NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Overview
PFSweb, Inc. and its subsidiaries are collectively referred to as the “Company;” “Supplies Distributors” refers to Supplies Distributors, Inc. and its subsidiaries; “Retail Connect” refers to PFSweb Retail Connect, Inc.; and “PFSweb” refers to PFSweb, Inc. and i
ts subsidiaries excluding Supplies Distributors and Retail Connect.
PFSweb Overview
PFSweb is an international business process outsourcing provider of end-to-end eCommerce solutions to major brand name companies seeking to optimize their supply chain and to enhance their traditional and online business channels and initiatives in the United States, Canada, and Europe. PFSweb offers a broad range of service offerings that include digital marketing, eCommerce technologies, order management, customer care,
logistics and fulfillment, financial management and professional consulting.
Supplies Distributors Overview
Supplies Distributors and PFSweb operate under distributor agreements with Ricoh Company Limited and Ricoh Production Print Solutions, a strategic business unit within the Ricoh Family Group of Companies (collectively hereafter referred to as “Ricoh”)
, under which Supplies Distributors acts as a distributor of various Ricoh products. Substantially all of Supplies Distributors’ revenue is generated by its sale of product purchased from Ricoh.
Supplies Distributors has obtained financing (see Notes 3 and 4) that allows it to fund the working capital requirements for the sale of primarily Ricoh products. Pursuant to the transaction management services agreements between PFSweb and Supplies Distributors, PFSweb provides to Supplies Distributors transaction management and fulfillment services, such as managed web hosting and maintenance, procurement support, web-enabled customer contact center services, c
ustomer relationship management, financial services including billing and collection services, information management, and international distribution services. Supplies Distributors does not have its own sales force and relies upon Ricoh’s sales force and product demand generation activities for its sale of Ricoh products. Supplies Distributors sells its products in the United States, Canada and Europe.
All of the agreements between PFSweb and Supplies Distributors were made in the context of a related party relationship and were negotiated in the overall context of PFSweb’s and Supplies Distributors’ arrangement with Ricoh. Although management believes the terms of these agreements are generally consistent with fair market values, there can be no assurance
that the prices charged to or by each company under these arrangements are not higher or lower than the prices that may be charged by, or to, unaffiliated third parties for similar services. All of these transactions are eliminated upon consolidation.
2. Significant Accounting Policies
Principles of Consolidation
All intercompany accounts and transactions have been eliminated in consolidation.
Investment in Affiliates
Priority Fulfillment Services, Inc. (“PFS”), a wholly-owned subsidiary of PFSweb, has made advances to Supplies Distributors that are evidenced by a Subordinated Demand Note (the “Subordinated Note”). Under the terms of certain of the Company’s debt facilities, the outstanding balance of the Subordinated Note cannot be increased to more
than $5.0 million or decreased to less than $2.5 million without prior approval of certain of the Company’s lenders (see Notes 3 and 4). As of both December 31, 2013 and 2012, the outstanding balance of the Subordinated Note was $3.5 million. The Subordinate Note is eliminated in the Company’s consolidated financial statements.
PFS has also made advances to Retail Connect, which aggregated $11.1 million as of both December 31, 2013 and 2012. Certain terms of the Company’s debt facilities provide that the total advances to Retail Connect may not be less than $2.0 million without prior approval of Retail Connect’s lender, if needed. PFS has received the approval of its lender to advance incremental amounts to certain of its subsidiaries and/or affiliates, in
cluding Retail Connect, if needed, subject to certain financial covenants, as defined. PFSweb, Inc. has also advanced to Retail Connect an additional $8.5 million and $8.2 million as of December 31, 2013 and 2012, respectively. As of December 31, 2013, PFSweb, Inc. has approximately $10.7 million available to be advanced to Retail Connect and/or other affiliates. All of these advances are eliminated upon consolidation.
40
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Use of Estimates
The preparation of consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses a
nd disclosure of contingent assets and liabilities. The recognition and allocation of certain revenues and selling, general and administrative expenses in these consolidated financial statements also require management estimates and assumptions.
Estimates and assumptions about future events and their effects cannot be determined with certainty. The Company bases its estimates on historical experience and various other assumptions believed to be applicable and reasonable under the circumstances. These estim
ates may change as new events occur, as additional information is obtained and as the operating environment changes. These changes have been included in the consolidated financial statements as soon as they became known. In addition, management is periodically faced with uncertainties, the outcomes of which are not within its control and will not be known for prolonged periods of time. Based on a critical assessment of accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes the Company’s consolidated financial statements are fairly stated in accordance with US GAAP, and provide a fair presentation of the Company’s financial position and results of operations.
Revenue and Cost Recognition
Depending on the terms of the customer arrangement, Supplies Distributors recognizes product revenue and product cost either upon the shipment of product to customers or when the customer receives the product. Supplies Distributors permits its customers to return product for credit against other purchases, which include returns for defective products (that Supplies Distributors then returns to the manufacturer) and incorrect shipments. Supplies Distributors provides a reserve for estimated returns an
d allowances and offers terms to its customers that it believes are standard for its industry.
Freight costs billed to customers are reflected as components of product revenue. Freight costs incurred are recorded as a component of cost of goods sold.
Under its distributor agreements (see Note 6), Supplies Distributors bills Ricoh for reimbursements of certain expenses, including: pass-through customer marketing programs, including rebates and coop funds; certain freight costs; direct costs incurred in pas
sing on any price decreases offered by Ricoh to Supplies Distributors or its customers to cover price protection and certain special bids; the cost of products provided to replace defective product returned by customers; and certain other expenses as defined. Supplies Distributors includes these reimbursable amounts as they are incurred with a corresponding reduction in either inventory or cost of product revenue. Supplies Distributors also reflects pass-through customer marketing programs as a reduction of both product revenue and cost of product revenue.
The Company’s service fee revenue relates to its distribution services, order management/customer care services, professional and technology services
and the reimbursement of out-of-pocket and third-party expenses. The Company typically charges its service fee revenue on either a cost-plus basis, a percent of shipped revenue basis or a per transaction basis, such as a per item basis for fulfillment services or a per labor hour basis for web-enabled customer contact center services. Additional fees are billed for other services. The Company evaluates its contractual arrangements to determine whether or not they include multiple service elements. Revenue recognition is determined for the separate service elements of the contract in accordance with the requirements of Accounting Standards Codification 605, “Revenue Recognition.”
