. An executive officer and a director of PFSweb serve on the
Board of Directors of this company.
7. INCOME TAXES:
The Company's operations have been included in consolidated income tax
returns filed by Daisytek. If Daisytek or other members of the consolidated
group fail to make tax payments required by law, PFSweb would be liable for any
shortfall. The provision for income taxes reflected in the combined statements
of operations and the deferred tax assets reflected in the combined balance
sheets have been prepared as computed on a separate return basis. The current
income tax liabilities for the periods presented have been included in the
payable to Daisytek.
A reconciliation of the difference between the expected income tax
provision at the U.S. federal statutory corporate tax rate of 34%, and the
Company's effective tax rate is as follows (in thousands):
FISCAL YEARS ENDED
MARCH 31,
------------------
1997 1998 1999
---- ---- ----
Provision (benefit) computed at statutory rate.............. $27 $(15) $224
Impact of foreign taxation at different rate................ 1 6 16
State income taxes, net of federal tax impact............... 6 (2) 26
Expenses not deductible for tax purposes.................... 8 5 11
Other....................................................... 2 (1) (4)
--- ---- ----
Provision (benefit) for income taxes...................... $44 $ (7) $273
=== ==== ====
The consolidated income (loss) before taxes, by domestic and foreign
entities, is as follows (in thousands):
FISCAL YEARS ENDED
MARCH 31,
------------------
1997 1998 1999
---- ---- ----
Domestic.................................................... $ 67 $(95) $407
Foreign..................................................... 11 50 251]
---- ---- ----
Total............................................. $ 78 $(45) $658
==== ==== ====
F-13
89
PFSWEB
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The provision (benefit) for income taxes is summarized as follows (in
thousands):
FISCAL YEARS ENDED
MARCH 31,
--------------------
1997 1998 1999
---- ----- -----
Current
Domestic.................................................. $ 64 $ 180 $ 321
State..................................................... 8 12 39
Foreign................................................... 13 23 105
---- ----- -----
Total current..................................... 85 215 465
Deferred
Domestic.................................................. (41) (208) (175)
State..................................................... -- (14) (17)
---- ----- -----
Total deferred......................................... (41) (222) (192)
---- ----- -----
Total............................................. $ 44 $ (7) $ 273
==== ===== =====
The components of the deferred tax asset (liability) as of March 31, 1998
and 1999 are as follows (in thousands):
MARCH 31,
-----------
1998 1999
---- ----
Deferred tax asset:
Allowance for doubtful accounts........................... $119 $244
Inventory................................................. 49 70
Other..................................................... 95 177
---- ----
Total deferred tax asset.......................... 263 491
---- ----
Deferred tax liability:
Property and equipment.................................... (2) (38)
---- ----
Total deferred liability.......................... (2) (38)
---- ----
Deferred tax asset, net..................................... $261 $453
==== ====
8. COMMITMENTS AND CONTINGENCIES:
The Company leases facilities, and warehouse, office, transportation and
other equipment under operating leases expiring in various years through fiscal
year 2009. In most cases, management expects that, in the normal course of
business, leases will be renewed or replaced by other leases. Minimum future
annual rental payments under non-cancelable operating leases having original
terms in excess of one year are as follows (in thousands):
2000...................................................... $ 1,254
2001...................................................... 1,896
2002...................................................... 1,896
2003...................................................... 1,896
2004...................................................... 1,846
Thereafter................................................ 2,250
-------
Total........................................... $11,038
=======
Total rental expense under operating leases approximated $38,000, $357,000
and $805,000 for the fiscal years ended March 31, 1997, 1998 and 1999,
respectively. As discussed in Note 10, the Company expects to enter into a
master separation agreement with Daisytek upon the successful completion of this
Offering which will result in additional operating lease obligations.
F-14
90
PFSWEB
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is involved in certain litigation arising in the ordinary
course of business. Management believes that such litigation will be resolved
without material effect on the Company's financial position or results of
operations.
9. SEGMENT AND GEOGRAPHIC INFORMATION:
The Company operates one reportable segment as an international provider of
transaction management services to both traditional and e-commerce companies.
Geographic areas in which the Company operates include the United States, Europe
(Belgium, Germany and The Netherlands) and Canada.
The following is geographic information by area. Transfers between
geographic areas were immaterial.
YEAR ENDED OR AT MARCH 31
----------------------------
1997 1998 1999
------- ------- --------
Revenues:
United States........................................ $16,540 $45,729 $ 85,746
Europe............................................... -- -- 10,456
Canada............................................... 1,037 3,614 5,047
------- ------- --------
$17,577 $49,343 $101,249
======= ======= ========
Long-lived assets:
United States........................................ $ 318 $ 14,449
Europe............................................... -- 373
Canada............................................... 10 152
------- --------
$ 328 $ 14,974
======= ========
10. SUBSEQUENT EVENTS:
On August 31, 1999, the Company entered into a lease for an approximately
442,000 square foot distribution facility in Memphis, Tennessee. The five year
lease, with monthly lease payments totaling $109,000, expires on August 31, 2004
and contains a renewal option for four years.
PFSweb, Inc. has authorized 6,000,000 shares of common stock for issuance
under its 1999 stock option plans (the "Option Plans"). The Option Plans, which
are currently administered by the Compensation Committee of the Board of
Directors of PFSweb, Inc., provide for the granting of incentive awards in the
form of stock options to directors, executive management, key employees, and
outside consultants of PFSweb, Inc. and its subsidiaries. The right to purchase
shares under the stock option agreements typically vest over a three year
period. Stock options must be exercised within 10 years from the date of grant.
