Supplies Distributors' earnings prior to October 1, 2002. Due to the
consolidation of Supplies Distributors, effective October 1, 2002, we no longer
report equity in earnings of affiliate, on a consolidated basis, for our
ownership of Supplies Distributors.
Interest Expense. Interest expense was $0.5 million for the three months
ended September 30, 2003 as compared to $0.1 million for the three months ended
September 30, 2002. Interest expense was $1.7 million for the nine months ended
September 30, 2003 as compared to $0.3 million for the nine months ended
September 30, 2002. The increase in interest expense is due to the consolidation
of Supplies Distributors. Based on current estimates of interest rates and
borrowing levels, we expect interest expense to be approximately $0.4 million to
$0.7 million in the fourth quarter of 2003.
Interest Income. Interest income was $0.01 million and $0.3 million for the
three months ended September 30, 2003 and 2002, respectively. Interest income
was $0.1 million and $1.0 million for the nine months ended September 30, 2003
and 2002, respectively. Effective October 1, 2002 we now report lower
consolidated interest income resulting from the elimination of interest income
from the Subordinated Note due to PFS from Supplies Distributors upon
consolidating Supplies Distributors. Interest income, prior to the consolidation
of Supplies Distributors, would have been $0.2 million and $0.7 million for the
three and nine months ended September 30, 2003 respectively. Interest income
decreased as compared to the three and nine months ended September 30, 2002,
respectively, attributable to lower interest rates earned by our cash and cash
equivalents and lower balances of cash and cash equivalents.
Income Taxes. For the three and nine months ended September 30, 2003, we
recorded a tax provision of $0.1 million and $0.3 million, respectively,
primarily associated with Supplies Distributors' Canadian and European
operations. We did not record an income tax benefit associated with our
consolidated net loss in our U.S. operations. A valuation allowance has been
provided for our net deferred tax assets as of September 30, 2003, which are
primarily related to our net operating loss carryforwards. For the three and
nine months ended September 30, 2002, we did not record an income tax benefit.
We did not record an income tax benefit for our PFSweb European pre-tax losses
in the current or prior period. Due to the consolidation of Supplies
Distributors, in the future we anticipate that we will continue to record an
income tax provision associated with Supplies Distributors' Canadian and
European results of operations.
SUPPLIES DISTRIBUTORS
In July 2001, we and Inventory Financing Partners, LLC ("IFP") formed
Business Supplies Distributors Holdings, LLC ("Holdings"), and Holdings formed a
wholly-owned subsidiary, Supplies Distributors ("SD"). Concurrently, SD formed
its wholly-owned subsidiaries Supplies Distributors of Canada, Inc. ("SDC") and
Supplies Distributors S.A. ("SDSA"), a Belgium corporation (collectively with
Holdings, SD, SDC and SDSA, "Supplies Distributors"). Supplies Distributors acts
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. 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 September 30, 2003, had an outstanding
balance of $8.0 million and accrued interest at a rate of approximately 10%.
On September 27, 2001, Supplies Distributors entered into short-term credit
facilities with IBM Credit Corporation ("IBM Credit") and IBM Belgium Financial
Services S.A. ("IBM Belgium") to finance its distribution of IBM products. We
provided a collateralized guaranty to secure the repayment of these credit
facilities. As of September 30, 2003, the subsequently amended asset-based
credit facilities provided financing for up to $27.5 million and up to 12.5
million Euros (approximately $14.1 million) with IBM Credit and IBM Belgium,
respectively. These agreements expire in March 2004.
In March 2002, Supplies Distributors also entered into a loan and security
agreement with Congress Financial Corporation (Southwest) ("Congress") to
provide financing for up to $25 million of eligible accounts receivables in the
U.S. and Canada. The Congress facility expires on the earlier of three years or
the date on which the parties to the IBM Master Distributor Agreement shall no
longer operate under the terms of such agreement and/or IBM no longer supplies
products pursuant to such agreement. In March
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