Distribution services relate primarily to inventory management, product receiving, warehousing and fulfillment (i.e., picking, packing and shipping) and facilities and operations management. Service fee revenue for these activities is recognized as earned, which is either (i) on a per transaction basis or (ii) at the time of product fulfillment, which occurs at the completion of the di
stribution services.
Order management/customer care services relate primarily to taking customer orders for the Company’s clients’ products. These services also entail addressing customer questions related to orders, as well as cross-selling/up-selling activities. Service fee revenue for this activity is recognized as the services are rendered. Fees charged to the client are on a per transaction basis based on either (i) a pre-determined fee per order or fee per telephone minutes incurred, (ii) a per dedic
ated agent fee, or (iii) are included in the product fulfillment service fees that are recognized on product shipment.
Professional consulting and technology service revenues primarily relate to service and support of eCommerce platforms, website solutions and quality control for the Company’s clients. Additionally, the Company provides digital agency services that
41
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
enable client marketing programs to attract new customers, convert buyers and increase website value. These fees are typically charged on either a per labor hour basis, a dedicated resource model, or a percent of merchandise shipped basis. Service fee revenue for this activity is generally recognized as the services are rendered.
The Company’s billings for reimbursement of out-of-pocket expenses, including travel and certain third-party vendor expenses such as shipping and handling costs and telecommunication charges
, are included in pass-through revenue. The related reimbursable costs are reflected as cost of pass-through revenue.
The Company’s cost of service fee revenue, representing the cost to provide the services described above, is recognized as incurred. Cost of service fee revenue also includes certain costs associated with technology collaboration and ongoing technology support
that include maintenance, web hosting and other ongoing programming activities. These activities are primarily performed to support the distribution and order management/customer care services and are recognized as incurred.
The Company recognizes revenue and records trade accounts receivable, pursuant to the methods described above, when collectability is reasonably assured. Collectability is evaluated in the aggregate and on an individual customer
or client basis taking into consideration payment due date, historical payment trends, current financial position, results of independent credit evaluations and payment terms. Related reserves are determined by either using percentages applied to certain aged receivable categories based on historical results, reevaluated and adjusted as additional information is received, or a specific identification method. After all attempts to collect a receivable have failed, the receivable is written off against the allowance for doubtful accounts.
The Company primarily performs its services under
multiple year contracts, certain of which include early termination provisions. In conjunction with these long-term contracts, the Company sometimes receives start-up fees to cover its implementation costs, including certain technology infrastructure and development costs. The Company defers the start-up fees received, and the related costs, and recognizes them over the contract term. The amortization of deferred revenue is included as a component of service fee revenue. The amortization of deferred implementation costs is included as a cost of service fee revenue. To the extent implementation costs for non-technology infrastructure and development exceed the corresponding fees received, the excess costs are expensed as incurred. The following summarizes the deferred implementation revenues and costs, excluding technology and development costs that are included in property and equipment (in thousands):
|
December 31,
2013
|
|
|
December 31,
2012
|
|
Deferred implementation revenues
|
|
|
|
|
|
|
|
Current
|
$
|
8,181
|
|
|
$
|
6,573
|
|
Non-current
|
|
7,491
|
|
|
|
7,562
|
|
|
$
|
15,672
|
|
|
$
|
14,135
|
|
Deferred implementation costs
|
|
|
|
|
|
|
|
Current
|
$
|
1,977
|
|
|
$
|
1,833
|
|
Non-current
|
|
1,780
|
|
|
|
1,834
|
|
|
$
|
3,757
|
|
|
$
|
3,667
|
|
Current and non-current deferred implementation costs, excluding technology and development costs, are a component of prepaid expenses and other current assets and other assets, respectively. Current and non-current deferred implementation revenues may precede the timing of when the related implementation costs are incurred, and thus deferred.
42
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Concentration of Business and Credit Risk
No product revenue customer or service fee client relationship represented more than
10% of the Company’s consolidated total net revenue during the years ended December 31, 2013 or 2012. One client exceeded 10% of the Company’s accounts receivable at December 31, 2013. A summary of the customer and client concentrations is as follows:
|
December 31,
2013
|
|
|
December 31,
2012
|
|
Product Revenue (as a percentage of total Product Revenue, net):
|
|
|
|
|
|
|
|
Customer 1
|
|
16
|
%
|
|
|
15
|
%
|
Customer 2
|
|
12
|
%
|
|
|
12
|
%
|
Service Fee Revenue (as a percentage of total Service Fee Revenue):
|
|
|
|
|
|
|
|
Client 1
|
|
7
|
%
|
|
|
15
|
%
|
Client 2
|
|
7
|
%
|
|
|
14
|
%
|
The Company currently anticipates that its product revenue and service fee revenue from the customers and clients identified above will decline during the next twelve months and the contractual relationship with Client 1 ended during 2013
.
The Company has provided certain collateralized guarantees of its subsidiaries’ financings and credit arrangements. These subsidiaries’ ability to obtain financing on similar terms would be significantly impacted without these guarantees.
The Company has multiple arrangements with International Business Machines Corporation (“IBM”) and Ricoh, and is dependent upon the continuation of such arrangements. These arrangements, which are critical to the Company’s ongoing operations, include Supplies Distributors’ distributor agreements and certain of Supplies Distributors’ working capital financing agreements. Substantially all of Supplies Distributors’ revenue is generated by its sale of product
purchased from Ricoh. Supplies Distributors also relies upon Ricoh’s sales force and product demand generation activities and the discontinuance of such services would have a material impact upon Supplies Distributors’ business. In addition, Supplies Distributors has product sales to IBM and Ricoh business affiliates.
As a result of certain operational restructuring of its business, Ricoh has implemented, and will continue to implement, certain changes in the sale and distribution of Ricoh products. The changes have resulted, and are expected to continue to result, in reduced revenues and profitability for Supplies Distributors in 201
3 and beyond.
Cash and Cash Equivalents
Cash equivalents are defined as short-term highly liquid investments with original maturities, when acquired, of three months or less.
Other Receivables
Other receivables include $3.9
million and $6.5 million as of December 31, 2013 and 2012, respectively, primarily for amounts due from Ricoh for costs incurred by the Company under the distributor agreements (see Note 6). In addition, other receivables include $0.7 million and $0.6 million as of December 31, 2013 and 2012, respectively, applicable to value added tax receivables.
Inventories
Inventories (all of which are finished goods) are stated at the lower of weighted average cost or market. The Company establishes inventory reserves based upon estimates of declines in values due to inventories that are slow moving or obsolete, excess levels of inventory or values assessed at lower
than cost.