Stock options are generally issued at fair market value. In July 1999, PFSweb,
Inc. issued options to purchase 1,344,250 common shares at $10.45. In August
1999, PFSweb, Inc. issued options to purchase 32,250 common shares at $13.00.
All of these options are subject to a three year vesting schedule, under which
no options vest for three years, subject to acceleration, in part, upon
completion of the spin-off of PFSweb, Inc. from Daisytek.
On September 21, 1999, Daisytek announced its plans to file this Offering.
In conjunction with the successful completion of this Offering, PFSweb, Inc. has
stated its intention to enter into agreements with Daisytek, including a tax
sharing agreement, a transaction management services agreement, transition
services agreement and a master separation agreement which are expected to have
a significant impact on the financial position and results of operations of
PFSweb, Inc.
F-15
91
PFSWEB
INTERIM CONDENSED COMBINED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
MARCH 31, JUNE 30,
1999 1999
--------- --------
(UNAUDITED)
CURRENT ASSETS:
Cash...................................................... $ 587 $ 2,408
Accounts receivable, net of allowance for doubtful
accounts of $635 and $638 at March 31, 1999 and June
30, 1999, respectively................................. 22,190 22,729
Inventories, net.......................................... 29,856 24,568
Prepaid expenses and other current assets................. 997 846
Deferred tax asset........................................ 453 420
------- -------
Total current assets.............................. 54,083 50,971
------- -------
PROPERTY AND EQUIPMENT, at cost:
Furniture, fixtures and equipment......................... 3,009 4,977
Leasehold improvements.................................... 32 121
------- -------
3,041 5,098
Less -- Accumulated depreciation and amortization......... (330) (516)
------- -------
Net property and equipment........................ 2,711 4,582
OTHER ASSETS................................................ 12,263 12,414
------- -------
Total assets...................................... $69,057 $67,967
======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Trade accounts payable.................................... $38,329 $29,403
Accrued expenses.......................................... 1,118 749
------- -------
Total current liabilities......................... 39,447 30,152
------- -------
PAYABLE TO DAISYTEK......................................... 28,889 37,349
------- -------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Daisytek's net equity investment.......................... 852 654
Accumulated other comprehensive loss...................... (131) (188)
------- -------
Total shareholder's equity........................ 721 466
------- -------
Total liabilities and shareholder's equity........ $69,057 $67,967
======= =======
The accompanying notes are an integral part of these unaudited interim
condensed combined statements.
F-16
92
PFSWEB
INTERIM CONDENSED COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
JUNE 30,
-------------------
1998 1999
-------- --------
REVENUES:
Product revenue........................................... $20,424 $32,620
Service fee revenue....................................... 1,004 3,191
------- -------
Total revenues.................................... 21,428 35,811
------- -------
COSTS OF REVENUES:
Cost of product revenue................................... 19,345 30,793
Cost of service fee revenue............................... 834 2,231
------- -------
Total costs of revenues........................... 20,179 33,024
------- -------
Gross profit...................................... 1,249 2,787
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 1,154 2,788
------- -------
Income (loss) from operations..................... 95 (1)
INTEREST EXPENSE, net....................................... 53 326
------- -------
Income (loss) before income taxes................. 42 (327)
PROVISION (BENEFIT) FOR INCOME TAXES........................ 17 (129)
------- -------
NET INCOME (LOSS)........................................... $ 25 $ (198)
======= =======
NET INCOME (LOSS) PER SHARE:
Basic and diluted......................................... $ 0.00 $ (0.01)
======= =======
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic and diluted......................................... 14,305 14,305
======= =======
The accompanying notes are an integral part of these unaudited interim condensed
combined statements.
F-17
93
PFSWEB
INTERIM CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
JUNE 30,
------------------
1998 1999
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 25 $ (198)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization.......................... 35 216
Provision for doubtful accounts........................ 79 5
Deferred income tax benefit............................ (50) (15)
Changes in operating assets and liabilities:
Accounts receivable.................................. (2,210) (565)
Inventories, net..................................... (665) 5,264
Prepaid expenses and other current assets............ -- 200
Trade accounts payable and accrued expenses.......... 1,496 (9,312)
------- -------
Net cash used in operating activities............. (1,290) (4,405)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (339) (2,077)
Increase in other assets.................................. (3,980) (163)
------- -------
Net cash used in investing activities............. (4,319) (2,240)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in payable to Daisytek, net...................... 5,565 8,460
------- -------
Net cash provided by financing activities......... 5,565 8,460
------- -------
EFFECT OF EXCHANGE RATES ON CASH............................ (44) 6
------- -------
NET (DECREASE) INCREASE IN CASH............................. (88) 1,821
CASH, beginning of period................................... 113 587
------- -------
CASH, end of period......................................... $ 25 $ 2,408
======= =======
The accompanying notes are an integral part of these unaudited interim condensed
combined statements.
F-18
94
PFSWEB
NOTES TO UNAUDITED INTERIM
CONDENSED COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
PFSweb (the "Company") reflects the business operations of certain
wholly-owned subsidiaries of Daisytek International Corporation ("Daisytek").
PFSweb's business unit was formed in 1991 and expanded in 1996 under the name
"Priority Fulfillment Services." The Company is currently wholly-owned by
Daisytek. Accordingly, Daisytek exerts substantial influence over, and has the
ability to direct all operations of, the Company. The Company is an
international provider of transaction management services to both traditional
and e-commerce companies and sells products and services primarily in the United
States, Canada and Europe. The Company offers such services as order management,
customer care, billing, credit management and collection, information
management, and distribution. The Company provides its services under fee-based
contracts (where service fee revenue is based on either the sales value of the
products or service activity volume) and under master distributor agreements
(where the Company takes title to and resells the product).
