UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _______ to _______
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
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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 [ ]
At May 7, 2003 there were 18,428,871 shares of registrant's common stock
outstanding, excluding 86,300 shares of common stock in treasury.
PFSWEB, INC. AND SUBSIDIARIES
FORM 10-Q
MARCH 31, 2003
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
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Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 2003 (unaudited)
and December 31, 2002................................................... 3
Unaudited Interim Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2003 and 2002.............................. 4
Unaudited Interim Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2003 and 2002.............................. 5
Notes to Unaudited Interim Condensed Consolidated Financial Statements....... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................................... 17
Item 3. Quantitative and Qualitative Disclosure about Market Risk ....................... 26
Item 4. Controls and Procedures ......................................................... 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................................... 27
Item 2. Changes in Securities and Use of Proceeds ....................................... 27
Item 3. Defaults Upon Senior Securities ................................................. 27
Item 4. Submission of Matters to a Vote of Security Holders.............................. 27
Item 5. Other Information ............................................................... 27
Item 6. Exhibits and Reports on Form 8-K ................................................ 27
SIGNATURES ............................................................................. 29
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PFSWEB, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
March 31, December 31,
2003 2002
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................................................ $ 8,858 $ 8,595
Restricted cash .................................................................. 1,387 1,016
Accounts receivable, net of allowance for doubtful accounts of $531
and $411 at March 31, 2003 and December 31, 2002, respectively .............. 32,158 29,961
Inventories, net ................................................................. 39,531 46,291
Other receivables ................................................................ 3,544 3,417
Prepaid expenses and other current assets ........................................ 2,776 2,888
------------ ------------
Total current assets ............................................... 88,254 92,168
------------ ------------
PROPERTY AND EQUIPMENT, net .......................................................... 10,947 11,695
RESTRICTED CASH ...................................................................... 2,889 2,878
OTHER ASSETS ......................................................................... 211 285
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Total assets ....................................................... $ 102,301 $ 107,026
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capital lease obligations .................. $ 58,706 $ 60,863
Trade accounts payable ........................................................... 7,006 7,317
Accrued expenses ................................................................. 7,570 7,862
------------ ------------
Total current liabilities .......................................... 73,282 76,042
------------ ------------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current
portion ........................................................................ 2,761 3,094
OTHER LIABILITIES .................................................................... 1,246 1,420
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;
18,503,377 and 18,397,983 shares issued at March 31, 2003 and December 31,
2002, respectively; and 18,417,077 and 18,311,683 outstanding at
March 31, 2003 and December 31, 2002, respectively ............................. 18 18
Additional paid-in capital ....................................................... 52,122 52,094
Accumulated deficit .............................................................. (27,331) (25,557)
Accumulated other comprehensive income ........................................... 288 --
Treasury stock at cost, 86,300 shares at March 31, 2003 and December 31, 2002 .... (85) (85)
------------ ------------
Total shareholders' equity ......................................... 25,012 26,470
------------ ------------
Total liabilities and shareholders' equity ......................... $ 102,301 $ 107,026
============ ============
The accompanying notes are an integral part of these unaudited interim condensed
consolidated financial statements.
3
PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended
March 31,
----------------------
2003 2002
-------- --------
REVENUES:
Product revenue, net .......................... $ 59,719 $ --
-------- --------
Gross service fee revenue ..................... 7,248 7,826
Gross service fee revenue, affiliate .......... -- 1,565
-------- --------
Total gross service fee revenue ............. 7,248 9,391
Less pass-through charges ..................... 640 1,073
-------- --------
Net service fee revenues .................... 6,608 8,318
-------- --------
Total net revenues .......................... 66,327 8,318
-------- --------
COSTS OF REVENUES:
Cost of product revenue ....................... 56,407 --
Cost of net service fee revenue ............... 4,913 5,304
-------- --------
Total costs of revenues ..................... 61,320 5,304
-------- --------
Gross profit ................................ 5,007 3,014
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ...... 6,112 7,018
-------- --------
Loss from operations ........................ (1,105) (4,004)
EQUITY IN EARNINGS OF AFFILIATE ................... -- 512
INTEREST EXPENSE .................................. 638 83
INTEREST INCOME ................................... (30) (348)
-------- --------
Loss before income taxes .................... (1,713) (3,227)
INCOME TAX EXPENSE ................................ 61 --
-------- --------
NET LOSS .................................... $ (1,774) $ (3,227)
======== ========
NET LOSS PER SHARE:
Basic and diluted ............................. $ (0.10) $ (0.18)
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic and diluted ............................. 18,416 18,149
======== ========
The accompanying notes are an integral part of these unaudited interim condensed
consolidated financial statements.
4
PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three Months Ended
March 31,
----------------------
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ......................................................................... $ (1,774) $ (3,227)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization ................................................. 1,189 1,648
Provision for doubtful accounts ............................................... 151 21
Equity in earnings of affiliate ............................................... -- (512)
Non-cash compensation expense ................................................. -- 24
Changes in operating assets and liabilities:
Accounts receivables ...................................................... (2,030) (1,008)
Inventories, net .......................................................... 7,237 --
Prepaid expenses, other receivables and other current assets .............. 134 713
Accounts payable, accrued expenses and deferred income .................... (885) 1,555
-------- --------
Net cash provided by (used in) operating activities .................. 4,022 (786)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .............................................. (267) (338)
Increase in restricted cash ...................................................... -- (154)
Payments of loans to affiliate, net .............................................. -- (145)
-------- --------
Net cash used in investing activities ................................ (267) (637)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations ............................................ (272) (259)
Increase in restricted cash ...................................................... (342) --
Proceeds from issuance of common stock ........................................... 28 54
Proceeds from (payments on) debt, net ............................................ (2,821) 172
-------- --------
Net cash used in financing activities ................................ (3,407) (33)
-------- --------
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS ................................ (85) (8)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................................. 263 (1,464)
CASH AND CASH EQUIVALENTS, beginning of period ....................................... 8,595 10,786
-------- --------
CASH AND CASH EQUIVALENTS, end of period ............................................. $ 8,858 $ 9,322
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash investing and financing activities:
Fixed assets acquired under capital leases ....................................... $ 64 $ 186
======== ========
The accompanying notes are an integral part of these unaudited interim condensed
consolidated financial statements.
