BUSINESS SUPPLIES DISTRIBUTORS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OVERVIEW AND BASIS OF PRESENTATION:
PFSweb, Inc. ("PFS"), Daisytek International, Inc. ("Daisytek"), Business
Supplies Distributors, Inc., (a Daisytek subsidiary -- "BSD"), and International
Business Machines Corporation ("IBM") were parties to various Master Distributor
Agreements that had various scheduled expiration dates through September 2001.
Under these agreements, BSD and its affiliates Business Supplies Distributors
Europe B.V. ("BSD Europe"), a Daisytek subsidiary, and BSD (Canada) Inc., a
Daisytek subsidiary ("BSD Canada" and together with BSD and BSD Europe, the "BSD
Companies"), acted as master distributors of various IBM products. Daisytek
provided financing and credit support to the BSD Companies and PFS provided
transaction management and fulfillment services to the BSD Companies. On June 8,
2001, Daisytek notified PFS and IBM that it did not intend to renew these
agreements upon their scheduled expiration dates.
On July 3, 2001, PFS and Inventory Financing Partners, LLC ("IFP") formed
Business Supplies Distributors Holdings, LLC ("Holdings"), and Holdings formed a
wholly-owned subsidiary, Supplies Distributors, Inc. ("Supplies Distributors").
Concurrently, Supplies Distributors formed its wholly-owned subsidiaries
Supplies Distributors of Canada, Inc. ("SDC") and Supplies Distributors S.A.
("SDSA"), a Belgium corporation. Supplies Distributors, SDSA, PFS and IBM
entered into new Master Distributor Agreements to replace the prior agreements
(see Note 4). Under the new agreements, Supplies Distributors and SDSA act as
master distributors of various IBM products and, pursuant to a transaction
management services agreement between PFS and Supplies Distributors, PFS
provides transaction management and fulfillment services to Supplies
Distributors. On September 26, 2001, Supplies Distributors purchased all of the
stock of the BSD Companies for a purchase price of $923,000 and incurred $60,000
of acquisition costs (see Note 3). In conjunction with the purchase, BSD and
Supplies Distributors were merged with Supplies Distributors being the surviving
corporation. Effective December 31, 2001, BSD Canada and SDC were amalgamated,
with SDC being the surviving corporation.
All references to the "Company" include Holdings and Supplies Distributors
and its subsidiaries.
The Company, through its subsidiaries, is primarily a master distributor of
various IBM products. Supplies Distributors and SDSA have obtained certain
financing (see Note 6 and 7) that allows them to fund the working capital
requirements for the sale of IBM products. Pursuant to the transaction
management services agreement between PFS and Supplies Distributors, PFS
provides to Supplies Distributors and SDSA such services as managed website
hosting and maintenance, procurement support, web-enabled customer contact
center services, customer relationship management, financial services including
billing and collection services, information management, selected financial
services and international distribution services. Additionally, IBM and Holdings
have outsourced its product demand generation to Global Marketing Services, Inc.
("GMS"). The Company, via its arrangements with GMS and PFS, sells its products
in the United States, Canada and Europe.
All of the agreements between PFS and Holdings were made in the context of
a related party relationship and were negotiated in the overall context of PFS'
and Holdings' prior arrangement with IBM. Although management generally believes
that the terms of these agreements are consistent with fair market values, there
can be no assurance that the prices charged to or by each company under these
arrangements are not higher or lower than the prices that may be charged by, or
to, unaffiliated third parties for similar services.
2. SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
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