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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
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Commission File Number 000-28275
PFSweb, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 75-2837058
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(State of Incorporation) (I.R.S. Employer I.D. No.)
500 NORTH CENTRAL EXPRESSWAY, PLANO, TEXAS 75074
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 881-2900
-----------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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At August 3, 2000 there were 17,870,000 shares of registrant's common stock
outstanding.
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PFSweb, INC. AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 2000
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
-----------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 2000
(unaudited) and March 31, 2000.......................................... 3
Unaudited Interim Condensed Consolidated Statements of
Operations for the Three Months Ended June 30, 2000 and 1999............ 4
Unaudited Interim Condensed Consolidated Statements of Cash
Flows for the Three Months Ended June 30, 2000 and 1999................. 5
Notes to Unaudited Interim Condensed Consolidated Financial
Statements.............................................................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................................... 9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.............................. 16
Item 6. Exhibits and Reports on Form 8-K ................................................ 16
SIGNATURES......................................................................................... 17
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PFSweb, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
June 30, March 31,
2000 2000
---------- --------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents ................................................ $ 22,113 $ 24,896
Accounts receivable, net of allowance for doubtful accounts of
$501 and $690 at June 30, 2000 and March 31, 2000, respectively ...... 7,967 8,892
Receivable from Daisytek ................................................. 2,912 --
Other receivables ........................................................ 1,729 3,482
Prepaid expenses and other current assets ................................ 1,691 1,052
-------- --------
Total current assets ....................................... 36,412 38,322
-------- --------
NET PROPERTY AND EQUIPMENT ................................................... 21,557 21,555
OTHER ASSETS ................................................................. 501 528
-------- --------
Total assets ............................................... $ 58,470 $ 60,405
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ........................................ $ 281 $ 274
Trade accounts payable ................................................... 5,190 6,277
Accrued expenses ......................................................... 3,336 3,525
Payable to Daisytek ...................................................... -- 272
-------- --------
Total current liabilities .................................. 8,807 10,348
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CAPITAL LEASE OBLIGATIONS, less current portion .............................. 2,342 2,407
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COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000,000 shares authorized; none issued
and outstanding ...................................................... -- --
Common stock, $0.001 par value; 40,000,000 shares authorized;
17,870,000 shares issued and outstanding ............................. 18 18
Additional paid-in capital ............................................... 50,689 50,673
Retained deficit ......................................................... (3,074) (2,836)
Accumulated other comprehensive loss ..................................... (312) (205)
-------- --------
Total shareholders' equity ................................. 47,321 47,650
-------- --------
Total liabilities and shareholders' equity ................. $ 58,470 $ 60,405
======== ========
The accompanying notes are an integral part of these unaudited interim
condensed consolidated statements.
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PFSweb, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended
June 30,
--------------------
2000 1999
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REVENUES:
Product revenue ................................. $ -- $ 32,620
Service fee revenue ............................. 13,370 3,191
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Total revenues .............................. 13,370 35,811
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COSTS OF REVENUES:
Cost of product revenue ......................... -- 30,793
Cost of service fee revenue ..................... 8,645 2,231
-------- --------
Total costs of revenues ..................... 8,645 33,024
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Gross profit ................................ 4,725 2,787
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ........ 5,230 2,788
-------- --------
Loss from operations ........................ (505) (1)
INTEREST (INCOME) EXPENSE, net ...................... (316) 326
-------- --------
Loss before income taxes .................... (189) (327)
PROVISION (BENEFIT) FOR INCOME TAXES ................ 49 (129)
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NET LOSS ............................................ $ (238) $ (198)
======== ========
NET LOSS PER SHARE:
Basic and diluted .............................. $ (0.01) $ (0.01)
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic and diluted .............................. 17,870 14,305
======== ========
The accompanying notes are an integral part of these unaudited interim
condensed consolidated statements.
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PFSweb, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three Months Ended
June 30,
--------------------
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................. $ (238) $ (198)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization .......................................... 1,380 216
Non-cash compensation expense .......................................... 16 --
Provision for doubtful accounts ........................................ 175 105
Deferred income tax provision (benefit) ................................ -- (15)
Changes in operating assets and liabilities:
Accounts and other receivables ..................................... (2,057) (665)
Inventories, net ................................................... -- 5,264
Prepaid expenses and other current assets .......................... (639) 200
Accounts payable and accrued expenses .............................. (1,540) (9,312)
-------- --------
Net cash used in operating activities ......................... (2,903) (4,405)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ....................................... (1,387) (2,077)
Decrease (increase) in other assets ....................................... 1,675 (163)
-------- --------
Net cash provided by (used in) investing activities ........... 288 (2,240)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in long-term debt ................................................ (58) --
Increase in payable to Daisytek, net ...................................... -- 8,460
-------- --------
Net cash provided by (used in) financing activities ........... (58) 8,460
-------- --------
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS ......................... (110) 6
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS .......................... (2,783) 1,821
CASH AND CASH EQUIVALENTS, beginning of period ................................ 24,896 587
-------- --------
CASH AND CASH EQUIVALENTS, end of period ...................................... $ 22,113 $ 2,408
======== ========
The accompanying notes are an integral part of these unaudited interim
condensed consolidated statements.
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PFSweb, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. OVERVIEW AND BASIS OF PRESENTATION:
In June 1999, Daisytek International Corporation ("Daisytek") created a
separate wholly-owned subsidiary named PFSweb, Inc. (the "Company" or "PFSweb"),
a Delaware corporation, to become a holding company for certain of Daisytek's
wholly-owned subsidiaries ("PFS") in contemplation of an initial public offering
(the "Offering") of PFSweb. Daisytek contributed $20,000 for 14,305,000 shares
of common stock of PFSweb. In December 1999, PFSweb sold 3,565,000 shares of
common stock, including the underwriters' over-allotment, at a price of $17 per
share. Prior to the Offering, the financial position, results of operations and
cashflows of PFS were referred to as the combined financial statements of
PFSweb. Subsequent to the Offering and for all periods presented herein, the
financial position, results of operations and cash flows of the Company are
referred to as the consolidated financial statements of PFSweb, Inc. and
subsidiaries.
PFSweb is an international provider of transaction management services to
both traditional and e-commerce companies in the United States, Canada and
Europe. The company offers such services as professional consulting services,
e-marketplace order management, Web-enabled customer contact centers, customer
lifecycle management, billing and collection services, information management,
international distribution services.
On June 8, 2000, the Daisytek Board of Directors approved the separation of
PFSweb from Daisytek by means of a tax-free dividend of Daisytek's remaining
ownership of PFSweb after receiving a favorable ruling from the IRS to the
effect that the distribution by Daisytek of its shares of PFSweb stock would be
tax-free to Daisytek and to Daisytek's shareholders for U.S. federal income tax
purposes. The distribution of Daisytek's 14,305,000 shares of PFSweb occurred at
the close of business on July 6, 2000, to Daisytek shareholders of record as of
June 19, 2000.
On June 8, 2000, the Board of Directors declared a dividend distribution of
one preferred stock purchase right (a "Right") for each share of the Company's
common stock outstanding on July 6, 2000. Each Right entitles the registered
shareholders to purchase from the Company one one-thousandth of a share of
preferred stock at an exercise price of $67, subject to adjustment. The Rights
are not currently exercisable, but would become exercisable if certain events
occurred relating to a person or group acquiring or attempting to acquire 15
percent or more of the Company's outstanding shares of common stock. The Rights
expire on July 6, 2010, unless redeemed or exchanged by the Company earlier.
The unaudited interim condensed consolidated financial statements as of
June 30, 2000, and for the three months ended June 30, 2000 and 1999, have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC") and are unaudited. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations promulgated by the SEC. For all periods
presented, certain expenses reflected in the unaudited interim condensed
consolidated financial statements include an allocation of certain Daisytek
corporate expenses and infrastructure costs. Management believes that the
methods used to allocate expenses are reasonable, although the cost of services
could be higher if obtained from other sources. In addition, certain service fee
revenue and cost of service fee revenue have been reflected by PFSweb for
services subcontracted to PFSweb by Daisytek. The service fee revenue, cost of
service fee revenue and allocated expenses have been reflected on bases that
Daisytek and PFSweb consider to be a reasonable reflection of the services
provided and revenue earned by PFSweb and the utilization of services provided
by Daisytek and the benefit received by PFSweb. The financial information
included herein may not reflect the consolidated financial position, operating
results, and cash flows of PFSweb in the future or what it would have been had
PFSweb been a separate, stand-alone entity during the periods presented.