In June 1999, Daisytek created a separate wholly-owned subsidiary and
PFSweb, Inc., a Delaware corporation, to become a holding company for PFSweb
upon completion of an initial public offering (the "Offering"). Daisytek has
contributed $20,000 for 14,305,000 shares of PFSweb, Inc. Simultaneous with the
effective date of the Offering, the assets, liabilities and equity which
currently comprise PFSweb will be contributed to PFSweb, Inc. No separate
financial statements of PFSweb, Inc. have been provided because it is a holding
company and they only reflect cash and equity of $20,000.
Daisytek plans to divest PFSweb, in two stages. The first stage involves
the sale and issuance of common stock of PFSweb, Inc. in this Offering. The
second stage, planned to occur in the year 2000, involves Daisytek distributing
to holders of its common stock all of its interest in PFSweb, Inc. through a
spin-off transaction in which the shares of PFSweb, Inc. would be distributed to
Daisytek common stockholders on a pro-rata basis. Daisytek, however, is not
obligated to effect the spin-off through the distribution of its interest and
the Company cannot provide assurance as to whether or when it will occur.
The interim condensed combined financial statements as of June 30, 1999,
and for the three months ended June 30, 1998 and 1999, have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
and are unaudited. The interim condensed combined financial statements are
presented on a carve-out basis and reflect the combined results of operations
and assets and liabilities of PFSweb. For all periods presented, certain
expenses reflected in the interim condensed combined financial statements
include an allocation of certain Daisytek corporate expenses and infrastructure
costs. Management believes that the method used to allocate expenses is
reasonable, although the cost of services could be higher if obtained from other
sources. In addition, certain service fee revenue and cost of service fee
revenue have been reflected by PFSweb for services subcontracted to PFSweb by
Daisytek. The service fee revenue, cost of service fee revenue and allocated
expenses have been reflected on bases that Daisytek and PFSweb consider to be a
reasonable reflection of the services provided and revenue earned by PFSweb and
the utilization of services provided by Daisytek and the benefit received by
PFSweb. However, an allocation of the salaries and benefits of Daisytek
corporate executives have not been allocated or reflected in the interim
condensed combined financial statements of PFSweb because management believes
that the service provided by these executives were related to corporate level
activities. The financial information included herein may not reflect the
combined financial position, operating results, changes in Daisytek's net
investment and cash flows of PFSweb in the future or what it would have been had
PFSweb been a separate, stand-alone entity during the periods presented.
F-19
95
PFSWEB
NOTES TO UNAUDITED INTERIM
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In the opinion of management, the unaudited interim condensed combined
financial statements include all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of the Company's
financial position as of June 30, 1999, its results of operations and its
results of cash flows for the three months ended June 30, 1998 and 1999. Results
of the Company's operations for interim periods may not be indicative of results
for the full fiscal year.
The unaudited interim condensed combined financial statements should be
read in conjunction with the audited combined financial statements and
accompanying notes for the years ended March 31, 1997, 1998 and 1999 included
herein. Accounting policies used in the preparation of the unaudited interim
condensed combined financial statements are consistent in all material respects
with the accounting policies described in the notes to audited combined
financial statements.
2. COMPREHENSIVE INCOME (LOSS) (IN THOUSANDS):
THREE MONTHS
ENDED
JUNE 30,
-------------
1998 1999
---- -----
Net income (loss)........................................... $ 25 $(198)
Comprehensive income adjustments:
Foreign currency translation adjustment................... (19) (57)
---- -----
Comprehensive income (loss)................................. $ 6 $(255)
==== =====
3. TRANSACTIONS WITH DAISYTEK AND OTHER RELATED PARTIES:
The Company's product revenue from sales to Daisytek was $3.6 million and
$4.1 million for the three months ended June 30, 1998 and 1999, respectively.
The Company's cost and expenses include allocations from Daisytek for
certain general administrative services including information technology,
financial, treasury, legal, insurance and other corporate functions as well as
certain costs of operations including facility charges. These allocations have
been estimated on bases that Daisytek and the Company consider to be a
reasonable reflection of the utilization of services provided or the benefit
received by the Company. However, these allocations of costs and expenses do not
necessarily indicate the costs and expenses that would have been or will be
incurred by the Company on a stand-alone basis.
In addition, included in the combined financial statements are service fee
revenues and cost of service fee revenue which have been reflected by PFSweb for
certain services subcontracted to PFSweb by Daisytek under Daisytek's
contractual agreements. Service fee revenues applicable to these contracts were
$146,000 and $186,000 for the three months ended June 30, 1998 and 1999,
respectively.
In May 1999, the Company entered into an agreement to provide services to a
certain company. An executive officer and director of PFSweb serve on the Board
of Directors of this company.
PFSweb, along with several other Daisytek subsidiaries, has guaranteed an
unsecured revolving line of credit with commercial banks of Daisytek (the
"Facility"). As of June 30, 1999, Daisytek had borrowed $43.0 million and has a
maximum borrowing availability of $85.0 million under the Facility, leaving
approximately $42.0 million available under the Facility. The Facility, and
PFSweb's guarantee thereon, expires on December 31, 2000.
