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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 December 15,
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 during 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 $0.2
million during the six months ended September 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.
Under the most reasonably likely worst case scenario, we do not anticipate
more than isolated, temporary disruptions of our operations caused by Y2K
failures affecting either our operations or those of our major clients. We
expect that our technically trained personnel, working in cooperation with major
clients and key service providers, should be able to address Y2K system issues
that may arise. To the extent that our systems or those of our key providers are
unable to provide services due to Y2K issues, we believe that we may have to use
one or more of our contingency plans that would, in the short-term, involve
numerous operational inconveniences and inefficiencies that would increase costs
and divert management's time and attention from its ordinary business
activities. Many risks, however, such as the failure to perform by public
utilities, telecommunications providers, and financial institutions, and the
impact of the Y2K issue on the economy as a whole, are outside our control and
could adversely affect the company and our ability to conduct business. While we
believe that we have made a significant effort to address all anticipated risks
within our control, this is an event without precedent; consequently, there can
be no assurance that the Y2K issue will not have a material adverse impact on
our financial condition, operating results, or business.
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 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.
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