In the opinion of management and subject to the foregoing, the unaudited
interim condensed consolidated financial statements of the Company include all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of the Company's financial position as of June 30, 2000, its
results of operations and its results of cash flows for the three months ended
June 30, 2000 and
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PFSweb, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1999. Results of the Company's operations for interim periods may not be
indicative of results for the full fiscal year.
Certain prior period data has been reclassified to conform to the current
period presentation. These reclassifications had no effect on previously
reported net income, shareholders' equity or cash flows.
2. COMPREHENSIVE LOSS (IN THOUSANDS):
Three Months Ended
June 30,
------------------
2000 1999
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Net loss ............................ $(238) $(198)
Comprehensive income adjustments:
Foreign currency translation
adjustment .................. (107) (57)
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Comprehensive loss ................. $(345) $(255)
===== =====
3. NET LOSS PER COMMON SHARE AND COMMON SHARE EQUIVALENT:
Basic and diluted net loss per common share attributable to PFSweb common
stock were determined based on dividing the loss available to common
stockholders by the weighted-average number of common shares outstanding. For
purposes of this calculation, the 14,305,000 shares of PFSweb issued prior to
the Offering were treated as outstanding for the periods presented prior to the
Offering. There were no potentially dilutive securities outstanding during the
period presented prior to the Offering. During the three months ended June 30,
2000, outstanding options to purchase common shares were anti-dilutive and have
been excluded from the weighted average share computation.
4. TRANSACTIONS WITH DAISYTEK AND OTHER RELATED PARTIES:
The Company's costs and expenses include allocations from Daisytek for
certain general administrative services including information technology,
financial, treasury, legal, insurance and other corporate functions as well as
certain costs of operations including facility charges. These allocations have
been estimated on bases that Daisytek and the Company consider to be a
reasonable reflection of the utilization of services provided or the benefit
received by the Company. The methods used for allocation of expenses from
Daisytek were either (i) percentage of: revenue, shipped orders, or number of
employees or (ii) management's best estimate. However, these allocations of
costs and expenses do not necessarily indicate the costs and expenses that would
have been or will be incurred by the Company on a stand-alone basis. Management
estimates that incremental selling, general and administrative expenses
associated with PFSweb operating as a stand-alone publicly traded company,
including executive management, overhead and public company costs, insurance and
risk management costs, and other costs would have been approximately $0.2
million and $0.5 million for the three months ended June 30, 2000 and 1999,
respectively.
The Company's product revenue from sales to Daisytek was zero and $4.1
million for the three months ended June 30, 2000 and 1999, respectively.
During the quarter ended September 30, 1999 and in connection with the
restructuring of certain IBM master distribution agreements, the Company
transferred to Daisytek certain related product inventory, accounts receivable
and accounts payable that it held under its prior agreements. In consideration
of this transfer, the Company received the net book value of these assets and
liabilities of approximately $20 million and reduced its payable to Daisytek by
a corresponding amount.
In conjunction with the successful completion of the Offering, PFSweb
entered into agreements with Daisytek, including a tax sharing agreement, a
transaction management services agreement, a transition services agreement and a
master separation agreement which are expected to have a significant impact on
the financial position and results of operations of PFSweb.
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PFSweb, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
In addition, included in the financial statements are service fee revenues
and cost of service fee revenue which have been reflected by PFSweb for certain
services subcontracted to PFSweb by Daisytek under Daisytek's contractual
agreements.
Service fee revenues charged to Daisytek under (i) the new IBM contracts,
entered into during the quarter ended September 30, 1999, (ii) terms of the
transaction management services agreement with Daisytek and (iii) for certain
subcontracted services, were $7.5 million for the three months ended June 30,
2000. Service fee revenues applicable to the subcontracted service were $0.2
million for the three months ended June 30, 1999.
5. SUBSEQUENT EVENT
In connection with the completion of the spin-off, as of July 6, 2000, all
outstanding Daisytek options ("Daisytek Pre-spin Options") were adjusted and/or
replaced with Daisytek options (the "Daisytek Post-spin Options") and PFSweb
options (the "PFSweb Post-spin Options," and together with the Daisytek
Post-spin Options, the "Replacement Options").
In general, the exercise price and the number of shares subject to each of
the Replacement Options was established pursuant to a formula designed to ensure
that: (1) the aggregate "intrinsic value" (i.e. the difference between the
exercise price of the option and the market price of the common stock underlying
the option) of the Replacement Option did not exceed the aggregate intrinsic
value of the outstanding Daisytek Pre-spin Option which is replaced by such
Replacement Option immediately prior to the spin-off, and (2) the ratio of the
exercise price of each option to the market value of the underlying stock
immediately before and after the spin-off was preserved.
Substantially all of the other terms and conditions of each Replacement
Option, including the time or times when, and the manner in which, each option
is exercisable, the duration of the exercise period, the permitted method of
exercise, settlement and payment, the rules that apply in the event of the
termination of employment of the employee, the events, if any, that may give
rise to an employee's right to accelerate the vesting or the time or exercise
thereof and the vesting provisions, is the same as those of the replaced
Daisytek Pre-spin Option, except that option holders who are employed by one
company are permitted to exercise, and are subject to all of the terms and
provisions of, options to acquire shares in the other company as if such holder
was an employee of such other company.
As a result of the spin-off, on July 6, 2000, 3,479,697 PFSweb Post-spin
Options, with a weighted average exercise price of $7.26, were issued to
Daisytek and PFSweb officers, directors and employees.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of our results of operations and
financial condition should be read in conjunction with the unaudited interim
condensed consolidated financial statements and related notes appearing
elsewhere in this Form 10-Q.
FORWARD-LOOKING INFORMATION
We have made forward-looking statements in this Report on Form 10-Q. These
statements are subject to risks and uncertainties, and there can be no guarantee
that these statements will prove to be correct. Forward-looking statements
include assumptions as to how we may perform in the future. When we use words
like "seek," "strive," "believe," "expect," "anticipate," "predict,"
"potential," "continue," "will," "may," "could," "intend," "plan," "target" and
"estimate" or similar expressions, we are making forward-looking statements. You
should understand that the following important factors, in addition to those set
forth above or elsewhere in this Report on Form 10-Q, our Prospectus dated
December 2, 1999, and our Form 10-K for the year ended March 31, 2000, could
cause our results to differ materially from those expressed in our
forward-looking statements. These factors include:
o our reliance on the fees generated by the transaction volume or product
sales of our clients;
o the impact of strategic alliances;
o trends in the market for our services;
o trends in e-commerce;
o whether we can continue and manage growth;
o changes in the trend toward outsourcing;
o increased competition;
o effects of changes in profit margins;
o the unknown effects of possible system failures and rapid changes in
technology;
o trends in government regulation; and
o our relationship with and separation from Daisytek.
We have based these statements on our current expectations about future
events. Although we believe that the expectations reflected in our
forward-looking statements are reasonable, we cannot guarantee you that these
expectations actually will be achieved. This Report on Form 10-Q also contains
other forward-looking statements, including those related to our completed
spin-off from Daisytek. The realization of the anticipated results could take
longer than expected and implementation difficulties and market factors could
alter anticipated results. These factors may cause our actual results to differ
materially from any forward-looking statements.
OVERVIEW
We are an international provider of transaction management services to both
traditional and e-commerce companies. We derive our revenues from a broad range
of services, including order management, Web-enabled customer contact centers,
billing services, information management, international fulfillment and
distribution services and professional consulting services. Our distribution
services are conducted at our warehouses and include picking, packing and
shipping our clients' customer orders. We offer our services as an integrated
solution, which enables our clients to outsource their
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complete transaction management needs to a single source and to focus on their
core competencies. We currently provide transaction management services to over
30 clients that operate in a range of vertical markets, including apparel,
computer products, printers, sporting goods, cosmetics and consumer electronics,
among others.
Our service fee revenue is typically charged on a percent of shipped revenue
basis or a per-transaction basis, such as a per-minute basis for Web-enabled
customer contact center services and a per-item basis for fulfillment services.
Additional fees are billed for other services. We price our services based on a
variety of factors, including the depth and complexity of the services provided,
the amount of capital expenditures or systems customization required, the length
of contract and other factors. Many of our contracts with our clients involve
third-party vendors who provide additional services such as package delivery.
