| SEC Filings | Section 16 Filings Only | ||||||||||||||||||
Both the renewed facility with IBM Global Finance here in the US, as well as the new direct terms agreement that we anticipate entering, are expected to provide adequate financing for us as we continue to support this important client relationship going forward. As you may recall in December 2011, we issued a press release regarding the PFSweb share repurchase program, which authorized the Company to repurchase up to $1 million of shares in the open market. While we continue to closely monitor the activity in our shares, as of today, we have not yet repurchased any shares. As Mark mentioned previously, we’re in the process of expanding our call center operations and are relocating to a new facility in downtown Dallas in the next several weeks. We’re also moving to a new headquarters in Allen, TX as our existing lease expires at the end of March 2012. This is in addition to moving our Canadian call center and distribution operations to a larger facility in late 2011. During the fourth quarter of 2011, we incurred approximately $0.2 million of incremental costs towards these relocation-related activities, and we expect that we will continue to incur ongoing incremental relocation-related costs totaling between $0.7 million to $0.9 million over the next several quarters. Such costs include duplicate facility rent costs as we prepare the facilities for occupancy, as well as certain move-in related costs, which although generally being funded by the landlord have to be recognized for accounting purposes as expense in the period incurred. Consistent with 2011, these incremental costs will be excluded in computing our adjusted EBITDA. While the net operating cost per square foot of these new facilities will be relatively consistent with our prior rental costs, there will be some nuances related to the accounting treatment for these leases. First, both leases provide for tenant improvement allowances from the landlords. These tenant improvements are expected to total approximately $7 million in aggregate for both locations, of which approximately $1 million had been incurred and reported as of December 31, 2011. While these improvements will be funded by the landlord, from an accounting standpoint, we will recognize the full amount of these tenant improvements as capital expenditures in our property and equipment account, and we will also record a corresponding deferred credit. The property and equipment portion will be amortized over the useful life of the related assets into depreciation expense, and the deferred credit will be treated as a reduction in rent expense on a streamlined basis over the life of the lease. As a result, we will see an increase in depreciation expense beginning in 2012 relating to the amortization of these tenant improvements. In addition to these tenant improvements, we will also incur an additional approximate $1.5 million of furniture and fixture components applicable to these new facilities that are planned to be financed under various equipment leases, and we will also continue to make other capital expenditures to support our ongoing operations, including new client activity, and this will include a planned upgrade in 2012 of our IBM iSeries hardware platform. We expect to fund the majority of these capital expenditures with vendor financing, equipment leasing arrangements or client funding. As we look ahead to 2012, we believe that service fee revenue will continue to grow, and we are expecting it to increase by 20% or more in 2012 compared to 2011. We expect the gross margins for our service fee segment to be approximately 25%, though it might be slightly lower than that earlier in the year. We also expect SG&A to increase from 2011 as we continue to support our continued growth. We do expect depreciation expense to increase year over year in relation to the higher level of capital expenditures made in 2011 and forecasted in 2012, including the depreciation on the tenant improvements of the new facilities. In the March quarter 2012, we expect to also record a charge currently estimated to be approximately $0.5 million related to the early termination of an equipment lease, which we are no longer going to be using. This incremental charge will also be excluded from our adjusted EBITDA results. For our Retail and Business Connect segments, we currently expect further declining product revenues for 2012, down to approximately $120 million to $130 million for the year as a result of the continued restructuring and reorganization activities of our primary client in this business. We believe the impact of these revenue reductions will be partially offset by the improving gross margin percentage as we currently expect to earn in this business during the year with an overall target of approximately 8% as compared to approximately 7% in 2011. On an overall aggregate basis, with the various business segments’ components I just discussed, we’re targeting an increase to our service fee equivalent revenue of approximately 20% for 2012 as compared to 2011 and an improvement in adjusted EBITDA to a level of $8 million to $10 million during that period. Now I would like to turn the call back over to Mark for some closing comments. Mark Layton —PFSweb, Inc.—Chairman & CEO
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