F-20
96
PFSWEB
NOTES TO UNAUDITED INTERIM
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. NET INCOME (LOSS) PER COMMON SHARE:
The Company computed net income (loss) per share in accordance with SFAS
No. 128 "Earnings Per Share." Basic and diluted net income (loss) per common
share attributable to PFSweb common stock was determined based on net income
(loss) divided by the 14,305,000 shares of PFSweb, Inc. outstanding prior to the
Offering. For purposes of the net income (loss) per common share calculation,
the shares outstanding prior to the Offering are treated as outstanding for all
periods presented. There were no potentially dilutive securities outstanding
during the periods presented.
5. SUBSEQUENT EVENTS:
On August 31, 1999, the Company entered into a lease for an approximately
442,000 square foot distribution facility in Memphis, Tennessee. The five year
lease, with monthly lease payments totaling approximately $109,000, expires on
August 31, 2004 and contains a renewal option for four years.
PFSweb, Inc. has authorized 6,000,000 shares of common stock for issuance
under its 1999 stock option plans (the "Option Plans"). The Option Plans, which
are currently administered by the Compensation Committee of the Board of
Directors of PFSweb, Inc. provide for the granting of incentive awards in the
form of stock options to directors, executive management, key employees, and
outside consultants of PFSweb, Inc. and its subsidiaries. The right to purchase
shares under the stock option agreements typically vest over a three year
period. Stock options must be exercised within 10 years from the date of grant.
Stock options are generally issued at fair market value. In July 1999, PFSweb,
Inc. issued options to purchase 1,344,250 common shares at $10.45. In August
1999, PFSweb, Inc. issued options to purchase 32,250 common shares at $13.00.
All of these options are subject to a three year vesting schedule, under which
no options vest for three years, subject to acceleration, in part, upon
completion of the spin-off of PFSweb, Inc. from Daisytek.
On September 21, 1999, Daisytek announced its plans to file this Offering.
In conjunction with the successful completion of this Offering, PFSweb, Inc. has
stated its intention to enter into agreements with Daisytek, including a tax
sharing agreement, a transaction management services agreement, transition
services agreement and a master separation agreement which are expected to have
a significant impact on the financial position and results of operations of
PFSweb, Inc.
F-21
97
PFSWEB, INC.
PRO FORMA AND SUPPLEMENTAL PRO FORMA COMBINED BALANCE SHEETS (UNAUDITED)
JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SUPPLEMENTAL
PRO FORMA PRO FORMA SUPPLEMENTAL
HISTORICAL ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
ASSETS ---------- ----------- --------- ------------ ------------
CURRENT ASSETS:
Cash.......................... $ 2,408 $ 20(10) $ 2,428 $ 7,660(3),(4) $10,088
Accounts receivable, net...... 22,729 -- 22,729 (17,672)(3) 5,057
Inventories, net.............. 24,568 -- 24,568 (24,568)(3) --
Prepaid expenses and other
current assets.............. 846 -- 846 -- 846
Deferred tax asset............ 420 -- 420 -- 420
------- -------- ------- -------- -------
Total current assets..... 50,971 20 50,991 (34,580) 16,411
------- -------- ------- -------- -------
PROPERTY AND EQUIPMENT:
Furniture, fixtures and
equipment................... 4,977 -- 4,977 5,873(4) 10,850
Leasehold improvements........ 121 -- 121 175(4) 296
------- -------- ------- -------- -------
5,098 -- 5,098 6,048 11,146
Less -- Accumulated
depreciation and
amortization................ (516) -- (516) -- (516)
------- -------- ------- -------- -------
Net property and
equipment.............. 4,582 -- 4,582 6,048 10,630
OTHER ASSETS....................... 12,414 -- 12,414 -- 12,414
------- -------- ------- -------- -------
Total assets............. $67,967 $ 20 $67,987 $(28,532) $39,455
======= ======== ======= ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable........ $29,403 $ $29,403 $(26,984)(3) $ 2,419
Accrued expenses.............. 749 -- 749 62 811
------- -------- ------- -------- -------
Total current
liabilities............ 30,152 -- 30,152 (26,922) 3,230
------- -------- ------- -------- -------
PAYABLE TO DAISYTEK................ 37,349 (35,479)(2) 1,870 (1,870) --
CAPITAL LEASE OBLIGATIONS.......... -- -- -- 260 260
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par
value, 1,000,000 shares
authorized, none issued and
outstanding................. -- -- -- -- --
Common stock, no par value,
40,000,000 shares
authorized, 17,405,000
shares issued and
outstanding (pro forma and
supplemental pro forma)..... -- -- -- -- --
Additional paid-in capital.... -- 36,153(1),(2),(10) 36,153 -- 36,153
Daisytek's net equity
investment.................. 654 (654)(1),(2) -- -- --
Accumulated other
comprehensive loss.......... (188) -- (188) -- (188)
------- -------- ------- -------- -------
Total shareholders'
equity................. 466 35,499 35,965 -- 35,965
------- -------- ------- -------- -------
Total liabilities and
shareholders' equity... $67,967 $ 20 $67,987 $(28,532) $39,455
======= ======== ======= ======== =======
The accompanying notes are an integral part of these unaudited pro forma and
supplemental pro forma combined statements.
F-22
98
PFSWEB, INC.