The costs we are charged by these third-party vendors for these services are
passed on to our clients (and, in many cases, our clients' customers) and are
not reflected in our revenue or expense. Historically, our services have also
included purchasing and reselling client product inventory. In these
arrangements, our product revenue was recognized at the time product was
shipped. During the quarter ended September 30, 1999, our primary client
agreement under which we previously purchased and sold inventory was
restructured to provide transaction management services only on a service fee
basis.
Our expenses are comprised of:
o on an historical basis prior to September 30, 1999, cost of product
revenue, which consists of the purchase price of product sold and net
freight costs;
o cost of service fee revenue, which consists primarily of compensation
and related expenses for our Web-enabled customer contact center
services, international fulfillment and distribution services and
professional consulting services, and other fixed and variable
expenses directly related to providing services under the terms of fee
based contracts, including certain occupancy and information
technology costs and depreciation and amortization expenses; and
o selling, general and administrative expenses, which consist primarily
of compensation and related expenses for sales and marketing staff,
executive, management and administrative personnel and other overhead
costs, including certain occupancy and information technology costs
and depreciation and amortization expenses. In addition, on an
historical basis, certain direct contract costs related to our IBM
master distributor agreements have been reflected as selling and
administrative expenses.
ADJUSTED FINANCIAL PRESENTATION
We believe our June 30, 1999 historical financial statements may not provide
a meaningful comparison to our current and future financial statements for the
reasons described below.
In 1996, we entered into an agreement with the printer supplies division of
IBM. Under this agreement, we provided IBM with various transaction management
services, such as customer contact center services and order fulfillment and
distribution. We also served as an IBM master distributor of printer supply
products. Under this master distributor arrangement, we purchased the printer
supply products from IBM and resold them to IBM customers. Following our initial
agreement with the printer supplies division, we entered into several similar
agreements with other divisions of IBM, both in the U.S. and Europe, and
expanded our then existing agreements to include more product lines.
During the quarter ended September 30, 1999, we, Daisytek and IBM entered
into new agreements to conform to our current business model. Under these new
agreements, Daisytek acts as the master distributor of the IBM products and we
will continue to provide various transaction management services. As part of
this restructuring, we transferred to Daisytek the IBM product inventory, which
we held as the master distributor, together with our customer accounts
receivable and our accounts payable owing to IBM in respect of the product
inventory. The purpose of the restructuring was to separate the master
distributor
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and transaction management responsibilities between ourselves and Daisytek so
that each could focus on its core competencies.
As a result of the restructuring of the IBM agreements, our June 30, 1999
historical financial statements may not provide a meaningful comparison to our
current and future financial statements. This is because, as a master
distributor under our prior agreements, we recorded revenue as product revenue
as we sold the product to IBM customers. Similarly, our gross profit was based
upon the difference between our revenue from product sales and the cost of
purchasing the product from IBM. Currently, however, our revenue under the new
IBM agreements is service fee revenue that is payable by Daisytek and is based
upon a variable percentage of Daisytek's gross profit arising from its IBM
product sales.
As a result of this restructuring of our IBM agreements, our total revenues
arising under our new IBM agreements will be reduced, as compared to the total
revenues arising under the prior IBM agreements. However, our gross profit
margin as a percent of service fee revenue under the new IBM agreements is
anticipated to be significantly higher as compared to our gross profit margin as
a percent of product revenue under the prior IBM agreements.
In addition, upon completion of the Offering in December 1999, we entered
into a new transaction management services agreement with Daisytek. Under this
agreement, we receive service fee revenue based upon a percentage of Daisytek's
shipped product revenue. Consequently, the service fee revenue we receive from
Daisytek under this new agreement have been recognized only subsequent to the
Offering.
Additionally, upon completion of the Offering, Daisytek transferred to us
fixed assets and other assets which are used in our business. We paid to
Daisytek a portion of the net proceeds of the Offering and assumed capital and
operating lease obligations related to these assets.
In order to show how our current financial statements compare with our
historical financial statements because of our new arrangements with IBM and
Daisytek, we have set forth below an adjusted presentation of our total
historical revenue and cost of revenue. This presentation shows, retroactively,
what our service fee revenue and cost of service fee revenue for the three
months ended June 30, 1999, would have been if (i) our modified agreement with
IBM and our new agreement with Daisytek had been in effect for this period, and
(ii) our acquisition of the assets and liabilities that Daisytek transferred to
us upon completion the IPO had occurred as of the beginning of the three months
ended June 30, 1999.
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2000 1999
---------- ----------
(IN THOUSANDS)
(UNAUDITED)
Service fee revenue................... $ 13,370 $ 9,250
Cost of service fee revenue .......... 8,645 5,827
Service fee gross profit.............. 4,725 3,423
Service fee gross profit margin ...... 35.3% 37.0%
Based on this presentation, our largest clients for the three months ended
June 30, 2000 were Daisytek (43.0%) and IBM (13.5%), and our largest clients for
the three months ended June 30, 1999 would have been Daisytek (52.0%) and IBM
(15.5%). In calculating these percentages, we have considered IBM as our client
under our new IBM agreements even though the service fees arising under these
agreements are paid by Daisytek.
We based the adjusted operating data on available information and certain
estimates and assumptions. We believe that such assumptions provide a reasonable
basis for presenting our results, adjusting for the transactions described
above. This adjusted financial information does not reflect what our operating
income or net income would have been during the period presented or what our
results of operations may be in the future.
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RESULTS OF OPERATIONS
Three Months Ended
June 30,
-----------------
2000 1999
------ ------
Product revenue ................................. -- % 91.1%
Service fee revenue ............................. 100.0 8.9
----- -----
Total revenues ........................... 100.0 100.0
Cost of product revenue (as % of product
revenue) .................................... -- 94.4
Cost of service fee revenue (as % of service fee
revenue) .................................... 64.7 69.9
----- -----
Total costs of revenues .................. 64.7 92.2
----- -----
Gross profit .................................... 35.3 7.8
Selling, general and administrative expenses .... 39.1 7.8
----- -----
Loss from operations ............................ (3.8) (0.0)
Interest (income) expense, net .................. (2.4) 0.9
----- -----
Loss before income taxes ........................ (1.4) (0.9)
Provision (benefit) for income taxes ............ 0.4 (0.3)
----- -----
Net loss ........................................ (1.8)% (0.6)%
===== =====
RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED JUNE 30, 2000 AND 1999
We believe our June 30, 1999 historical financial statements may not provide
a meaningful comparison to our current and future financial statements for the
reasons described above.
Product Revenue. Product revenue was zero for the three months ended June
30, 2000, as compared to $32.6 million for the three months ended June 30, 1999.
As stated above, during the quarter ended September 30, 1999, we, Daisytek and
IBM entered into new agreements applicable to all of our IBM relationships. As a
result of these agreements, the activities performed under these contracts since
that date were accounted for as service fee revenue as opposed to product
revenue. In future periods, we do not expect to have any product revenue.
Service Fee Revenue. Service fee revenue was $13.4 million for the three
months ended June 30, 2000, as compared to $3.2 million during the three months
ended June 30, 1999, an increase of $10.2 million or 319%. The increase in
service fee revenues over prior periods was due to the further expansion of
existing contracts, the restructuring of all the IBM contracts, and new service
contract relationships, including our new transaction management services
agreement with Daisytek which commenced on the completion of the Offering in
December 1999. Service fee revenue from existing contracts increased $.2 million
and new service contract relationships added $10.0 million for the three months
ended June 30, 2000. For the three months ended June 30, 2000, new service fee
revenue totaling $7.3 million included fees earned from Daisytek under our new
transaction management services agreement, effective as of the Offering, and our
new IBM contracts that, prior to the September 1999 quarter, would have been
reported as product revenue. As a result of certain contract terminations and a
longer implementation cycle associated with new larger contracts, slower service
fee revenue growth is currently expected to occur over the remaining fiscal 2000
quarters.
Cost of Product Revenue. Cost of product revenue was zero for the three
months ended June 30, 2000, as compared to $30.8 million during the three months
ended June 30, 1999. Cost of product revenue as a percent of product revenue was
94.4% during the three months ended June 30, 1999. The resulting gross profit
margin was 5.6% during the three months ended June 30, 1999. As a result of the
new IBM arrangements, we do not expect to incur any cost of product revenue in
future periods.
Cost of Service Fee Revenue. Cost of service fee revenue was $8.6 million
for the three months ended June 30, 2000, as compared to $2.2 million during the
three months ended June 30, 1999, an increase of $6.4 million or 287.5%. The
resulting service fee gross profit margin was 35.3% during the three months
12
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ended June 30, 2000, and 30.1% during the three months ended June 30, 1999.
