Distributors provides a reserve for estimated returns and allowances and offers terms to its customers that it believes are standard for its industry.
Freight costs billed to customers are reflected as components of product revenue. Freight
costs incurred are recorded as a component of cost of goods sold.
Under the master distributor agreements (see Note 6), Supplies Distributors bills IPS for
reimbursements of certain expenses, including: pass through customer marketing programs, including
rebates and coop funds; certain freight costs; direct costs incurred in passing on any price
decreases offered by IPS to Supplies Distributors or its customers to cover price protection and
certain special bids; the cost of products provided to replace defective product returned by
customers; and certain other expenses as defined. Supplies Distributors includes these reimbursable
amounts as they are incurred with a corresponding reduction in either inventory or cost of product
revenue. Supplies Distributors also reflects pass through customer marketing programs as a
reduction of both product revenue and cost of product revenue.
eCOST recognizes product revenue, net of estimated returns, promotional discounts, credit card
fraud and chargebacks, when both title and risk of loss to the products has transferred to the
customer, which eCOST has determined to occur upon receipt of products by the customer. eCOST
generally requires payment by credit card upon placing an order, and to a lesser extent, grants
credit to business customers on normal credit terms. eCOST permits its customers to return
defective product for credit against other purchases.
For product sales shipped directly from eCOSTs vendors to end customers, eCOST records
revenue and related costs at the gross amounts charged to the customer and paid to the vendor based
on an evaluation of certain criteria. eCOSTs evaluation is performed based on a number of factors,
including whether eCOST is the primary obligor in the transaction, has latitude in establishing
prices and selecting suppliers, takes title to the products sold upon shipment, bears credit risk,
and bears inventory risk for returned products that are not successfully returned to third-party
suppliers. eCOST recognizes revenue on extended warranties and other services for which it is not
the primary obligor on a net basis.
The Companys service fee revenue primarily relates to its (1) distribution services, (2)
order management/customer care services and (3) the reimbursement of out-of-pocket and third-party
expenses. The Company typically charges its service fee revenue on a cost-plus basis, a percent of
shipped revenue basis or a per transaction basis, such as a per item basis for fulfillment services
or a per minute basis for web-enabled customer contact center services. Additional fees are billed
for other services.
Distribution services relate primarily to inventory management, product receiving, warehousing
and fulfillment (i.e., picking, packing and shipping) and facilities and operations management.
Service fee revenue for these activities is recognized as earned, which is either (i) on a per
transaction basis or (ii) at the time of product fulfillment, which occurs at the completion of the
Order management/customer care services relate primarily to taking customer orders for the
Companys clients products via various channels such as telephone call-center, electronic or
facsimile. These services also entail addressing customer questions related to orders, as well as
cross-selling/up-selling activities. Service fee revenue for this activity is recognized as the
services are rendered. Fees charged to the client are on a per transaction basis based on either
(i) a pre-determined fee per order or fee per telephone minutes incurred, (ii) a per dedicated
agent fee, or (iii) are included in the product fulfillment service fees that are recognized on
The Companys billings for reimbursement of out-of-pocket expenses, including travel and
certain third-party vendor expenses such as shipping and handling costs and telecommunication
charges are included in pass-through revenue. The related reimbursable costs are reflected as cost
of pass-through revenue.
The Companys cost of service fee revenue, representing the cost to provide the services
described above, is recognized as incurred. Cost of service fee revenue also includes certain costs
associated with technology collaboration and ongoing technology support that include maintenance,
web hosting and other ongoing programming activities. These activities are primarily performed to
support the distribution and order management/customer care services and are recognized as