Supplies Distributors assumes responsibility for slow-moving inventory under its Ricoh distributor agreements, subject to certain termination rights, but has the right to return product rendered obsolete by engineering changes, as defined (see Note 6). In the event PFSweb, Supplies Distributors and Ricoh terminate the distributor agreements, the agreements provide for the parties to mutually agree on a plan of disposition of Supplies Distributors’ then existing inventory.
Supplies Distributors’ inventories include merchandise in-transit that has not been received by the Company but that has been shipped and invoiced by Supplies Distributors’ vendors. The corresponding payable for inventories in-transit is included in accounts payable in the acc
ompanying consolidated financial statements.
43
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
The Company reviews inventory for impairment on a periodic basis, but at a minimum annually. The provision for excess and obsolete inventory in the years ended December 31, 2013 and 2012 was $0.1 million and $0
.4 million, respectively. Recoverability of the inventory on hand is measured by comparison of the carrying value of the inventory to the fair value of the inventory. The reserve for slow moving or excess inventory was $1.0 million and $1.8 million as of December 31, 2013 and 2012, respectively.
Property and Equipment
The components of property and equipment as of December 31, 2013 and 2012 are as follows (in thousands):
|
December 31,
2013
|
|
|
December 31,
2012
|
|
|
Depreciable
Life
|
|
Purchased and capitalized software costs
|
$
|
39,829
|
|
|
$
|
35,024
|
|
|
|
1-5 years
|
|
Furniture and fixtures
|
|
23,158
|
|
|
|
22,378
|
|
|
|
2-10 years
|
|
Computer equipment
|
|
11,050
|
|
|
|
14,035
|
|
|
|
3-5 years
|
|
Leasehold improvements
|
|
13,648
|
|
|
|
13,229
|
|
|
|
3-10 years
|
|
Other
|
|
2,520
|
|
|
|
2,953
|
|
|
|
3-5 years
|
|
|
|
90,205
|
|
|
|
87,619
|
|
|
|
|
|
Less-accumulated depreciation and amortization
|
|
(63,015
|
)
|
|
|
(59,702
|
)
|
|
|
|
|
Property and equipment, net
|
$
|
27,190
|
|
|
$
|
27,917
|
|
|
|
|
|
The Company makes judgments and estimates in conjunction with the carrying value of these assets, including amounts to be capitalized, depreciation and amortization methods and useful lives. Additionally, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. The Company records impairment losses, if any, in the period in which the Company determines the carrying amount is not recoverable. Recoverabili
ty of any assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. This may require the Company to make judgments regarding long-term forecasts of future revenues and costs related to the assets subject to review. During 2013 and 2012, no impairment of property and equipment was identified or recorded.
Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the respective assets. Capitalized implementation costs are depreciated over the respective client contract
term. Leasehold improvements are amortized over the shorter of the useful life of the related asset or the remaining lease term. Depreciation and amortization expense related to property and equipment, excluding capital leases, during 2013 and 2012 was $7.6 million and $7.0 million, respectively.
The Company’s property held under capital leases amount to approximately $4.0
million and $5.1 million, net of accumulated amortization of approximately $4.4 million and $2.6 million, at December 31, 2013 and 2012, respectively. Depreciation and amortization expense related to capital leases during 2013 and 2012 was $2.6 million and $2.2 million, respectively. In addition, during 2012, PFS incurred approximately $6.0 million of leasehold improvements at certain of its leased facilities that is being amortized over the shorter of the asset’s useful lives or the lease terms and were primarily financed via tenant allowances that are also being amortized over the lease terms.
Operating Leases
The Company leases certain real estate for its warehouse, call center and corporate offices, as well as certain equipment under non-cancelable operating leases that expire at various dates through
2024. Management expects that, in the normal course of business, leases that expire will be renewed or replaced by other similar leases. The Company recognizes escalating lease payments on a straight-line basis over the term of each respective lease, with the difference between cash payments and rent expense recognized being recorded as deferred rent in the accompanying consolidated balance sheets.
Foreign Currency Translation and Transactions
For the Company’s Canadian and European operations, the local currency is the functional currency. All assets and liabilities are translated at exchange rates in effect at the end of the period, and income and expense items are translated at the average exchange rates on a mo
nthly basis.
44
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
The Company includes currency gains and losses on short-term intercompany advances in the determination of net income and loss. The Company reports gains and losses on intercompany foreign currency transactions that are of a long-term investment nature as a separate component of shareholders’ equity.
Stock-Based Compensation
The Company uses stock-based compensation, including stock options, deferred stock units and other stock-based awards to provide long-term performance incentives for its executives, key employees and non-employee directors. From the service inception date to the grant date, the Company recognizes compensation cost for all share-based payments based on the reporting date fair value of the award. After the grant date, compe
nsation cost is measured based on the grant date fair value. Depending on the conditions associated with the vesting of the award, compensation cost is recognized on a straight-line or graded basis, net of estimated forfeitures, over the requisite service period of each award. The Company records compensation cost as a component of selling, general and administrative expenses in the consolidated statements of operations.
The Company estimates the fair value of each option grant on the date of grant using the Black-Scholes option-pricing model and estimates the compensation cost for certain of the awards that have a performance condition using a Monte-Carlo simulation. The estimated fair value for awards involves assumptions for expected dividend yield, sto
ck price volatility, risk-free interest rates and the expected life of the award.
Income Taxes
For federal income tax purposes, tax years that remain subject to examination include years 20
10 through 2013. However, the utilization of net operating loss (“NOL”) carryforwards that arose prior to 2010 remain subject to examination through the years such carryforwards are utilized. For Europe, tax years that remain subject to examination include years 2011 to 2013. However, the utilization of NOL carryforwards that arose prior to 2011 remain subject to examination through the years such carryforwards are utilized. For Canada, tax years that remain subject to examination include years 2005 to 2013, depending on the subsidiary. For state income tax purposes, the tax years that remain subject to examination include years 2009 to 2013, depending upon the jurisdiction in which the Company files tax returns. The Company and its subsidiaries have various income tax returns in the process of examination. The Company does not expect these examinations will result in unrecognized tax benefits.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount more likely than not to be realized.
The Company recognizes interest and penalties related to certain tax positions in income tax expense.
Self Insurance
The Company is self-insured in the U.S.
for medical insurance benefits up to certain stop-loss limits. Such costs are accrued based on known claims and an estimate of incurred, but not reported (“IBNR”) claims. IBNR claims are estimated using historical lag information and other data provided by claims administrators.