During the three months ended June 30, 2000, cost of service fee revenue
increased related to a large number of new service contract relationships.
Gross Profit. Gross profit was $4.7 million, or 35.3% of revenues, for the
three months ended June 30, 2000, as compared to $2.8 million, or 7.8% of
revenues, for the three months ended June 30, 1999. The increase in total gross
profit resulted primarily from the further expansion of existing contracts and
new service contract relationships, including our new transaction management
services agreement with Daisytek, which commenced on the completion of the
Offering in December 1999. The increase in gross profit as a percentage of
revenues resulted from the restructuring of all of the IBM contracts into
service fee contracts, which typically have a higher gross profit margin as a
percent of revenue as compared to the gross profit margin as a percent of
revenue earned under the IBM master distributor agreements. In the Adjusted
Financial Presentation data above, we have provided, retroactively, what our
service fee gross profit margin would have been for the three months ended June
30, 1999, considering the impact of our modified agreement with IBM and our new
agreement with Daisytek and our acquisition of the assets and liabilities which
Daisytek transferred to us upon completion of the Offering.
Selling, General and Administrative Expenses. SG&A expenses were $5.2
million for the three months ended June 30, 2000, or 39.1% of revenues, as
compared to $2.8 million, or 7.8% of revenues, for the three months ended June
30, 1999. As a result of incremental costs, the restructuring of the IBM
agreements and the related reduction in product revenue, SG&A expenses as a
percentage of total revenue are higher in the current quarter than in the prior
years quarter. SG&A expenses increased as a result of costs incurred to support
the higher transaction volumes under both new and existing contracts,
incremental investments in resources and technology to support our continued
growth and public company costs. In the future, while we anticipate that we will
continue to incur incremental costs as we make further SG&A investments in our
sales, marketing, and technology areas to support our growth strategies and as a
result of operating as a stand-alone public company, we are targeting our SG&A,
as a percent of sales, to decrease as we increase our service fee revenue.
Interest (Income) Expense, Net. Interest income was $0.3 million for the
three months ended June 30, 2000 as compared to interest expense of $0.3 million
for the three months ended June 30, 1999. Interest income was earned for the
three months ended June 30, 2000 at a weighted average interest rate of 6.13%.
The weighted average interest rate charged for the three months ended June 30,
1999 was 6.11%. In December 1999, we used a portion of the funds from the
Offering to repay our intercompany payable balance to Daisytek and purchase
certain assets from Daisytek. The remaining available cash will be used for
future capital expenditures, general working capital needs and possible
acquisitions. To the extent that we have excess cash available, we expect to
generate interest income in future periods.
Income Taxes. Our income tax provision as a percentage of pre-tax loss was
25.9% for the three months ended June 30, 2000 as compared to and income benefit
of 39.4% for the three months ended June 30, 1999. Although we had a pre-tax
loss for the three months ended June 30, 2000, we recorded an income tax
provision associated with a pre-tax income from our Canadian operations. For the
three months ended June 30, 2000 certain deferred tax assets were realized,
which offset the taxes associated with our pre-tax income generated in the U.S.
Because of our limited operating history in Europe, it is uncertain whether it
is "more likely than not" that we will be able to utilize our European losses in
future periods and therefore we did not record an income tax benefit for those
pre-tax losses. To the extent we have future losses in Europe, it will continue
to negatively impact our income tax provision. Additionally, since we will cease
to be included in Daisytek's consolidated return due to the completion of the
spin-off and we have not established a sufficient history of earnings, on a
stand-alone basis, a valuation allowance has been provided for the remaining net
deferred income tax asset as of June 30, 2000. For the three months ended June
30, 1999, the income tax percentage is impacted by the differences between our
U.S. and foreign subsidiaries, which are taxed at different rates.
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LIQUIDITY AND CAPITAL RESOURCES
As a subsidiary of Daisytek, we have historically funded our business
through intercompany borrowings from Daisytek. As a result of the Offering, we
repaid such intercompany borrowings. Since Daisytek is prohibited from advancing
funds to us, except in the normal course of business, in order to provide
additional financing flexibility in the future above the over $22 million
current cash position, we plan to seek our own credit facility. Working capital
decreased to $27.6 million at June 30, 2000 from $28.0 million at March 31,
2000. We currently believe that the remaining net proceeds from the Offering and
funds generated from operations will satisfy our working capital and capital
expenditure requirements for the next twelve months.
Net cash used in financing activities was $0.1 million for the three months
ended June 30, 2000, representing payments on our capital lease obligations. Net
cash provided by financing activities was $8.5 million for the three months
ended June 30, 1999. For the three months ended June 30, 1999, cash provided by
Daisytek was used to fund the incremental financing of one of our client's
inventory, our capital expenditures and working capital requirements.
Cash flows used in operating activities totaled $2.9 million and $4.4
million during the three months ended June 30, 2000 and 1999, respectively. For
the three months ended June 30, 2000, the net cash used in operating activities
primarily reflected a reduction in accounts payable and accrued expenses of $1.5
million and an increase in prepaid expenses and accounts receivable of $2.7
million. For the three months ended June 30, 1999, the net cash used in
operating activities were primarily related to the IBM contracts and reflected a
decrease in inventory of $5.3 million, an increase in accounts receivable of $.6
million, and a decrease in accounts payable and accrued expenses of $9.3
million.
Cash provided by investing activities was $.3 million for the three months
ended June 30, 2000 as compared to cash used of $2.2 million for the three
months ended June 30, 1999. During the three months ended June 30, 2000, our
capital expenditures of $1.4 million for property and equipment were more than
offset by a reduction of third-party financed inventory. Subsequent to June 30,
2000, this client fully repaid the remaining $1.7 million balance. Cash used in
investing activities for the three months ended June 30, 1999 was primarily as a
result of an increase in third-part financed inventory. Capital expenditures
have historically consisted primarily of additions to upgrade our management
information systems, including our Internet-based customer tools, other methods
of e-commerce and general expansion of our facilities, both domestic and
foreign. We expect to incur significant capital expenditures in order to support
new contracts and anticipated future growth opportunities. We anticipate that
our total investment in upgrades and additions to facilities and information
technology services for fiscal year 2001 will be approximately $7 to $10
million. Some of these expenditures may be financed through operating or capital
leases.
We may consider entering into forward exchange contracts in order to
hedge our net investment in our Canadian or European operations or in other
international countries in which we establish a presence, although no assurance
can be given that we will be able to do so on acceptable terms.
In the future, we may attempt to acquire other businesses to expand our
services or capabilities in connection with our efforts to grow our business. We
currently have no binding agreements to acquire any such businesses. Should we
be successful in acquiring other businesses, we may require additional
financing. Acquisitions involve certain risks and uncertainties. Therefore, we
can give no assurance with respect to whether we will be successful in
identifying businesses to acquire, whether we will be able to obtain financing
to complete an acquisition, or whether we will be successful in operating the
acquired business.
Currently, the Company believes that it is operating with and incurring
costs applicable to excess capacity in both its North American and European
operations. The Company estimates that it will require approximately $15 million
of quarterly service fee revenue to more fully utilize its capacity, cover
existing operating costs and future incremental stand-alone public company costs
and reach profitability. Based on current sales and contract implementation
cycles, the Company is targeting that profitability will be achieved in the
middle of calendar year 2001. No assurance can be given that the Company can
achieve such service fee revenue levels, or that, if achieved, the Company will
be profitable in any particular fiscal period.
SEASONALITY
The seasonality of our business is dependent upon the seasonality of our
clients' business and their sale of their products. Accordingly, our management
must rely upon the projections of our clients in assessing quarterly
variability. We believe that with our current client mix, our business activity
will be more significant in the quarter ended December 31.
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We believe that results of operations for a quarterly period may not be
indicative of the results for any other quarter or for the full year.
INFLATION
Management believes that inflation has not had a material effect on our
operations.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires that an entity
recognize all derivative financial instruments as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. If certain conditions are met, a derivative may be used to hedge certain
types of transactions, including foreign currency exposures of a net investment
in a foreign operation. SFAS No. 133 is effective for fiscal years beginning
after June 15, 2000, with initial application as of the beginning of an entity's
fiscal quarter. The Company is currently evaluating the provisions of SFAS No.
133 and its effect on the accounting treatment of its financial instruments.
