would be required to repay all amounts outstanding thereunder. In
particular, if PFS service fee revenue declines from
expected levels and it is unable to reduce costs to correspond to such reduced revenue levels or if
Supplies Distributors revenue or gross profit declines from expected levels, such events may result
in a breach of one or more of the financial covenants required under their working capital lines of
credit. In such event, absent a waiver, the working capital lender would be entitled to accelerate
all amounts outstanding thereunder and exercise all other rights and remedies, including sale of
collateral and payment under our Company parent guarantee. A requirement to accelerate the repayment of
the credit facility obligations would have a material adverse impact on our financial condition and
results of operations. We can provide no assurance that we will have the financial ability to repay
all of such obligations. As of March 31, 2011, we were in compliance with all debt covenants.
Further, any non-renewal of any of our credit facilities would have a material adverse impact on
our business and financial condition. We do not have any other material financial commitments,
although future client contracts may require capital expenditures and lease commitments to support
the services provided to such clients.
In the future, we may attempt to acquire other businesses or seek an equity or strategic
partner to generate capital or expand our services or capabilities in connection with our efforts
to grow our business. Acquisitions involve certain risks and uncertainties and may require
additional financing. Therefore, we can give no assurance with respect to whether we will be
successful in identifying businesses to acquire or an equity or strategic partner, whether we or
they will be able to obtain financing to complete a transaction, or whether we or they will be
successful in operating the acquired business.
We receive municipal tax abatements in certain locations. During 2004 we received notice from
a municipality that we did not satisfy certain criteria necessary to maintain the abatements. In
December 2006, we received notice that the municipal authority planned to make an adjustment to our
tax abatement. We disputed the adjustment and such dispute has been settled with the municipality.
However, the amount of additional property taxes to be assessed against us and the timing of the
related payments has not been finalized. As of March 31, 2011, we believe we have adequately
accrued for the expected assessment.
In April 2010, a sales employee of eCOST was charged with violating various federal criminal
statutes in connection with the sales of eCOST products to certain customers, and approximately
$620,000 held in an eCOST deposit account was seized and turned over to the Office of the U.S.
Attorney in connection with such activity. We received subpoenas from the Office of the U.S.
Attorney requesting information regarding the employee and other matters, and have responded to
such subpoenas and are fully cooperating with the Office of the U.S. Attorney. We have commenced
our own investigation into the actions of the employee. Neither the Company nor eCOST have been
charged with any criminal activity, and we intend to seek the recovery or reimbursement of the
funds, which are currently classified as other receivables in the March 31, 2011 financial
statements. Based on the information available to date, we are unable to determine the amount of
the loss, if any, relating to the seizure of such funds. No assurance can be given, however, that
the seizure of such funds, or our inability to recover such funds or any significant portion
thereof, or any costs and expenses we may incur in connection with such matter will not have a
material adverse effect upon our financial condition or results of operations.
Supplies Distributors Financing
To finance their distribution of IPS products, Supplies Distributors and its subsidiaries have
short-term credit facilities with IBM Credit LLC (IBM Credit) and IBM Belgium Financial Services
S.A. (IBM Belgium). We have provided a collateralized guarantee to secure the repayment of these
credit facilities. These asset-based credit facilities provided financing for up to $25.0 million
and up to 16 million euros (approximately $22.7 million at March 31, 2011) with IBM Credit and IBM
Belgium, respectively. These agreements expire in March 2012.
Supplies Distributors also has a loan and security agreement with Wells Fargo Bank, National
Association (Wells Fargo) to provide financing for up to $25 million of eligible accounts
receivables in the United States and Canada. The Wells Fargo facility expires on the earlier of
March 2014 or the date on which the parties to the IPS master distributor agreement no longer
operate under the terms of such agreement and/or IPS no longer supplies products pursuant to such
Supplies Distributors European subsidiary had a factoring agreement with Fortis Commercial