Fair Value of Financial Instruments
The carrying value of the Company’s financial instruments, which include cash and cash equivalents, accounts receivable, accounts payable, debt and capital lease obligations, approximate their fair values based on short terms to maturity or current market prices and interest rates.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income (loss) consists of net income (loss) and foreign currency translation adjustments.
45
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Net Loss Per Common Share
Basic and diluted net loss per share are computed by dividing net loss by the weighted-average number of common shares outstanding for the reporting period. Stock options not included in the calculation of diluted net loss per share for the years ended December 31, 2013 and 2012, were
1.8 million and 2.1 million, respectively, as the effect would be anti-dilutive.
Cash Paid For Interest and Taxes During Year
The Company made payments for interest of approximately $0.7 million and
$1.0 million in the years ended December 31, 2013 and 2012, respectively (see Notes 3 and 4). Income tax payments of approximately $0.5 million and $0.6 million were made during each of the years ended December 31, 2013 and 2012, respectively (see Note 8).
3. Vendor Financing
Supplies Distributors has a short-term credit facility with IBM Credit LLC (“IBM Credit”) to finance its distribution of Ricoh products in the United States, providing financing for eligible Ricoh inventory and certain receivables up to $20.0 million. The agreement has no stated maturity date and provides either party the ability to exit the facility following a 90-day notice. Giv
en the structure of this facility, the Company has classified the outstanding amounts under this facility, which were $9.8 million and $11.9 million as of December 31, 2013 and 2012, respectively, as accounts payable in the consolidated balance sheets. As of December 31, 2013, Supplies Distributors had $2.2 million of available credit under this facility. The credit facility contains cross default provisions, various restrictions upon the ability of Supplies Distributors to, among others, merge, consolidate, sell assets, incur indebtedness, make loans and payments to related parties (including entities directly or indirectly owned by PFSweb, Inc.), provide guarantees, make investments and loans, pledge assets, make changes to capital stock ownership structure and pay dividends, as well as financial covenants, such as annualized revenue to working capital, net profit after tax to revenue, and total liabilities to tangible net worth, as defined, and are secured by certain of the assets of Supplies Distributors, as well as a collateralized guaranty of PFSweb. Additionally, PFS is required to maintain a minimum Subordinated Note receivable balance from Supplies Distributors of $3.5 million and the Company is required to maintain a minimum shareholders’ equity of $18.0 million. Borrowings under the credit facility accrue interest, after a defined free financing period, at prime rate plus 0.5% (3.75% as of both December 31, 2013 and 2012). The facility also includes a monthly service fee.
On March 28,
2014, Supplies Distributors entered into an amended credit facility with IBM Credit, which reduces the maximum financing under the facility from $20 million to $15 million, reduces the minimum Subordinated Note balance to $2.5 million and modifies certain financial covenants.
4. Debt and Capital Lease Obligations:
Outstanding debt and capital lease obligations consist of the following (in thousands):
|
December 31,
2013
|
|
|
December 31,
2012
|
|
|
|
|
|
Loan and security agreements, United States:
|
|
|
|
|
|
|
|
Supplies Distributors
|
$
|
3,776
|
|
|
$
|
3,264
|
|
PFS
|
|
1,473
|
|
|
|
11,077
|
|
Master lease agreements
|
|
4,973
|
|
|
|
6,648
|
|
Other
|
|
885
|
|
|
|
1,071
|
|
Total
|
|
11,107
|
|
|
|
22,060
|
|
Less current portion of long-term debt
|
|
8,231
|
|
|
|
16,660
|
|
Long-term debt, less current portion
|
$
|
2,876
|
|
|
$
|
5,400
|
|
Loan and Security Agreement – Supplies Distributors
Supplies Distributors has a loan and security agreement with Wells Fargo Bank, National Association (“Wells Fargo”) to provide financing for up to $25 million of eligible accounts receivable in the United States and Canada. As of December 31, 2013, Supplies Distributors had $2.3 million of available credit under this agreement. The Wells Fargo facility expires on the earlier of Ma
rch 2014 or the date on which the parties to the Ricoh distributor agreement (see Note 6) no longer operate under the terms of such agreement and/or Ricoh no longer supplies products pursuant to such agreement. Borrowings under the Wells Fargo facility accrue interest at prime rate plus 0.25% to 0.75% (3.75% as of December 31, 2013) or Eurodollar rate plus 2.5% to 3.0%, dependent on excess availability and subject to a minimum of 3.0%, as defined. The interest rate as of December 31, 2013 was 3.75% for $3.8
46
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
million of outstanding borrowings. As of December 31, 2012, the interest rate was 3.75% for $1.3 million and 3.0% for $2.0 million of outstanding borrowings. This agreement contains cross default provisions, various restrictions upon the ability of Supplies Distributors to, among other things, merge, consolidate, sell assets, incur indebtedness, make loans and payments to related parties (including entities directly or indirectly owned by PFSweb, Inc.), provide guarantees, make investments and loans, pledge assets, make changes to capital stock ownership structure and pay dividends, as well as financial covenants, such as a fixed charge coverage ratio and minimum net worth, as defined, and is secured by all of the assets of Supplies Distributors, as well as a collateralized guarantee of PFSweb. Additionally, PFS is required to maintain a Subordinated Note receivable balance from Supplies Distributors of no less than $3.5 million and may not maintain restricted cash of more than $5.0 million, and is restricted with regard to transactions with related parties, indebtedness and changes to capital stock ownership structure. Supplies Distributors has entered into blocked account agreements with its banks and Wells Fargo pursuant to which a security interest was granted to Wells Fargo for all U.S. and Canadian customer remittances received in specified bank accounts. At December 31, 2013 and 2012, these bank accounts held $0.1 million and $0.2 million, respectively, which was restricted for payment to Wells Fargo.
On March 28,
2014, Supplies Distributors amended the Wells Fargo agreement, which extends the termination date through March 2016, reduces the maximum financing from $25 million to $12 million and reduces the minimum Subordinate Note balance to $2.5 million.