During 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition." SAB No. 101 requires that
revenue generally is realized or realizable and earned when all of the following
criteria are met: (i) persuasive evidence of an arrangement exists, (ii)
delivery has occurred or services have been rendered, (iii) the seller's price
to the buyer is fixed or determinable, and (iv) collectibility is reasonably
assured. SAB No. 101 is effective for the Company's fourth quarter ending March
31, 2001. The Company is currently evaluating the provisions of SAB No. 101 and
its effect, if any, on the Company's financial statements.
I
TEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The carrying value of the Company's financial instruments, which include
cash and cash equivalents and a capital lease obligation, approximate their fair
values based on current market prices and rates.
Currently, our foreign currency exchange rate risk is primarily limited to
Canadian dollars and the Euro. In the future, we believe our foreign currency
exchange risk will also include other currencies applicable to certain of our
international operations. In order to mitigate foreign currency rate risk, we
will consider entering into forward currency exchange contracts to hedge our net
investment and long-term intercompany payable balances.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
------- -----------------------
3.1* Amended and Restated Certificate of Incorporation
3.2* Amended and Restated Bylaws
10.1** Form of Change in Control Severance Agreement
between the Company and its executive officers
10.2*** Rights Agreement dated as of June 8, 2000 between
the Company and ChaseMellon Shareholder Services,
LLC, which includes the Certificate of Designation
in respect of the Series A Preferred Stock as
Exhibit A, the form of Rights Certificate as Exhibit
B, and the Summary of Rights to Purchase Series A
Preferred Stock as Exhibit C
27.1** Financial Data Schedule for the three months ended
June 30, 2000
-----------------
* Incorporated by reference from PFSweb, Inc. Registration Statement on Form
S-1 (Commission File No. 333-87657).
** Filed herewith.
*** Incorporated by reference from Exhibit 4 to the Company's Report on Form
8-K dated June 14, 2000.
b) Reports on Form 8-K:
Form 8-K filed on June 14, 2000 reporting Item 5, the Company's
Board of Directors declared a dividend of one preferred share
purchase right on each outstanding share of common stock to
shareholders of record on July 6, 2000 and reporting Item 5, the
Company's press release dated June 8, 2000, announcing the
separation of PFSweb, Inc. from Daisytek International Corporation
by means of a tax-free dividend of Daisytek's remaining 80.1%
ownership of PFSweb, Inc.
Form 8-K filed on July 12, 2000 reporting Item I, change in control
of registrant, the Company's press release announced the dividend
by Daisytek International Corporation of its remaining 80.1%
ownership of PFSweb, Inc. to the holders of record of Daisytek
common stock and referencing further information regarding the
spin-off contained in the Daisytek Information Statement dated June
20, 2000 (filed as Exhibit 99 to Form 8-K filed by Daisytek on June
22, 2000).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 2000
PFSweb, Inc.
By: /s/ Thomas J. Madden
----------------------------
Thomas J. Madden
Chief Financial Officer,
Chief Accounting Officer,
Executive Vice President
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INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
------- -----------------------
3.1* Amended and Restated Certificate of Incorporation
3.2* Amended and Restated Bylaws
10.1** Form of Change in Control Severance Agreement between the
Company and its executive officers
10.2*** Rights Agreement dated as of June 8, 2000 between the
Company and ChaseMellon Shareholder Services, LLC, which
includes the Certificate of Designation in respect of the
Series A Preferred Stock as Exhibit A, the form of Rights
Certificate as Exhibit B, and the Summary of Rights to
Purchase Series A Preferred Stock as Exhibit C
27.1** Financial Data Schedule for the three months ended June 30,
2000
---------------
* Incorporated by reference from PFSweb, Inc. Registration Statement on Form
S-1 (Commission File No. 333-87657).
** Filed herewith.
*** Incorporated by reference from Exhibit 4 to the Company's Report on Form
8-K dated June 14, 2000.
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1
EXHIBIT 10.1
CHANGE IN CONTROL SEVERANCE AGREEMENT
THIS AGREEMENT is entered into as of the ______ day of June,
2000 by and between PFSweb, Inc., a Delaware corporation (the "Company"), and
__________________________________ ("Executive").
W I T N E S S E T H
WHEREAS, the Company considers the establishment and
maintenance of a sound and vital management to be essential to protecting and
enhancing the best interests of the Company and its stockholders; and
WHEREAS, the Company recognizes that, as is the case with many
publicly held corporations, the possibility of a change in control may arise and
that such possibility may result in the departure or distraction of management
personnel to the detriment of the Company and its stockholders; and
WHEREAS, the Board (as defined in Section 1) has determined
that it is in the best interests of the Company and its stockholders to secure
Executive's continued services and to ensure Executive's continued and undivided
dedication to his duties in the event of any threat or occurrence of a Change in
Control (as defined in Section 1) of the Company; and
WHEREAS, the Board has authorized the Company to enter into
this Agreement.
NOW, THEREFORE, for and in consideration of the premises and
the mutual covenants and agreements
herein contained, the Company and Executive
hereby agree as follows:
1. Definitions. As used in this Agreement, the following terms
shall have the respective meanings set forth below:
"Board" means the Board of Directors of the Company.
"Bonus Amount" means the greater of (i) the highest annual
incentive bonus earned by Executive from the Company (or its affiliates) during
the last three (3) completed fiscal years of the Company immediately preceding
Executive's Date of Termination (annualized in the event Executive was not
employed by the Company (or its affiliates) for the whole of any such fiscal
year) or (ii) the Executive's target bonus for the fiscal year of the Company
which includes the Executive's Date of Termination.
"Cause" means (i) the willful and continued failure of
Executive to perform substantially his duties with the Company (other than any
such failure resulting from Executive's incapacity due to physical or mental
illness or any such failure subsequent to Executive being delivered a Notice of
Termination without Cause by the Company or
2
delivering a Notice of Termination for Good Reason to the Company) after a
written demand for substantial performance is delivered to Executive by the
Board which specifically identifies the manner in which the Board believes that
Executive has not substantially performed Executive's duties, or (ii) the
willful engaging by Executive in illegal conduct or gross misconduct which is
demonstrably and materially injurious to the Company or its affiliates. For
purpose of the preceding sentence, no act or failure to act by Executive shall
be considered "willful" unless done or omitted to be done by Executive in bad
faith and without reasonable belief that Executive's action or omission was in
the best interests of the Company. Any act, or failure to act, based upon
authority given pursuant to a resolution duly adopted by the Board, based upon
the advice of counsel for the Company (or upon the instructions of the Company's
chief executive officer or another senior officer of the Company) shall be
conclusively presumed to be done, or omitted to be done, by Executive in good
faith and in the best interests of the Company. Cause shall not exist unless and
until the Company has delivered to Executive a copy of a resolution duly adopted
by a majority of the entire Board (excluding Executive if Executive is a Board
member) at a meeting of the Board called and held for such purpose (after
reasonable notice to Executive and an opportunity for Executive, together with
counsel, to be heard before the Board), finding that in the good faith opinion
of the Board an event set forth in clauses (1) or (2) has occurred and
specifying the particulars thereof in detail. The Company must notify Executive
of any event constituting Cause within ninety (90) days following the Company's
knowledge of its existence or such event shall not constitute Cause under this
Agreement.