PRO FORMA AND SUPPLEMENTAL PRO FORMA COMBINED
STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED MARCH 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SUPPLEMENTAL
PRO FORMA PRO FORMA SUPPLEMENTAL
HISTORICAL ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
---------- ----------- --------- ------------ ------------
REVENUES:
Product revenue........ $ 93,702 $ -- $ 93,702 $(93,702)(6) $ --
Service fee revenue.... 7,547 -- 7,547 23,963(6),(7) 31,510
-------- ------- -------- -------- -------
Total revenues...... 101,249 -- 101,249 (69,739) 31,510
-------- ------- -------- -------- -------
COSTS OF REVENUES:
Cost of product
revenue............. 88,335 -- 88,335 (88,335)(6) --
Cost of service fee
revenue............. 5,323 -- 5,323 13,203(6),(7) 18,526
-------- ------- -------- -------- -------
Total costs of
revenues.......... 93,658 -- 93,658 (75,132) 18,526
-------- ------- -------- -------- -------
Gross profit............. 7,591 -- 7,591 5,393 12,984
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES............... 6,559 2,309(5) 8,868 (236)(6),(7) 8,632
-------- ------- -------- -------- -------
Income (loss) from
operations............. 1,032 (2,309) (1,277) 5,629 4,352
INTEREST EXPENSE
(INCOME), net.......... 374 (1,039)(2) (665) 374 (291)
-------- ------- -------- -------- -------
Income before income
taxes.................. 658 (1,270) (612) 5,255 4,643
PROVISION (BENEFIT) FOR
INCOME TAXES(8)........ 273 (457) (184) 1,884 1,700
-------- ------- -------- -------- -------
NET INCOME (LOSS)........ $ 385 $ (813) $ (428) $ 3,371 $ 2,943
======== ======= ======== ======== =======
NET INCOME (LOSS) PER
COMMON SHARE(9):
Basic and diluted...... $ 0.03 $ (0.05) $ (0.02) $ 0.19 $ 0.17
======== ======= ======== ======== =======
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING:
Basic and diluted...... 14,305 17,405 17,405 17,405 17,405
The accompanying notes are an integral part of these unaudited pro forma
and supplemental pro forma combined statements.
F-23
99
PFSWEB, INC.
PRO FORMA AND SUPPLEMENTAL PRO FORMA COMBINED
STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SUPPLEMENTAL
PRO FORMA PRO FORMA SUPPLEMENTAL
HISTORICAL ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
---------- ----------- --------- ------------ ------------
REVENUES:
Product revenue......... $32,620 $ -- $32,620 $(32,620)(6) $ --
Service fee revenue..... 3,191 -- 3,191 6,059(6),(7) 9,250
------- ------- ------- -------- -------
Total revenues....... 35,811 -- 35,811 (26,561) 9,250
------- ------- ------- -------- -------
COSTS OF REVENUES:
Cost of product
revenue.............. 30,793 -- 30,793 (30,793) --
Cost of service fee
revenue.............. 2,231 -- 2,231 3,596(6),(7) 5,827
------- ------- ------- -------- -------
Total costs of
revenues........... 33,024 -- 33,024 (27,197) 5,827
------- ------- ------- -------- -------
Gross profit.............. 2,787 -- 2,787 636 3,423
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES................ 2,788 596(5) 3,384 (268)(6),(7) 3,116
------- ------- ------- -------- -------
Income (loss) from
operations.............. (1) (596) (597) 904 307
INTEREST EXPENSE (INCOME),
net..................... 326 (422)(2) (96) (45)(3) (141)
------- ------- ------- -------- -------
Income (loss) before
income taxes............ (327) (174) (501) 949 448
PROVISION (BENEFIT) FOR
INCOME TAXES(8)......... (129) (37) (166) 343 177
------- ------- ------- -------- -------
NET INCOME (LOSS)......... $ (198) $ (137) $ (335) $ 606 $ 271
======= ======= ======= ======== =======
NET INCOME (LOSS) PER
COMMON SHARE(9):
Basic and diluted....... $ (0.01) $ (0.01) $ (0.02) $ 0.04 $ 0.02
======= ======= ======= ======== =======
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES
OUTSTANDING:
Basic and diluted....... 14,305 17,405 17,405 17,405 17,405
The accompanying notes are an integral part of these unaudited pro forma
and supplemental pro forma combined statements.
F-24
100
PFSWEB, INC.
NOTES TO PRO FORMA AND SUPPLEMENTAL PRO FORMA
COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
PFSweb's historical financial statements reflect its operations and client
agreements prior to the following transactions. As of October 1, 1999, PFSweb
has restructured its arrangements with IBM, one of its key clients, so that the
transaction management services it provides for IBM will no longer include
purchasing and reselling IBM product inventory, but instead will be reflected as
service fees. In addition, upon completion of this offering, PFSweb will enter
into a transaction management services agreement with Daisytek and begin
recording service fee revenue for this agreement. PFSweb's historical financial
statements, therefore, may not provide a meaningful basis for analyzing its
business in the future. To assist in evaluating PFSweb's ongoing business,
PFSweb has provided the following pro forma and supplemental pro forma financial
information.
The column labeled "pro forma" shows how PFSweb's historical financial data
would reflect:
- the contribution from Daisytek of $20,000 for 14,305,000 shares of
PFSweb, Inc. common stock;
- the reclassification of Daisytek's net investment as common stock and
additional paid-in-capital;
- the issuance of 3,100,000 shares of common stock in this offering and the
anticipated application of the net proceeds; and
- the incremental cost PFSweb expects to incur as a stand-alone publicly
traded company.
The column labeled "supplemental pro forma" shows how the pro forma
financial data would reflect what PFSweb's results would have been:
- under its prior IBM agreements if PFSweb had received service fees
instead of purchasing IBM products and reselling them;
- if it had performed transaction management services and recorded service
fee revenue for its business with Daisytek under its new agreement; and
- if PFSweb had acquired certain assets and liabilities from Daisytek as
part of its separation from Daisytek.