Loan and Security Agreement – PFSweb
PFS has a Loan and Security Agreement (“Comerica Agreement”) with Comerica Bank (“Comerica”). The Comerica Agreement provides for up to $12.5 million ($10.0 million during certain non-seasonal peak months) of eligible accounts receivable financing (“Working Capital Advances”) through March 2014. The Comerica Agreement also provide
d for up to $3.0 million of eligible equipment purchases (“Equipment Advances”) through January 2013, with principal payments due through April 2015. As of December 31, 2013, PFS had $12.4 million of available credit under the Working Capital Advance portion of this facility and no remaining availability for Equipment Advances. Borrowings under the Working Capital Advance portion of this Comerica Agreement accrue interest at prime rate plus 2% (5.25% at both December, 31, 2013 and 2012), while the Equipment Advances accrue interest at prime rate plus 2.25% (5.5% at both December 31, 2013 and 2012). The Comerica Agreement contains cross default provisions, various restrictions upon PFS’s ability to, among other things, merge, consolidate, sell assets, incur indebtedness, make loans and payments to related parties (including entities directly or indirectly owned by PFSweb, Inc.), make capital expenditures, make investments and loans, pledge assets, make changes to capital stock ownership structure, as well as financial covenants of a minimum tangible net worth of $20 million, as defined, a minimum earnings before interest and taxes, plus depreciation, amortization and non-cash compensation accruals, if any, as defined, and a minimum liquidity ratio, as defined. The Comerica Agreement restricts the amount of the Subordinated Note receivable from Supplies Distributors to a maximum of $5.0 million. The Comerica Agreement is secured by all of the assets of PFS, as well as a guarantee of PFSweb, Inc.
On March 31
, 2014, PFS amended the Comerica Agreement, which extends the termination date through March 2016, increases the maximum financing amount to $20.0 million ($17.0 million during certain non-peak months), provides additional equipment financing opportunities of $2.0 million and modifies certain financial covenants.
Factoring Agreement
Supplies Distributors’ European subsidiary has a factoring agreement with BNP Paribas Fortis Factor (“BNP Paribas”) that provides factoring for up to 7.5 million Euros (approximately $10.3 million at December 31, 2013) of eligible accounts receivables through March 2014. This factoring agreement is accounted for as a secured borrowing. There were no outstanding borrowings as of December 31, 2013 or 2012. As of December 31, 2013, Supplies Distributors’ European subsidiary had approximately 0.7 million Euros
(approximately $1.0 million) of available credit under this agreement. Borrowings accrue interest at Euribor plus 0.7% (0.9% at December 31, 2013).
Supplies Distributors’ European subsidiary renewed the factoring agreement with BNP Paribas effective March 31, 2014, which extends the termination date through March 2015.
Credit Facility – Retail Connect
Retail Connect has an asset-based line of credit facility of up to $2
.0 million from Wells Fargo through May 2014, which is collateralized by substantially all of Retail Connect’s assets. Borrowings under the facility are limited to a percentage of eligible accounts receivable and inventory, up to a specified amount. Outstanding borrowings under the facility bear interest at prime rate plus 1% or Eurodollar rate plus 3.5%. There were no outstanding borrowings as of December 31, 2013 or 2012. As of December 31, 2013, Retail Connect had no available credit under this facility. In connection with the line of credit, Retail Connect entered into a cash management arrangement whereby Retail Connect’s operating accounts are considered restricted and swept and used to repay
47
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
outstanding amounts under the line of credit, if any. The credit facility restricts Retail Connect’s ability to, among other things, merge, consolidate, sell assets, incur indebtedness, make loans, investments and payments to subsidiaries, affiliates and related parties (including entities directly or indirectly owned by PFSweb, Inc.), make investments and loans, pledge assets, make changes to capital stock ownership structure, and requires a minimum tangible net worth for Retail Connect of $0, as defined. PFSweb has guaranteed all current and future obligations of Retail Connect under this line of credit. Based on current borrowing needs, the Company does not anticipate renewing this credit facility upon its maturity.
Debt Covenants
To the extent the Company or any of its subsidiaries fail to comply with its covenants applicable to its debt or vendor financing obligations, including the monthly financial covenant requirements, such as profitability and cash flow, and required level of shareholders’ equity or net worth (as defined), the Company would be required to obtain a waiver from the lender or the lender would be entitled to accelerate the repaym
ent of any outstanding credit facility obligations, and exercise all other rights and remedies, including sale of collateral and enforcement of payment under the Company parent guarantee. Any acceleration of the repayment of the credit facilities may have a material adverse impact on the Company’s financial condition and results of operations and no assurance can be given that the Company would have the financial ability to repay all of such obligations. At December 31, 2013 and 2012, the Company had restricted net assets of approximately $26.9 million and $20.7 million, respectively. As of December 31, 2013, the Company was in compliance with all debt covenants.
Master Lease Agreements
The Company has various agreements that provide for leasing or financing transactions of equipment and other assets and will continue to enter into such arrangements as needed to finance the purchasing or leasing of certain equipment or other assets. Borrowings under these agreements, which generally have terms of three to f
ive years, are generally secured by the related equipment, and in certain cases, by a Company parent guarantee.
Debt and Capital Lease Maturities
The Company’s aggregate maturities of debt subsequent to December 31, 2013 are as follows (in thousands):
Fiscal year ended December 31,
|
|
|
|
2014
|
$
|
6,074
|
|
2015
|
|
1,022
|
|
2016
|
|
150
|
|
Thereafter
|
|
—
|
|
Total
|
$
|
7,246
|
|
The following is a schedule of the Company’s future minimum lease payments under the capital leases, together with the present value of the net minimum lease payments as of December 31, 2013 (in thousands):
Fiscal year ended December 31,
|
|
|
|
2014
|
$
|
2,290
|
|
2015
|
|
1,099
|
|
2016
|
|
504
|
|
2017
|
|
141
|
|
2018
|
|
41
|
|
Thereafter
|
|
—
|
|
Total minimum lease payments
|
$
|
4,075
|
|
Less amount representing interest at rates ranging from 4.5% to 4.75%
|
|
(214
|
)
|
Present value of net minimum lease payments
|
|
3,861
|
|
Less: Current portion
|
|
(2,157
|
)
|
Long-term capital lease obligations
|
$
|
1,704
|
|
48
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
5. Stock and Stock Options
In May 2013, the Company completed a private placement pursuant to which the Company sold an aggregate of 3.2 million shares of common stock, par value $0.001 per share, at $4.57 per share, resulting in net proceeds, after deducting offering expense, of approximately $14.1 million.
Preferred Stock Purchase Rights
On June 8, 2000, and as amended, the Company’s Board of Directors declared a dividend distribution of one preferred stock purchase right (a “Right”) for each share of the Company’s common stock outstanding on July 6, 2000 and each share of common stock issued thereafter. Each Right entitles the registere
d shareholders to purchase from the Company one one-thousandth of a share of preferred stock at an exercise price of $314.90, subject to adjustment. The Rights are not currently exercisable, but would become exercisable if certain events occurred relating to a person or group acquiring or attempting to acquire 23 percent or more of the Company’s outstanding shares of common stock. The Rights expire on July 6, 2015, unless redeemed, exchanged or extended by the Company.