"Change in Control" means the occurrence of any one of the
following events:
(1) individuals who, on the date of this Agreement,
constitute the Board (the "Incumbent Directors") cease for any reason to
constitute at least a majority of the Board, provided that any person becoming a
director subsequent to the date of this Agreement, whose election or nomination
for election was approved by a vote of at least two-thirds of the Incumbent
Directors then on the Board (either by a specific vote or by approval of the
proxy statement of the Company in which such person is named as a nominee for
director, without written objection to such nomination) shall be an Incumbent
Director; provided, however, that no individual initially elected or nominated
as a director of the Company as a result of an actual or threatened election
contest with respect to directors or as a result of any other actual or
threatened solicitation of proxies (or consents) by or on behalf of any person
other than the Board shall be deemed to be an Incumbent Director;
(2) any "Person" (as such term is defined in Section
3(a)(9) of the Securities Exchange Act of 1934 (the "Exchange Act") and as used
in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing 30% or more of the
combined voting power of the Company's then outstanding securities eligible to
vote for the election of the Board (the "Company Voting Securities"); provided,
however, that the event described in this paragraph (ii) shall not be deemed to
be a Change in Control by virtue of any of the following acquisitions: (A) by
the Company or any Subsidiary, (B) by any employee benefit plan (or related
trust) sponsored or maintained by the
2
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Company or any Subsidiary, (C) by any underwriter temporarily holding securities
pursuant to an offering of such securities, (D) pursuant to a Non-Qualifying
Transaction (as defined in paragraph (iii)), or (E) pursuant to any acquisition
by Executive or any group of persons including Executive (or any entity
controlled by Executive or any group of persons including Executive);
(3) the consummation of a merger, consolidation,
statutory share exchange or similar form of corporate transaction involving the
Company or any of its Subsidiaries that requires the approval of the Company's
stockholders, whether for such transaction or the issuance of securities in the
transaction (a "Business Combination"), unless immediately following such
Business Combination: (A) more than 50% of the total voting power of (x) the
corporation resulting from such Business Combination (the "Surviving
Corporation"), or (y) if applicable, the ultimate parent corporation that
directly or indirectly has beneficial ownership of 100% of the voting securities
eligible to elect directors of the Surviving Corporation (the "Parent
Corporation"), is represented by Company Voting Securities that were outstanding
immediately prior to such Business Combination (or, if applicable, is
represented by shares into which such Company Voting Securities were converted
pursuant to such Business Combination), and such voting power among the holders
thereof is in substantially the same proportion as the voting power of such
Company Voting Securities among the holders thereof immediately prior to the
Business Combination, (B) no person (other than any employee benefit plan (or
related trust) sponsored or maintained by the Surviving Corporation or the
Parent Corporation), is or becomes the beneficial owner, directly or indirectly,
of 30% or more of the total voting power of the outstanding voting securities
eligible to elect directors of the Parent Corporation (or, if there is no Parent
Corporation, the Surviving Corporation) and (C) at least a majority of the
members of the board of directors of the Parent Corporation (or, if there is no
Parent Corporation, the Surviving Corporation) following the consummation of the
Business Combination were Incumbent Directors at the time of the Board's
approval of the execution of the initial agreement providing for such Business
Combination (any Business Combination which satisfies all of the criteria
specified in (A), (B) and (C) above shall be deemed to be a "Non-Qualifying
Transaction); or
(4) the stockholders of the Company approve a plan of
complete liquidation or dissolution of the Company or a sale of all or
substantially all of the Company's assets.
Notwithstanding the foregoing, a Change in Control of the Company shall not be
deemed to occur solely because any person acquires beneficial ownership of more
than 30% of the Company Voting Securities as a result of the acquisition of
Company Voting Securities by the Company which reduces the number of Company
Voting Securities outstanding; provided, that if after such acquisition by the
Company such person becomes the beneficial owner of additional Company Voting
Securities that increases the percentage of outstanding Company Voting
Securities beneficially owned by such person, a Change in Control of the Company
shall then occur.
3
4
"Date of Termination" means (1) the effective date on which
Executive's employment by the Company terminates as specified in a prior written
notice by the Company or Executive, as the case may be, to the other, delivered
pursuant to Section 10 or (2) if Executive's employment by the Company
terminates by reason of death, the date of death of Executive.
"Disability" means termination of Executive's employment by
the Company due to Executive's absence from Executive's duties with the Company
on a full-time basis for at least one hundred eighty (180) consecutive days as a
result of Executive's incapacity due to physical or mental illness.
"Good Reason" means, without Executive's express written
consent, the occurrence of any of the following events after a Change in
Control:
(1) (A) any change in the duties or responsibilities
(including reporting responsibilities) of Executive that is inconsistent in any
material and adverse respect with Executive's position(s), duties,
responsibilities or status with the Company immediately prior to such Change in
Control (including any material and adverse diminution of such duties or
responsibilities); provided, however, that Good Reason shall not be deemed to
occur upon a change in duties or responsibilities (other than reporting
responsibilities) that is solely and directly a result of the Company no longer
being a publicly traded entity and does not involve any other event set forth in
this paragraph (g) or (B) a material and adverse change in Executive's titles or
offices (including, if applicable, membership on the Board) with the Company as
in effect immediately prior to such Change in Control;
(2) a reduction by the Company in Executive's rate of
annual base salary or annual target bonus opportunity (including any material
and adverse change in the formula for such annual bonus target) as in effect
immediately prior to such Change in Control or as the same may be increased from
time to time thereafter;
(3) any requirement of the Company that Executive (A)
be based anywhere more than thirty-five (35) miles from the office where
Executive is located at the time of the Change in Control, if such relocation
increases Executive's commute by more than twenty (20) miles, or (B) travel on
Company business to an extent substantially greater than the travel obligations
of Executive immediately prior to such Change in Control;
(4) the failure of the Company to (A) continue in
effect any employee benefit plan, compensation plan, welfare benefit plan or
material fringe benefit plan in which Executive is participating immediately
prior to such Change in Control or the taking of any action by the Company which
would adversely affect Executive's participation in or reduce Executive's
benefits under any such plan, unless Executive is permitted to participate in
other plans providing Executive with substantially equivalent benefits in the
aggregate (at substantially equivalent cost with respect to welfare benefit
plans), or (B) provide Executive with paid vacation in accordance with the most
favorable vacation policies of the Company as in effect for Executive
immediately prior to such Change in Control, including the crediting of
4
5
all service for which Executive had been credited under such vacation policies
prior to the Change in Control;
(5) any refusal by the Company to continue to permit
Executive to engage in activities not directly related to the business of the
Company which Executive was permitted to engage in prior to the Change in
Control;
(6) any purported termination of Executive's
employment which is not effectuated pursuant to Section 10(b) (and which will
not constitute a termination hereunder); or
(7) the failure of the Company to obtain the
assumption (and, if applicable, guarantee) agreement from any successor (and, if
applicable, Parent Corporation) as contemplated in Section 9(b).
An isolated, insubstantial and inadvertent action taken in good faith and which
is remedied by the Company within ten (10) days after receipt of notice thereof
given by Executive shall not constitute Good Reason. Executive's right to
terminate employment for Good Reason shall not be affected by Executive's
incapacity due to mental or physical illness and Executive's continued
employment shall not constitute consent to, or a waiver of rights with respect
to, any event or condition constituting Good Reason; provided, however, that
Executive must provide notice of termination of employment within ninety (90)
days following Executive's knowledge of an event constituting Good Reason or
such event shall not constitute Good Reason under this Agreement).
"Qualifying Termination" means a termination of Executive's
employment (i) by the Company other than for Cause or (ii) by Executive for Good
Reason. Termination of Executive's employment on account of death, Disability or
Retirement shall not be treated as a Qualifying Termination.
"Subsidiary" means any corporation or other entity in which
the Company has a direct or indirect ownership interest of 50% or more of the
total combined voting power of the then outstanding securities or interests of
such corporation or other entity entitled to vote generally in the election of
directors or in which the Company has the right to receive 50% or more of the
distribution of profits or 50% of the assets upon liquidation or dissolution.
"Termination Period" means the period of time beginning with a
Change in Control and ending two (2) years following such Change in Control.
Notwithstanding anything in this Agreement to the contrary, if (i) Executive's
employment is terminated prior to a Change in Control for reasons that would
have constituted a Qualifying Termination if they had occurred following a
Change in Control; (ii) Executive reasonably demonstrates that such termination
(or Good Reason event) was at the request of a third party who had indicated an
intention or taken steps reasonably calculated to effect a Change in Control;
and (iii) a Change in Control involving such third party (or a party competing
with such third party to effectuate a Change in Control) does occur, then for
purposes of this Agreement, the date
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immediately prior to the date of such termination of employment or event
constituting Good Reason shall be treated as a Change in Control. For purposes
of determining the timing of payments and benefits to Executive under Section 4,
the date of the actual Change in Control shall of treated as Executive's Date of
Termination under Section l(e).
2. Obligation of Executive. In the event of a tender or
exchange offer, proxy contest, or the execution of any agreement which, if
consummated, would constitute a Change in Control, Executive agrees not to
voluntarily leave the employ of the Company, other than as a result of
Disability or an event which would constitute Good Reason if a Change in Control
had occurred, until the Change in Control occurs or, if earlier, such tender or
exchange offer, proxy contest, or agreement is terminated or abandoned.
3. Term of Agreement. This Agreement shall be effective on the
date hereof and shall continue in effect until the Company shall have given
three (3) years' written notice of cancellation; provided, that, notwithstanding
the delivery of any such notice, this Agreement shall continue in effect for a
period of two (2) years after a Change in Control, if such Change in Control
shall have occurred during the term of this Agreement. Notwithstanding anything
in this Section to the contrary, this Agreement shall terminate if Executive or
the Company terminates Executive's employment prior to a Change in Control
except as provided in Section l(j).
