Interest Expense. Interest expense was $0.8 million for the year ended
December 31, 2002 as compared to $0.3 million for the year ended December 31,
2001. The increase in interest expense is due to the consolidation of Holdings.
Interest expense, without the consolidation of Holdings, would have been $0.4
million for the year ended December 31, 2002, an increase compared to the year
ended December 31, 2001, due to an increase in our long-term debt and capital
Interest Income. Interest income was $1.0 million and $1.0 million for
the year ended December 31, 2002 and 2001, respectively. Interest income,
without the consolidation of Holdings, would have been $1.2 million for the
year ended December 31, 2002. Interest income increased as compared to the year
ended December 31, 2001, attributable to interest charged on our subordinated
loan to Supplies Distributors, which was reflected in our consolidated results
for nine months during the year ended December 31, 2002 (through the October 1,
2002 acquisition date), as compared to approximately four months during the
prior year, offset by lower interest rates earned by our cash and cash
equivalents and lower balances of cash and cash equivalents.
Income Taxes. For the year ended December 31, 2002, we recorded a tax
provision of $0.1 million primarily associated with Holdings Canadian and
European operations. We did not record an income tax benefit associated with
our consolidated net loss in our U.S. operations or the net loss from our
Canadian and European service fee segments. A valuation allowance was provided
for our net deferred tax assets as of December 31, 2002, which were primarily
related to our net operating loss carryforwards. For the year ended December
31, 2001, we recorded an income tax benefit of $0.2 million, which primarily
related to a pre-tax loss from our Canadian operations that was able to be
carried back to prior tax years. We did not record an income tax benefit for
our European pre-tax losses in the current or prior period.
Supplies Distributors and Subsidiaries
BSD, Daisytek, IBM and us 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. Also
under these agreements, Daisytek provided financing and credit support to the
BSD Companies and we provided transaction management and fulfillment services
to the BSD Companies. In June 2001, Daisytek notified us and IBM that it did
not intend to renew these agreements upon their scheduled expiration dates.
In July 2001, Supplies Distributors formed its wholly-owned subsidiaries
Supplies Distributors of Canada, Inc. (SDC) and Supplies Distributors S.A.
(SDSA), a Belgium corporation. Supplies Distributors and its subsidiaries act
as master distributors of various IBM and other products and, pursuant to a
transaction management services agreement between us and Supplies Distributors,
we provide transaction management and fulfillment services to Supplies
Distributors, SDC and SDSA. We made an initial equity investment in Holdings
for a 49% voting interest, and IFP made an equity investment for a 51% voting
interest. Certain officers and directors of PFSweb owned, individually, a 9.8%
non-voting interest, and, collectively, a 49% non-voting interest, in IFP. In
addition to our equity investment in Holdings, we have also provided Supplies
Distributors with a subordinated loan that, as of December 31, 2003, had an
outstanding balance of $8.0 million and accrued interest at a rate of
On September 26, 2001, Supplies Distributors purchased all of the stock of
the BSD Companies for a purchase price of $923,000. 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.
Effective October 1, 2002, we purchased the remaining 51% interest in
Holdings from IFP for $0.3 million.
Pursuant to the terms of our transaction management services agreement
with Supplies Distributors, we earned service fees, which are reported as
service fee revenue, affiliate in the accompanying consolidated financial
statements (prior to the consolidation of Holdings results of operations
effective October 1, 2002), of approximately $4.7 million, net of $0.2 million
of pass-through charges, for the year ended December 31, 2002 and $1.4 million,
net of $0.3 million of pass-through charges, for the nine months ended December
31, 2001. For the nine months