Stock Compensation Plans
The Company has an Employee Stock and Incentive Plan (the “Employee Plan”) and a Non-Employee Director Stock Option and Retainer Plan (the “Director Plan”), each as amended and restated (collectively, the “Plans”) under which an aggregate of 4,142,341 shares of common
stock have been authorized for issuance. The Plans provide for the granting of incentive awards to directors, executive management, key employees, and outside consultants of the Company in a variety of forms such as the award of an option, stock appreciation right, restricted stock award, restricted stock unit, deferred stock unit, among other stock-based awards. The Company uses newly issued shares of common stock to satisfy awards under the Plans.
From the service inception date to the grant date, the Company recognizes compensation cost
for all share-based payments based on the reporting date fair value of the award. After the grant date compensation cost is measured based on the grant date fair value. Depending on the conditions associated with the vesting of the award, compensation cost is recognized on a straight-line or graded basis, net of estimated forfeitures, over the requisite service period of each award.
Total stock-based compensation expense was $
2.6 million and $1.3 million for the years ended December 31, 2013 and 2012, respectively, and was included as a component of selling, general and administrative expenses in the consolidated statements of operations. As of December 31, 2013, there was $4.2 million of total unrecognized compensation costs related to non-vested share-based compensation arrangements granted under the Plans, which is expected to be recognized over a weighted average period of approximately 2.6 years. This expected cost does not include the impact of any future stock-based compensation awards.
As of December 31, 2013, there were 1,174,674 shares available for future grants under the Plans. Each stock option or stock appreciation right award granted reduces the total shares available for grant by one share, while each award granted other than in the form of a stock option or stock appreciation right reduces the shares available for grant by 1.22 shares.
Stock Options
The rights to purchase shares under employee stock option agreements issued under
the Plans typically vest over a three-year period, one-twelfth each quarter. Stock options must be exercised within 10 years from the date of grant. Stock options are generally issued such that the exercise price is equal to the market value of the Company’s common stock at the date of grant.
49
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
The following table summarizes stock option activity under the Plans:
|
Shares
|
|
|
Price Per Share
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (in
years)
|
|
|
Aggregate
Intrinsic
Value (in
millions)
|
|
Outstanding, December 31, 2012
|
|
2,100,184
|
|
|
$1.01—$13.91
|
|
|
$
|
4.55
|
|
|
|
|
|
|
|
|
|
Granted
|
|
310,500
|
|
|
$4.01—$7.89
|
|
|
$
|
5.38
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(514,149
|
)
|
|
$1.01—$8.04
|
|
|
$
|
3.63
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
(77,943
|
)
|
|
$1.46—$12.08
|
|
|
$
|
5.29
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2013
|
|
1,818,592
|
|
|
$1.01—$13.91
|
|
|
$
|
4.90
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2013
|
|
1,498,097
|
|
|
$1.01—$13.91
|
|
|
$
|
4.82
|
|
|
|
5.6
|
|
|
$
|
6.7
|
|
Exercisable and expected to vest, December 31, 2013
|
|
1,788,882
|
|
|
$1.01—$13.91
|
|
|
$
|
4.90
|
|
|
|
6.2
|
|
|
$
|
7.8
|
|
The weighted average fair value per share of options granted during the years ended December 31, 2013 and 2012 was $
3.72 and $1.84, respectively. The total intrinsic value of options exercised under the Stock Option Plans was $1.5 million during the year ended December 31, 2013.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants of options under the Plans:
|
Year Ended
December 31,
2013
|
|
Year Ended
December 31,
2012
|
Expected dividend yield
|
—
|
|
—
|
Expected stock price volatility
|
80% - 82%
|
|
82% - 83%
|
Weighted average stock price volatility
|
82%
|
|
83%
|
Risk-free interest rate
|
1.0% - 2.1%
|
|
0.9% - 1.1%
|
Expected life of options (years)
|
6
|
|
6
|
The Black-Scholes option valuation model requires the input of highly subjective assumptions, including the expected life of the stock-based award and stock-price volatility. The assumptions listed above represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if other assumptions had been used, the Company’s recorded and pro forma stock-based compensation expense could have been different. In addition, the Company is
required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If the Company’s actual forfeiture rate is materially different from its estimate, the share-based compensation expense could be materially different. The expected life of options has been computed using the simplified method.
Performance Shares
On May 22, 2013, pursuant to the Employee Plan, the Company issued Performance-Based Share Awards (“Performance Shares”, as defined in the Employee Plan) to certain of the Company’s executives. The number of Performance Shares that each such individual may receive is subject to, and calculated by reference to, the achievement by the Company of certain 2013 financial targets. Based on the Company’s 2013 fi
nancial results, the aggregate maximum number of Performance Shares that may be issued for 2013 is approximately
598,000. The issuance of the Performance Shares is subject to four year vesting (beginning with fiscal year 2013) based upon continued employment and the comparative market performance (on an annual and cumulative basis) of the Company’s common stock on NASDAQ compared to the Russell Micro Cap Index. The actual number of shares issued on each annual vesting date could range from zero to 100%, depending on satisfaction of the vesting conditions.
The compensation cost for the market condition portion of the Performance Shares was estimated based on a grant date valuation using a Monte-Carlo simulation, which resulted in a range of estimated fair values of $5.29 - $
9.07 for the annual performance market condition and $7.34 - $9.07 for the cumulative performance market condition. The estimated fair values used for the Performance Shares were computed assuming a risk-free interest rate of 0.8% and an expected volatility of 52.6%.
As of December 31, 2013, the aggregate intrinsic value of the vested and unvested Performance Shares was $1.6 million and $3.8 million, respectively.
50
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
6. Distributor Agreements
Supplies Distributors, PFSweb and Ricoh have entered into distributor agreements under which Supplies Distributors acts as a distributor of various products, primarily Ricoh products, and PFSweb provides transaction management and fulfillment services to Supplies Distributors. The dis
tributor agreements are subject to periodic renewals, the next of which is in December 2014. Under the distributor agreements, Ricoh sells product to Supplies Distributors and reimburses Supplies Distributors for certain freight costs, direct costs incurred in passing on any price decreases offered by Ricoh to Supplies Distributors or its customers to cover price protection and certain special bids, the cost of products provided to replace defective product returned by customers and other certain expenses as defined. Supplies Distributors can return to Ricoh product rendered obsolete by Ricoh engineering changes after customer demand ends. Ricoh determines when a product is obsolete. Ricoh and Supplies Distributors also have agreements under which Ricoh reimburses or collects from Supplies Distributors amounts calculated in certain inventory cost adjustments. Supplies Distributors passes through to customers marketing programs specified by Ricoh and administers such programs according to Ricoh guidelines.