4. Payments and Benefits
(a) Qualifying Termination - Severance. If during the
Termination Period the employment of Executive shall terminate pursuant to a
Qualifying Termination, then the Company shall pay to Executive:
(1) within ten (10) days following the Date of
Termination a lump-sum cash amount equal to the sum of (A) Executive's base
salary through the Date of Termination and any bonus amounts which have become
payable, to the extent not theretofore paid or deferred, (B) a pro rata portion
of Executive's annual bonus for the fiscal year in which Executive's Date of
Termination occurs in an amount at least equal to (1) Executive's Bonus Amount,
multiplied by (2) a fraction, the numerator of which is the number of days in
the fiscal year in which the Date of Termination occurs through the Date of
Termination and the denominator of which is three hundred sixty-five (365), and
reduced by (3) any amounts paid from the Company's annual incentive plan for the
fiscal year in which Executive's Date of Termination occurs, and (C), any
compensation previously deferred by Executive other than pursuant to a
tax-qualified plan (together with any interest and earnings thereon) and any
accrued vacation pay, in each case to the extent not theretofore paid; plus
(2) within ten (10) days following the Date of
Termination, a lump-sum cash amount equal to (i) two (2) times Executive's
highest annual rate of base salary during the 12-month period immediately prior
to Executive's Date of Termination, plus (ii) two (2) times Executive's Bonus
Amount, plus (iii) the value of any Company-provided benefits under the
Company's 401(k) Plan which Executive would have accrued in the two (2) years
following
6
7
the Date of Termination had he remained employed by the Company during such
period, calculated assuming that both the Executive and the Company contributed
the highest permissible amounts to the plans during such period.
(b) Qualifying Termination - Benefits. If during the
Termination Period the employment of Executive shall terminate pursuant to a
Qualifying Termination, the Company shall continue to provide, for a period of
two (2) years following Executive's Date of Termination, Executive (and
Executive's dependents, if applicable) with the same level of medical, dental,
accident, disability and life insurance benefits upon substantially the same
terms and conditions (including contributions required by Executive for such
benefits) as existed immediately prior to Executive's Date of Termination (or,
if more favorable to Executive, as such benefits and terms and conditions
existed immediately prior to the Change in Control); provided, that, if
Executive cannot continue to participate in the Company plans providing such
benefits, the Company shall otherwise provide such benefits on the same
after-tax basis as if continued participation had been permitted.
Notwithstanding the foregoing, in the event Executive becomes reemployed with
another employer and becomes eligible to receive welfare benefits from such
employer, the welfare benefits described herein shall be secondary to such
benefits during the period of Executive's eligibility, but only to the extent
that the Company reimburses Executive for any increased cost and provides any
additional benefits necessary to give Executive the benefits provided hereunder.
(c) Nonqualifying Termination. If during the
Termination Period the employment of Executive shall terminate other than by
reason of a Qualifying Termination, then the Company shall pay to Executive
within thirty (30) days following the Date of Termination, a lump-sum cash
amount equal to the sum of (1) Executive's base salary through the Date of
Termination and any bonus amounts which have become payable, to the extent not
theretofore paid or deferred, and (2) any compensation previously deferred by
Executive other than pursuant to a tax-qualified plan (together with any
interest and earnings thereon) and any accrued vacation pay, in each case to the
extent not theretofore paid. The Company may make such additional payments, and
provide such additional benefits, to Executive as the Company and Executive may
agree in writing.
(d) Stock Options. In the event of a Change in
Control, all options to purchase Company stock held by Executive ("Options")
which are not fully vested and exercisable shall become fully vested and
exercisable as of a time established by the Board, which shall be no later than
a time preceding the Change in Control which allows Executive to exercise the
Options and cause the stock acquired thereby to participate in the Change in
Control transaction. If the Change in Control transaction is structured such
that stock participating therein at one time is or may be treated differently
than stock participating therein at a different time (e.g., a tender offer
followed by a squeeze-out merger, with differing forms or amounts of
consideration), the Board shall interpret this paragraph (d) to provide for the
required vesting acceleration in a manner designed to allow Executive to
exercise the Options and cause the stock acquired thereby to participate in the
earliest portion of the Change in Control transaction. If the consummation of a
pending or threatened Change in Control transaction is uncertain (e.g., a tender
offer in which the tender of a minimum number of
7
8
shares is a condition to closing, or a voted merger or proxy contest in which a
minimum number of votes is a condition to closing), the Board shall apply this
paragraph (d) by using its best efforts to determine if and when the Change in
Control transaction is likely to occur, and proceeding accordingly. To the
extent necessary to implement this Section 4(d), each stock option agreement
reflecting the Options, and each stock option plan relating to each such stock
option agreement, if any, shall be deemed amended.
5. Certain Additional Payments by the Company.
(a) Anything in this Agreement to the contrary
notwithstanding, in the event it shall be determined that any payment, award,
benefit or distribution (or any acceleration of any payment, award, benefit or
distribution) by the Company (or any of its affiliated entities) or any entity
which effectuates a Change in Control (or any of its affiliated entities) to or
for the benefit of Executive (whether pursuant to the terms of this Agreement or
otherwise, but determined without regard to any additional payments required
under this Section 5) (the "Payments") would be subject to the excise tax
imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the
"Code"), or any interest or penalties are incurred by Executive with respect to
such excise tax (such excise tax, together with any such interest and penalties,
are hereinafter collectively referred to as the "Excise Tax"), then the Company
shall pay to Executive an additional payment (a "Gross-Up Payment") in an amount
such that after payment by Executive of all taxes (including any Excise Tax)
imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up
Payment equal to the sum of (x) the Excise Tax imposed upon the Payments and (y)
the product of any deductions disallowed because of the inclusion of the
Gross-Up Payment in Executive's adjusted gross income and the highest applicable
marginal rate of federal income taxation for the calendar year in which the
Gross-Up Payment is to be made. For purposes of determining the amount of the
Gross-Up Payment, the Executive shall be deemed to (I) pay federal income taxes
at the highest marginal rates of federal income taxation for the calendar year
in which the Gross-Up Payment is to be made, (ii) pay applicable state and local
income taxes at the highest marginal rate of taxation for the calendar year in
which the Gross-Up Payment is to be made, net of the maximum reduction in
federal income taxes which could be obtained from deduction of such state and
local taxes and (iii) have otherwise allowable deductions for federal income tax
purposes at least equal to those which could be disallowed because of the
inclusion of the Gross-Up Payment in the Executive's adjusted gross income.
(b) Subject to the provisions of Section 5(a), all
determinations required to be made under this Section 5, including whether and
when a Gross-Up Payment is required, the amount of such Gross-Up Payment and the
assumptions to be utilized in arriving at such determinations, shall be made by
the public accounting firm that is retained by the Company as of the date
immediately prior to the Change in Control (the "Accounting Firm") which shall
provide detailed supporting calculations both to the Company and Executive
within fifteen (15) business days of the receipt of notice from the Company or
the Executive that there has been a Payment, or such earlier time as is
requested by the Company (collectively, the "Determination"). In the event that
the Accounting Firm is serving as accountant or auditor for the individual,
entity or group effecting the Change in Control, Executive may appoint
8
9
another nationally recognized public accounting firm to make the determinations
required hereunder (which accounting firm shall then be referred to as the
Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall
be borne solely by the Company and the Company shall enter into any agreement
requested by the Accounting Firm in connection with the performance of the
services hereunder. The Gross-Up Payment under this Section 5 with respect to
any Payments shall be made no later than thirty (30) days following such
Payment. If the Accounting Firm determines that no Excise Tax is payable by
Executive, it shall furnish Executive with a written opinion to such effect, and
to the effect that failure to report the Excise Tax, if any, on Executive's
applicable federal income tax return will not result in the imposition of a
negligence or similar penalty. The Determination by the Accounting Firm shall be
binding upon the Company and Executive. As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the Determination, it is
possible that Gross-Up Payments which will not have been made by the Company
should have been made ("Underpayment") or Gross-Up Payments are made by the
Company which should not have been made ("Overpayment"), consistent with the
calculations required to be made hereunder. In the event that the Executive
thereafter is required to make payment of any Excise Tax or additional Excise
Tax, the Accounting Firm shall determine the amount of the Underpayment that has
occurred and any such Underpayment (together with interest at the rate provided
in Section 1274(b)(2)(B) of the Code) shall be promptly paid by the Company to
or for the benefit of Executive. In the event the amount of the Gross-Up Payment
exceeds the amount necessary to reimburse the Executive for his Excise Tax, the
Accounting Firm shall determine the amount of the Overpayment that has been made
and any such Overpayment (together with interest at the rate provided in Section
1274(b)(2) of the Code) shall be promptly paid by Executive (to the extent he
has received a refund if the applicable Excise Tax has been paid to the Internal
Revenue Service) to or for the benefit of the Company. Executive shall
cooperate, to the extent his expenses are reimbursed by the Company, with any
reasonable requests by the Company in connection with any contests or disputes
with the Internal Revenue Service in connection with the Excise Tax.