The unaudited pro forma and supplemental pro forma combined statements of
operations of PFSweb, Inc. for the fiscal year ended March 31, 1999 and the
three months ended June 30, 1999 have been prepared based on the combined
financial statements and unaudited condensed interim combined financial
statements and related notes presented elsewhere in this prospectus. The
unaudited pro forma and supplemental pro forma combined statements of operations
and the unaudited pro forma and supplemental pro forma combined balance sheet
have been prepared as if the transactions and events described in the following
paragraphs had occurred as of the beginning of the respective periods presented,
and as of June 30, 1999, respectively.
PFSweb based the following pro forma adjustments on available information
and certain estimates and assumptions. Therefore, it is likely that the actual
adjustments will differ from the pro forma and supplemental pro forma
adjustments. PFSweb believes that such assumptions provide a reasonable basis
for presenting all of the significant effects of the following transactions and
events and that the pro forma and supplemental pro forma adjustments give
appropriate effect to those assumptions and are properly applied in the
unaudited pro forma and supplemental pro forma combined financial statements.
F-25
101
PFSWEB, INC.
NOTES TO PRO FORMA AND SUPPLEMENTAL PRO FORMA
COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(1) Reflects the reclassification of Daisytek's net equity investment as
common stock and additional paid-in capital.
(2) Reflects the issuance of 3,100,000 shares of common stock in this
offering, assuming an initial public offering price of $13.00 per
share, and the application of the estimated $35.5 million net proceeds
to reduce the payable to Daisytek. The pro forma adjustments reflect
the reduction of interest expense associated with our payable to
Daisytek. See "Capitalization" and "Use of Proceeds" elsewhere in this
prospectus.
(3) Reflects PFSweb's restructuring of its agreements with IBM as of
October 1, 1999. Under PFSweb's prior agreements, its services for IBM
included serving as a master distributor and purchasing and reselling
the product inventory to IBM customers. Under PFSweb's new agreements
with IBM, Daisytek will act as the master distributor (and be
responsible for the purchase and resale of the product inventory and
retain the customer revenue) and PFSweb will continue to perform most
of the other transaction management services it had provided
previously. As part of these new IBM agreements, PFSweb will receive
service fees from Daisytek for the transaction management services that
it provides. In connection with the restructuring of PFSweb IBM
agreements, as of October 1, 1999, it transferred to Daisytek the
IBM-related product inventory, customer accounts receivable and
accounts payable that it held under its prior agreements. In
consideration of this transfer, Daisytek will pay to PFSweb the net
value of these assets and liabilities (approximately $15.3 million as
of June 30, 1999). From this amount, PFSweb will repay to Daisytek the
remaining balance of the payable to Daisytek (approximately $1.9
million as of June 30, 1999). The pro forma adjustments reflect the
reduction of interest expense associated with PFSweb's payable to
Daisytek, but do not reflect investment interest income generated, if
any, by excess cash (proceeds in excess of payable to Daisytek) which
will be temporarily invested until used to fund expected growth in the
business.
(4) Reflects the transfer upon completion of this offering from Daisytek of
all of the fixed assets in the Memphis distribution facility as well as
certain assets associated with providing information technology
services and the stock of several subsidiaries of Daisytek representing
the business operations of PFSweb and PFSweb will transfer to Daisytek
$5.7 million in cash and assume $0.3 million of certain capital lease
obligations, as well as the operating lease obligations, related to
these assets.
(5) Reflects certain estimated incremental selling, general and
administrative expenses associated with PFSweb operating as a
stand-alone publicly traded company, including executive management,
overhead and public company costs, insurance and risk management costs,
and other costs.
(6) Reflects the conversion of historically recorded product revenue and
associated cost of product revenue to service fee revenue and related
cost of service fee revenue associated with the adjustments discussed
in Note (3) above. The service fee revenue impact of this conversion is
an incremental $5.5 million for fiscal 1999 and $1.8 million for the
three months ended June 30, 1999. Additionally, a reduction of service
fee revenue for fiscal 1999 and for the three months ended June 30,
1999 of $1.1 million and $0.4 million, respectively, is associated with
Daisytek providing certain services which PFSweb previously provided to
IBM. In addition, certain activities that have historically been
classified as selling, general and administrative expenses will be
directly related to these contracts and have been reclassified to cost
of service fee revenue. These amounts are
F-26
102
PFSWEB, INC.
NOTES TO PRO FORMA AND SUPPLEMENTAL PRO FORMA
COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
approximately $1.5 million for fiscal 1999 and $0.7 million for the
three months ended June 30, 1999.
(7) Reflects entering into a transaction management services agreement with
Daisytek upon completion of this offering under which PFSweb will
provide transaction management services for Daisytek's U.S. wholesale
consumable computer supplies business. The supplemental pro forma
adjustments include service fee revenues of approximately $19.7 million
for fiscal 1999 and $4.6 million for the three months ended June 30,
1999. In addition, this reflects the estimated operating costs
associated with the performance of this transaction management services
agreement and includes (i) operating costs associated with the Memphis
distribution center, including the salaries of management and
personnel, warehousing and distribution costs, and depreciation
expenses and (ii) operating costs associated with the information
technology function, including the salaries of management and
personnel, telephone and lease costs, and depreciation expense. These
costs are approximately $11.6 million for fiscal 1999 and $2.9 million
for the three months ended June 30, 1999. This also reflects certain
estimated additional expenses associated with performing services
required in connection with the transaction management services
agreement of approximately $1.3 million for fiscal 1999 and $0.4
million for the three months ended June 30, 1999. This adjustment does
not consider existing selling, general and administrative
infrastructure costs which will support this business but which are
already reflected as historical costs.
