PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PFSweb, Inc. and its subsidiaries, including Supplies Distributors, Inc, and eCOST.com, Inc.
are collectively referred to as the Company; Supplies Distributors refers to Supplies
Distributors, Inc. and its subsidiaries; eCOST refers to eCOST.com, Inc. and its subsidiaries and
PFSweb refers to PFSweb, Inc. and its subsidiaries excluding Supplies Distributors and eCOST.
PFSweb is an international provider of integrated business process outsourcing services to
major brand name companies seeking to maximize their supply chain efficiencies and to extend their
traditional and e-commerce initiatives in the United States, Canada, and Europe. PFSweb offers such
services as professional consulting, technology collaboration, managed web hosting and internet
application development, order management, web-enabled customer contact centers, customer
relationship management, financial services including billing and collection services and working
capital solutions, information management, facilities and operations management, kitting and
assembly services, and international fulfillment and distribution services.
Supplies Distributors Overview
Supplies Distributors, PFSweb and International Business Machines Corporation (IBM) have
entered into master distributor agreements whereby Supplies Distributors acts as a master
distributor of various products, primarily IBM product. Pursuant to transaction management services
agreements between PFSweb and Supplies Distributors, PFSweb provides transaction management and
fulfillment services to Supplies Distributors.
Supplies Distributors has obtained certain financing (see Notes 3 and 4) that allows it to
fund the working capital requirements for the sale of primarily IBM products. Pursuant to the
transaction management services agreements, PFSweb provides to Supplies Distributors such services
as managed web hosting and maintenance, procurement support, web-enabled customer contact center
services, customer relationship management, financial services including billing and collection
services, information management, and international distribution services. Additionally, IBM and
Supplies Distributors have outsourced the product demand generation to a third party. 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 PFSwebs and Supplies
Distributors 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.
eCOST is a multi-category online discount retailer of new, close-out and recertified
brand-name merchandise, selling products primarily to customers in the United States. eCOST offers
products in several merchandise categories, including computer hardware and software, home
electronics, digital imaging, watches and jewelry, housewares, DVD movies, video games and
cellular/wireless. eCOST carries products from leading manufacturers such as Apple, Canon,
Citizen, Denon, Hewlett-Packard, Nikon, Onkyo, Seiko and Toshiba.
The Companys liquidity has been negatively impacted as a result of the merger with eCOST.
During 2006 eCOST experienced a significant net usage of cash primarily due to losses incurred. As
a result, during the process of transitioning and integrating eCOSTs operations, the Company has
had to support eCOSTs cash needs to help it achieve a stabilized operational position. The amount
of further cash needed to support eCOST operations will depend upon the financing available as well
as eCOSTs ability to improve its financial results.
In the event eCOST is unable to increase its revenue and/or gross profit from its present
levels, it may fail to