6. Withholding Taxes. The Company may withhold from all
payments due to Executive (or his beneficiary or estate) hereunder all taxes
which, by applicable federal, state, local or other law, the Company is required
to withhold therefrom.
7. Reimbursement of Expenses. If any contest or dispute shall
arise under this Agreement involving termination of Executive's employment with
the Company or involving the failure or refusal of the Company to perform fully
in accordance with the terms hereof, the Company shall reimburse Executive, on a
current basis, for all reasonable legal fees and expenses, if any, incurred by
Executive in connection with such contest or dispute (regardless of the result
thereof), together with interest in an amount equal to the Chase Manhattan Bank
prime rate from time to time in effect, but in no event higher than the maximum
legal rate permissible under applicable law, such interest to accrue from the
date the Company receives Executive's statement for such fees and expenses
through the date of payment thereof, regardless of whether or not Executive's
claim is upheld by a court of competent jurisdiction; provided, however,
Executive shall be required to repay any such amounts to the Company to the
extent that a court issues a final order from which no appeal can be taken, or
with respect
9
10
to which the time period to appeal has expired, setting forth the determination
that the position taken by Executive was frivolous or advanced by Executive in
bad faith.
8. Scope of Agreement. Nothing in this Agreement shall be
deemed to entitle Executive to continued employment with the Company or its
Subsidiaries, and if Executive's employment with the Company shall terminate
prior to a Change in Control, Executive shall have no further rights under this
Agreement (except as otherwise provided hereunder); provided, however, that any
termination of Executive's employment during the Termination Period shall be
subject to all of the provisions of this Agreement.
9. Successors; Binding Agreement.
(a) This Agreement shall not be terminated by any
Business Combination. In the event of any Business Combination, the provisions
of this Agreement shall be binding upon the Surviving Corporation, and such
Surviving Corporation shall be treated as the Company hereunder.
(b) The Company agrees that in connection with any
Business Combination, it will cause any successor entity to the Company
unconditionally to assume (and for any Parent Corporation in such Business
Combination to guarantee), by written instrument delivered to Executive (or his
beneficiary or estate), all of the obligations of the Company hereunder. Failure
of the Company to obtain such assumption and guarantee prior to the
effectiveness of any such Business Combination that constitutes a Change in
Control, shall be a breach of this Agreement and shall constitute Good Reason
hereunder and shall entitle Executive to compensation and other benefits from
the Company in the same amount and on the same terms as Executive would be
entitled hereunder if Executive's employment were terminated following a Change
in Control by reason of a Qualifying Termination. For purposes of implementing
the foregoing, the date on which any such Business Combination becomes effective
shall be deemed the date Good Reason occurs, and shall be the Date of
Termination if requested by Executive.
(c) This Agreement shall inure to the benefit of and
be enforceable by Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
Executive shall die while any amounts would be payable to Executive hereunder
had Executive continued to live, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this Agreement to such
person or persons appointed in writing by Executive to receive such amounts or,
if no person is so appointed, to Executive's estate.
10. Notice. (a) For purposes of this Agreement, all notices
and other communications required or permitted hereunder shall be in writing and
shall be deemed to have been duly given when delivered or five (5) days after
deposit in the United States mail, certified and return receipt requested,
postage prepaid, addressed as follows:
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11
If to the Executive to the most recent address of such Executive on the books
and records of the Company; and
If to the Company:
PFSweb, Inc.
500 North Central Expressway
Plano, Texas 75074
Attention: Secretary
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
(b) A written notice of Executive's Date of
Termination by the Company or Executive, as the case may be, to the other, shall
(i) indicate the specific termination provision in this Agreement relied upon,
(ii) to the extent applicable, set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Executive's
employment under the provision so indicated and (iii) specify the termination
date (which date shall be not less than fifteen (15) (thirty (30), if
termination is by the Company for Disability) nor more than sixty (60) days
after the giving of such notice). The failure by Executive or the Company to set
forth in such notice any fact or circumstance which contributes to a showing of
Good Reason or Cause shall not waive any right of Executive or the Company
hereunder or preclude Executive or the Company from asserting such fact or
circumstance in enforcing Executive's or the Company's rights hereunder.
11. Full Settlement; Resolution of Disputes. The Company's
obligation to make any payments provided for in this Agreement and otherwise to
perform its obligations hereunder shall be in lieu and in full settlement of all
other severance payments to Executive under any other severance or employment
agreement between Executive and the Company, and any severance plan of the
Company. The Company's obligations hereunder shall not be affected by any
set-off, counterclaim, recoupment, defense or other claim, right or action which
the Company may have against Executive or others. In no event shall Executive be
obligated to seek other employment or take other action by way of mitigation of
the amounts payable to Executive under any of the provisions of this Agreement
and, except as provided in Section 4(b), such amounts shall not be reduced
whether or not Executive obtains other employment.
12. Employment with Subsidiaries. Employment with the Company
for purposes of this Agreement shall include employment with any Subsidiary.
13. Survival. The respective obligations and benefits afforded
to the Company and Executive as provided in Sections 4 (to the extent that
payments or benefits are owed as a result of a termination of employment that
occurs during the term of this Agreement), 5 (to the extent that Payments are
made to Executive as a result of a Change in Control that occurs
11
12
during the term of this Agreement), 6, 7, 9(c) and 11 shall survive the
termination of this Agreement.
14. GOVERNING LAW; VALIDITY. THE INTERPRETATION, CONSTRUCTION
AND PERFORMANCE OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF DELAWARE WITHOUT
REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF, OF SUCH PRINCIPLES OF ANY
OTHER JURISDICTION WHICH COULD CAUSE THE APPLICATION OF THE LAWS OF ANY
JURISDICTION OTHER THAN THE STATE OF DELAWARE. THE INVALIDITY OR
UNENFORCEABILITY OF ANY PROVISION OF THIS AGREEMENT SHALL NOT AFFECT THE
VALIDITY OR ENFORCEABILITY OF ANY OTHER PROVISION OF THIS AGREEMENT, WHICH OTHER
PROVISIONS SHALL REMAIN IN FULL FORCE AND EFFECT.
15. Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed to be an original and all of which
together shall constitute one and the same instrument.
16. Miscellaneous. No provision of this Agreement may be
modified or waived unless such modification or waiver is agreed to in writing
and signed by Executive and by a duly authorized officer of the Company. No
waiver by either party hereto at any time of any breach by the other party
hereto of, or compliance with, any condition or provision of this Agreement to
be performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time. Failure by Executive or the Company to insist upon strict compliance with
any provision of this Agreement or to assert any right Executive or the Company
may have hereunder, including, without limitation, the right of Executive to
terminate employment for Good Reason, shall not be deemed to be a waiver of such
provision or right or any other provision or right of this Agreement. Except as
otherwise specifically provided herein, the rights of, and benefits payable to,
Executive, his estate or his beneficiaries pursuant to this Agreement are in
addition to any rights of, or benefits payable to, Executive, his estate or his
beneficiaries under any other employee benefit plan or compensation program of
the Company.
IN WITNESS WHEREOF, the Company has caused this Agreement to
be executed by a duly authorized officer of the Company and Executive has
executed this Agreement as of the day and year first above written.
PFSweb, Inc.
By:
--------------------------------
Title: Chairman
-----------------------------------
[EXECUTIVE]
12
5
1,000
3-MOS
MAR-31-2001
JUN-30-2000
22,113
0
8,468
501
0
36,412
25,640
4,083
58,470
8,807
2,623
0
0
18
47,303
58,470
13,370
13,370
8,645
8,645
5,055
175
(316)
(189)
49
(238)
0
0
0
(238)
(0.01)
(0.01)