(8) Reflects income taxes determined in accordance with the provisions of
SFAS No. 109 "Accounting for Income Taxes." The pro forma adjustments
to the provision (benefit) for taxes reflect income taxes as if these
transactions and events had occurred as of the beginning of the
respective period presented. These pro forma effective income tax rates
may not be indicative of performance in future periods.
(9) Reflects basic pro forma net income per share calculated based on
common stock outstanding of 17,405,000 shares upon completion of this
offering. It does not include up to 465,000 shares of common stock
which the underwriters have the option to exercise solely to cover
over-allotments. If the underwriters exercise their over-allotment
option in full, basic and diluted pro forma net loss per share would be
($0.02) and basic and diluted supplemental pro forma net loss per share
would be $0.16 for the fiscal year ended March 31, 1999. Basic and
diluted pro forma net loss per share would be ($0.02) and basic and
diluted supplemental pro forma net income per share would be $0.02 for
the three months ended June 30, 1999.
(10) Reflects the contribution from Daisytek of $20,000 for 14,305,000
shares of PFSweb's common stock.
F-27
103
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,100,000 SHARES
PFS LOGO
COMMON STOCK
-----------------------
PROSPECTUS
-----------------------
HAMBRECHT & QUIST
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
WILLIAM BLAIR & COMPANY
JEFFERIES & COMPANY, INC.
----------------------
, 1999
----------------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
which is contained in this prospectus. We are offering to sell and seeking
offers to buy shares of PFSweb, Inc. common stock only in jurisdictions where
offers and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of the PFSweb, Inc. common stock.
Through and including , 1999 (the 25th day after commencement of
the offering), all dealers effecting transactions in the common stock, whether
or not participating in this offering, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
104
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale and
distribution of the securities being registered. All amounts are estimated
except the Securities and Exchange Commission registration fee and the
registration fee.
ITEM AMOUNT
- ---- --------
Securities and Exchange Commission registration fee......... $ 13,875
NASD registration fee....................................... 5,500
Nasdaq Stock Market listing fees............................
Blue Sky qualification fees and expenses....................
Legal fees and expenses.....................................
Accounting fees and expenses................................
Transfer agent and registrar fees...........................
Printing and engraving expenses.............................
Miscellaneous expenses......................................
--------
Total............................................. $
========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
PFSweb is incorporated under the laws of the State of Delaware. Section 145
("Section 145") of the General Corporation Law of the State of Delaware, as the
same exists or may hereafter be amended (the "General Corporation Law"), inter
alia, provides that a Delaware corporation may indemnify any persons who were,
are or are threatened to be made, parties to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation), by
reason of the fact that such person is or was an officer, director, employee or
agent of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation or
enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding, provided such
person acted in good faith and in a manner he reasonably believed to be in or
not opposed to the corporation's best interests and, with respect to any
criminal action or proceeding, had no reasonable cause to believe that his
conduct was illegal.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against him and incurred by him in any such
capacity, arising out of his status as such, whether or not the corporation
would otherwise have the power to indemnify him under Section 145.
PFSweb's Amended and Restated Certificate of Incorporation and Bylaws
provide for the indemnification of officers and directors to the fullest extent
permitted by the General Corporation Law.
PFSweb anticipates that all of its directors and officers will be covered
by insurance policies against certain liabilities for actions taken in their
capacities as such, including liabilities under the Securities Act of 1933, as
amended.
II-1
105
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In connection with its incorporation and organization, PFSweb issued
14,305,000 shares of common stock to Daisytek for an aggregate of $20,000.
PFSweb believes that this issuance was exempt from registration under Section
4(2) of the Securities Act as a transaction not involving any public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
1.1* -- Form of Underwriting Agreement
2.1 -- Form of Master Separation Agreement by and among Daisytek
International Corporation, Daisytek, Incorporated,
Priority Fulfillment Services, Inc. and PFSweb, Inc.
2.2 -- Form of Initial Public Offering and Distribution
Agreement by and among Daisytek International
Corporation, Daisytek, Incorporated, Priority Fulfillment
Services, Inc. and PFSweb, Inc.
2.3 -- Form of Registration Rights Agreement by and among
Daisytek International Corporation, Daisytek,
Incorporated and PFSweb, Inc.
2.4* -- Form of Tax Sharing Agreement between Daisytek
International Corporation and PFSweb, Inc.
2.5 -- Form of Transition Services Agreement between Daisytek
Incorporated and PFSweb, Inc.
2.6 -- Form of Transaction Management Services Agreement between
Daisytek, Incorporated and Priority Fulfillment Services,
Inc.
3.1 -- Amended and Restated Certificate of Incorporation
3.2 -- Bylaws
4.1* -- Form of Common Stock certificate of PFSweb, Inc.
5.1* -- Opinion of Wolff & Samson, P.A.
10.1 -- Non-Employee Director Stock Option and Retainer Plan
10.2 -- Employee Stock Option Plan
10.3* -- Employee Award Plan
10.4 -- Industrial Lease Agreement between Shelby Drive
Corporation and Priority Fulfillment Services, Inc.
10.5 -- Lease Contract between Transports Weerts and Priority
Fulfillment Services Europe B.V.
21.1 -- Subsidiaries of PFSweb, Inc.