7. Supplies Distributors
Pursuant to a credit agreement, Supplies Distributors is restricted from making any distributions to PFSweb if, after giving affect thereto, Supplies Distributors’ would be in noncompliance with its financial covenants. Under the terms of its amended credit agreements, Supplies Distributors is restricted from paying annual cash dividends without the prior approval of its lenders (see Notes 3 and 4). Supplies Distributors has received lender approval to pay approximately $
1.8 million of dividends in 2014. Supplies Distributors paid dividends to PFSweb of $1.5 million and $1.0 million in 2013 and 2012, respectively.
8. Income Taxes
The consolidated income (loss) from continuing operations before income taxes, by domestic and foreign entities, is as follows (in thousands):
|
Year Ended
December 31,
2013
|
|
|
Year Ended
December 31,
2012
|
|
Domestic
|
$
|
(6,043
|
)
|
|
$
|
(492
|
)
|
Foreign
|
|
691
|
|
|
|
(375
|
)
|
Total
|
$
|
(5,352
|
)
|
|
$
|
(867
|
)
|
A reconciliation of the difference between the expected income tax expense from continuing operations at the U.S. federal statutory corporate tax rate of 34%, and the Company’s effective tax rate is as follows (in thousands):
|
Year Ended
December 31,
2013
|
|
|
Year Ended
December 31,
2012
|
|
Income tax benefit computed at statutory rate
|
$
|
(1,820
|
)
|
|
$
|
(295
|
)
|
Foreign dividends received
|
|
45
|
|
|
|
171
|
|
Items not deductible for tax purposes
|
|
41
|
|
|
|
780
|
|
Change in valuation reserve
|
|
1,654
|
|
|
|
1,976
|
|
State taxes
|
|
367
|
|
|
|
492
|
|
Impact of foreign taxation
|
|
94
|
|
|
|
96
|
|
Foreign exchange rate difference
|
|
104
|
|
|
|
(76
|
)
|
Net operating loss adjustments
|
|
(220
|
)
|
|
|
(1,616
|
)
|
Prior year return-to-provision true-up
|
|
567
|
|
|
|
(665
|
)
|
Other
|
|
(293
|
)
|
|
|
(219
|
)
|
Provision for income taxes
|
$
|
539
|
|
|
$
|
644
|
|
51
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Current and deferred income tax expense (benefit) is summarized as follows (in thousands):
|
Year Ended
December 31,
|
|
|
Year Ended
December 31,
|
|
|
2013
|
|
|
2012
|
|
Current
|
|
|
|
|
|
|
|
State
|
$
|
406
|
|
|
$
|
537
|
|
Foreign
|
|
104
|
|
|
|
125
|
|
Total current
|
|
510
|
|
|
|
662
|
|
Deferred
|
|
|
|
|
|
|
|
State
|
|
(107
|
)
|
|
|
—
|
|
Foreign
|
|
136
|
|
|
|
(18
|
)
|
Total deferred
|
|
29
|
|
|
|
(18
|
)
|
Total
|
$
|
539
|
|
|
$
|
644
|
|
The components of the deferred tax asset (liability) are as follows (in thousands):
|
December 31,
2013
|
|
|
December 31,
2012
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
$
|
616
|
|
|
$
|
639
|
|
Inventory reserve
|
|
347
|
|
|
|
630
|
|
Accrued expenses
|
|
2,104
|
|
|
|
1,485
|
|
Net operating loss carryforwards
|
|
20,893
|
|
|
|
20,617
|
|
Other
|
|
4,192
|
|
|
|
3,191
|
|
|
|
28,152
|
|
|
|
26,562
|
|
Less — Valuation allowance
|
|
26,568
|
|
|
|
24,914
|
|
Total deferred tax asset
|
|
1,584
|
|
|
|
1,648
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Property and equipment
|
|
(931
|
)
|
|
|
(1,238
|
)
|
Other
|
|
—
|
|
|
|
(46
|
)
|
Total deferred tax liabilities
|
|
(931
|
)
|
|
|
(1,284
|
)
|
Deferred tax assets, net
|
$
|
653
|
|
|
$
|
364
|
|
Management believes that PFSweb has not established a sufficient history of earnings, on a stand-alone basis, to support the more likely than not realization of certain deferred tax assets in excess of existing taxable temporary differences. A valuation allowance has been provided for the majority of these net deferred income tax assets as of December 31, 2013 and 2012. The remaining net deferred tax assets at both December 31, 2013 and 2012 primarily relate to the Company’s European operations
and certain state tax benefits. At December 31, 2013, net operating loss (“NOL”) carryforwards relate to taxable losses of PFSweb’s European subsidiary totaling approximately $0.4 million, PFSweb’s Canadian subsidiary totaling approximately $6.0 million and PFSweb’s U.S. subsidiaries totaling approximately $56.7 million that expire at various dates from 2014 through 2033. The U.S. NOL carryforward includes approximately $4.9 million relating to tax benefits of stock option exercises and, if utilized, will be recorded against additional paid-in capital upon utilization rather than as an adjustment to income tax expense from continuing operations. The U.S. NOL also includes approximately $20.3 million of NOL acquired before February 2006, which is subject to annual limits of $1.2 million and $16.0 million of NOL created before February 2006 subject to annual limits of $1.4 million under IRS Section 382.
The Company evaluates its tax positions for potential liabilities associated with unrecognized tax benefits. As of December 31, 2013 and 2012, no unrecognized tax benefits, penalties or interest were identified or recorded. The Company does not expect to record unrecognized tax benefits in the next twelve months
.
9. Commitments and Contingencies
The Company leases facilities, warehouse and office space and transportation and other equipment under operating leases expiring in various years through February 28
, 2024. In most cases, management expects that, in the normal course of business, leases will be renewed or replaced by other similar leases. The Company’s facility leases generally contain one or more renewal options.
