38
INVENTORY MANAGEMENT
Prior to September 30, 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. During the quarter ended September 30, 1999, we have
restructured our agreements with IBM so that we will no longer be purchasing or
reselling the IBM product inventory. In addition, 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 $22.3 million at September 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 $111,500 annualized increase or decrease in interest expense based
on the outstanding balance of our payable to Daisytek at September 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
exposure to interest rate risk through the use of derivative instruments
designed to manage risk and minimize interest expense.
34