23.1 -- Consent of Arthur Andersen LLP
23.2* -- Consent of Wolff & Samson, P.A. (included in Exhibit 5.1)
24.1 -- Power of Attorney (contained on Page II-4)
27.1 -- Financial Data Schedule
- -------------------------
* To be filed by amendment.
(b) Financial Statement Schedule.
Schedule II -- Valuation and Qualifying Accounts
II-2
106
Schedules have been omitted because the information required to be set
forth therein is not applicable or is immaterial.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide the Underwriters at the closing
specified in the Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as the indemnification for liabilities arising under the Securities
Act of 1933 may be permitted as to directors, officers and controlling persons
of the Registrant pursuant to the provisions described in Item 14, or otherwise,
the Registrant has been advised that in the opinion of the SEC, such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payments by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes that:
(1) for purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective; and
(2) for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and this offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-3
107
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Plano, State of Texas, on
September 23, 1999.
/s/ MARK C. LAYTON
------------------------------------
Mark C. Layton
President, Chief Executive Officer
and Director
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Thomas J. Madden and Harvey H. Achatz, and each
of them, his or her attorneys-in-fact, each with the power of substitution, for
him or her in any and all capacities, in any and all capacities, to sign any and
all amendments to this Registration Statement (including post-effective
statements), and to sign any registration statement for the same offering
covered by this Registration Statement that is to be effective upon filing
pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and all
post-effective amendments thereto, and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that such attorneys-in-fact, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof. This Power of
Attorney may be signed in several counterparts.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on September 23,
1999 in the capacities indicated.
SIGNATURE TITLE
--------- -----
/s/ MARK C. LAYTON Chairman of the Board, President and Chief
- ----------------------------------------------------- Executive Officer (Principal Executive
Mark C. Layton Officer)
/s/ THOMAS J. MADDEN Executive Vice President and Chief Financial
- ----------------------------------------------------- and Accounting Officer (Principal
Thomas J. Madden Financial and Accounting Officer)
/s/ CHRISTOPHER YATES Director
- -----------------------------------------------------
Christopher Yates
/s/ JAMES R. POWELL Director
- -----------------------------------------------------
James R. Powell
/s/ TIMOTHY M. MURRAY Director
- -----------------------------------------------------
Timothy M. Murray
/s/ JAMES F. REILLY Director
- -----------------------------------------------------
James F. Reilly
/s/ PETER P. J. VIKANIS Director
- -----------------------------------------------------
Peter P. J. Vikanis
II-4
108
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Daisytek International Corporation and PFSweb, Inc.:
We have audited in accordance with generally accepted auditing standards,
the combined financial statements of PFSweb included in this registration
statement and have issued our report thereon dated September 22, 1999. Our
audits were made for the purpose of forming an opinion on the basic combined
financial statements taken as a whole. Schedule II of this registration
statement is the responsibility of the company's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic combined financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic combined
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
combined financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas,
September 22, 1999
S-1
109
SCHEDULE II
PFSWEB
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED MARCH 31, 1999
(AMOUNTS IN THOUSANDS)
ADDITIONS
-----------------------
BALANCE AT CHARGES TO CHARGES TO BALANCE AT
BEGINNING COST AND OTHER END OF
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
---------- ---------- ---------- ---------- ----------
Fiscal Year Ended March 31, 1997:
Allowance for doubtful accounts...... $ -- 122 -- -- $122
Fiscal Year Ended March 31, 1998:
Allowance for doubtful accounts...... $122 299 -- (103) $318
Fiscal Year Ended March 31, 1999:
Allowance for doubtful accounts...... $318 344 -- (27) $635
S-2
110
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
1.1* -- Form of Underwriting Agreement
2.1 -- Form of Master Separation Agreement by and among Daisytek
International Corporation, Daisytek, Incorporated,
Priority Fulfillment Services, Inc. and PFSweb, Inc.
2.2 -- Form of Initial Public Offering and Distribution
Agreement by and among Daisytek International
Corporation, Daisytek, Incorporated, Priority Fulfillment
Services, Inc. and PFSweb, Inc.
2.3 -- Form of Registration Rights Agreement by and among
Daisytek International Corporation, Daisytek,
Incorporated and PFSweb, Inc.
2.4* -- Form of Tax Sharing Agreement between Daisytek
International Corporation and PFSweb, Inc.
2.5 -- Form of Transition Services Agreement between Daisytek
Incorporated and PFSweb, Inc.
2.6 -- Form of Transaction Management Services Agreement between
Daisytek, Incorporated and Priority Fulfillment Services,
Inc.
3.1 -- Amended and Restated Certificate of Incorporation
3.2 -- Bylaws
4.1* -- Form of Common Stock certificate of PFSweb, Inc.
5.1* -- Opinion of Wolff & Samson, P.A.
10.1 -- Non-Employee Director Stock Option and Retainer Plan
10.2 -- Employee Stock Option Plan
10.3* -- Employee Award Plan
10.4 -- Industrial Lease Agreement between Shelby Drive
Corporation and Priority Fulfillment Services, Inc.
10.5 -- Lease Contract between Transports Weerts and Priority
Fulfillment Services Europe B.V.
21.1 -- Subsidiaries of PFSweb, Inc.
23.1 -- Consent of Arthur Andersen LLP
23.2* -- Consent of Wolff & Samson, P.A. (included in Exhibit 5.1)
24.1 -- Power of Attorney (contained on Page II-4)
27.1 -- Financial Data Schedule
- -------------------------
* To be filed by amendment.