52
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Minimum future annual rental payments under non-cancelable operating leases having original terms in excess of one year are as follows (in thousands):
|
Operating
Lease
Payments
|
|
|
|
Fiscal year ended December 31,
|
|
|
|
|
|
2014
|
$
|
6,281
|
|
|
|
2015
|
|
6,203
|
|
|
|
2016
|
|
5,452
|
|
|
|
2017
|
|
4,510
|
|
|
|
2018
|
|
4,393
|
|
|
|
Thereafter
|
|
18,577
|
|
|
|
Total
|
$
|
45,416
|
|
|
|
Minimum rental payments under operating leases are recognized on a straight-line basis over the term of the lease including any periods of free rent. Any differences between cash rental payments made and straight-line rent expense is recorded as deferred rent on the accompanying consolidated balance sheets. Total rental expense under operating leases approximated $
6.6 million and $6.5 million for the years ended December 31, 2013 and 2012, respectively. Certain landlord required deposits are secured by letters of credit.
In 2012
, the Company incurred approximately $6.0 million of leasehold improvements at certain of its leased facilities that will be amortized over the shorter of the assets lives or the lease terms and were primarily financed via tenant allowances that will also be amortized over the lease terms.
The Company received municipal tax abatements in certain locations. In prior years, the Company received notice from a municipality that it did not satisfy certain criteria necessary to maintain the abatements and that the municipal authority planned to make an adjustment to the Company’s tax abatement. The Company disputed the adjustment and such dispute has been settled with the municipality. However, the amount of additional property taxes to be
assessed against the Company and the timing of the related payments has not been finalized. As of December 31, 2013, the Company believes it has adequately accrued for the expected assessment.
In April 2010, a sales employee of eCOST.com, Inc. (“eCOST”, t
he former name of Retail Connect) was charged with violating various federal criminal statutes in connection with the sales of eCOST products to certain customers, and approximately $620,000 held in an eCOST deposit account was seized and turned over to the Office of the U.S. Attorney in connection with such activity. In August 2012, the employee pleaded guilty to a misdemeanor. Neither the Company nor eCOST have been charged with any criminal activity, and the Company is seeking the recovery or reimbursement of the funds which are currently classified as other receivables on the December 31, 2013 financial statements. Based on the information available to date, the Company is unable to determine the amount of the loss, if any, relating to the seizure of such funds. No assurance can be given, however, that the seizure of such funds, or the inability of the Company to recover such funds or any significant portion thereof, or any costs and expenses incurred by the Company in connection with this matter, will not have a material adverse effect upon the Company’s financial condition or results of operations.
The Company is subject to claims in the ordinary course of business, including claims of alleged infringement by the Company or its subsidiaries of the patents, trademarks and other intellectual property rights of third parties. PFS is generally required to indemnify its service fee clients against any third party claims alleging infringement by PFS of the patents, trademarks and other intellectual property rights of third parties.
53
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
10. Segment and Geographic Information
The Company is currently organized into two primary operating segments, which generally align with the corporate organization structure. In the first segment, PFSweb is an international provider of various business process outsourcing solutions and operates as a service fee business. In th
e second operating segment, (“Business and Retail Connect”), subsidiaries of the Company purchase inventory from clients and resell the inventory to client customers. In this segment, the Company generally recognizes product revenue.
|
Year Ended
December 31,
2013
|
|
|
Year Ended
December 31,
2012
|
|
Revenues (in thousands):
|
|
|
|
|
|
|
|
PFSweb
|
$
|
152,338
|
|
|
$
|
167,220
|
|
Business and Retail Connect
|
|
100,960
|
|
|
|
120,419
|
|
Eliminations
|
|
(11,695
|
)
|
|
|
(6,076
|
)
|
|
$
|
241,603
|
|
|
$
|
281,563
|
|
Income (loss) from operations (in thousands):
|
|
|
|
|
|
|
|
PFSweb
|
$
|
(5,859
|
)
|
|
$
|
(2,030
|
)
|
Business and Retail Connect
|
|
1,186
|
|
|
|
2,151
|
|
|
$
|
(4,673
|
)
|
|
$
|
121
|
|
|
Year Ended
December 31,
2013
|
|
|
Year Ended
December 31,
2012
|
|
Depreciation and amortization (in thousands):
|
|
|
|
|
|
|
|
PFSweb
|
$
|
10,051
|
|
|
$
|
9,147
|
|
Business and Retail Connect
|
|
159
|
|
|
|
101
|
|
|
$
|
10,210
|
|
|
$
|
9,248
|
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
Capital expenditures (in thousands):
|
|
|
|
|
|
|
|
PFSweb
|
$
|
7,876
|
|
|
$
|
14,449
|
|
Business and Retail Connect
|
|
95
|
|
|
|
263
|
|
|
$
|
7,971
|
|
|
$
|
14,712
|
|
Assets (in thousands):
|
|
|
|
|
|
|
|
PFSweb
|
$
|
98,745
|
|
|
$
|
94,940
|
|
Business and Retail Connect
|
|
47,116
|
|
|
|
52,648
|
|
Eliminations
|
|
(13,825
|
)
|
|
|
(14,117
|
)
|
|
$
|
132,036
|
|
|
$
|
133,471
|
|
54
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Geographic areas in which the Company operates include the United States, Europe (primarily Belgium), and Canada. The following is geographic information by area. Revenues are attributed based on the Company’s domicile.
|
Year Ended
December 31,
2013
|
|
|
Year Ended
December 31,
2012
|
|
Revenues (in thousands):
|
|
|
|
|
|
|
|
United States
|
$
|
192,522
|
|
|
$
|
225,591
|
|
Europe
|
|
44,770
|
|
|
|
51,582
|
|
Canada
|
|
5,988
|
|
|
|
5,817
|
|
Inter-segment eliminations
|
|
(1,677
|
)
|
|
|
(1,427
|
)
|
|
$
|
241,603
|
|
|
$
|
281,563
|
|
Other long-lived assets (in thousands):
|
|
|
|
|
|
|
|
United States
|
$
|
25,549
|
|
|
$
|
25,826
|
|
Europe
|
|
4,168
|
|
|
|
4,929
|
|
Canada
|
|
356
|
|
|
|
448
|
|
|
$
|
30,073
|
|
|
$
|
31,203
|
|
11. Employee Savings Plan
The Company has a defined contribution employee savings plan under Section 401(k) of the Internal Revenue Code. Substantially all full-time and part-time U.S. employees are eligible to participate in the plan. The Company, at its discretion, may match employee contributions
to the plan and also make an additional matching contribution in the form of profit sharing in recognition of the Company’s performance. The Company contributed approximately $0.2 million during each of the years ended December 31, 2013 and 2012, to match an approved percentage of employee contributions.
55