5
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. OVERVIEW AND BASIS OF PRESENTATION
PFSWEB OVERVIEW
PFSweb, Inc. and its subsidiaries (the "Company" or "PFSweb") is an
international provider of integrated business process outsourcing services to
major brand name companies seeking to maximize their supply chain efficiencies
and to extend their traditional and e-commerce initiatives in the United States,
Canada, and Europe. The Company offers such services as professional consulting,
technology collaboration, managed hosting and internet application development,
order management, web-enabled customer contact centers, customer relationship
management, financial services including billing and collection services and
working capital solutions, information management, option kitting and assembly
services, and international fulfillment and distribution services.
SUPPLIES DISTRIBUTORS OVERVIEW
Business Supplies Distributors Holdings, LLC ("Holdings") and its
subsidiaries (collectively "Supplies Distributors") are master distributors of
various products, primarily International Business Machines ("IBM") products.
Pursuant to transaction management services agreement between the Company and
Supplies Distributors, the Company provides to Supplies Distributors such
services as managed web hosting and maintenance, procurement support,
web-enabled customer contact center services, customer relationship management,
financial services including billing and collection services, information
management, and international distribution services. Additionally, IBM and
Supplies Distributors have outsourced the product demand generation to Global
Marketing Services, Inc. ("GMS"). Supplies Distributors, via its arrangements
with GMS and the Company, sells its products in the United States, Canada and
Europe.
All of the agreements between the Company and Supplies Distributors were
made in the context of a related party relationship and were negotiated in the
overall context of the Company's and Supplies Distributors' prior arrangement
with IBM. Although management generally believes that the terms of these
agreements are consistent with fair market values, there can be no assurance
that the prices charged to or by each company under these arrangements are not
higher or lower than the prices that may be charged by, or to, unaffiliated
third parties for similar services.
BASIS OF PRESENTATION
For the period from July 2001 to September 2002, the Company owned 49% of
Supplies Distributors and as such the results of Supplies Distributors were not
consolidated into the Company's results. The Company's equity interest in
Supplies Distributors was presented in the consolidated balance sheet as
investment in affiliate prior to October 2002 and the Company's allocation of
Supplies Distributors' net income was presented in the consolidated statement of
operations as equity in earnings of affiliate for the period from inception
(July 2001) to September 2002, including the three months ended March 31, 2002.
Effective October 1, 2002, the Company purchased the remaining 51% interest in
Supplies Distributors from Inventory Financing Partners, LLC ("IFP"). As a
result of the purchase, effective October 1, 2002, the Company began
consolidating 100% of Supplies Distributors' financial position and results of
operations into the Company's consolidated financial statements. The following
table presents selected pro forma information, for comparative purposes,
assuming the acquisition had occurred on January 1, 2002, for the three months
ended March 31, 2002:
Net revenues...................... $ 59,879
========
Net loss.......................... $ 2,927
========
Loss per share.................... $ 0.16
========
The pro forma data includes a $0.2 million extraordinary gain on the purchase
from IFP, primarily as a result of the purchase price being less than IFP's
capital account. The unaudited pro forma net revenue and pro forma net loss are
not necessarily indicative of the consolidated results of operations for future
periods
6
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
or the results of operations that would have been realized had we consolidated
Supplies Distributors during the period noted.
The unaudited interim condensed consolidated financial statements as of
March 31, 2003, and for the three months ended March 31, 2003 and 2002, 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 accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to the rules and regulations promulgated
by the SEC. 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
March 31, 2003, its results of operations for the three months ended March 31,
2003 and 2002 and its results of cash flows for the three months ended March 31,
2003 and 2002. 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 or shareholders' equity.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
All intercompany accounts and transactions have been eliminated in
consolidation. Accounts and transactions between the Company and Supplies
Distributors have been eliminated as of December 31, 2002 and as of and for the
three months ended March 31, 2003.
INVESTMENT IN AFFILIATE
In July 2001, the Company made a 49% investment in Supplies Distributors.
Effective October 1, 2002, the Company purchased the remaining 51% ownership
interest of Supplies Distributors. Prior to consolidating Supplies Distributors'
financial position and results of operations, the Company recorded its interest
in Supplies Distributors' net income, which was allocated and distributed to the
owners pursuant to the terms of Supplies Distributors' operating agreement,
under the modified equity method, which resulted in the Company recording its
allocated earnings of Supplies Distributors or 100% of Supplies Distributors'
losses.
In addition to the equity investment, the Company loaned Supplies
Distributors monies in the form of a Subordinated Demand Note (the "Subordinated
Demand Note"). Under certain new and amended terms of its senior debt
facilities, the outstanding balance of the Subordinated Demand Note cannot be
increased or decreased without prior approval of the Company's lenders. As of
March 31, 2003 and December 31, 2002, the outstanding balance of the
Subordinated Demand Note was $8.0 million.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the U.S. requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities, and the reported
amounts of revenues and expenses, including allowances for the collectibility of
accounts and other receivable and the recoverability of inventory. The
recognition and allocation of certain operating expenses, restructuring costs
and the determination of costs applicable to client terminations in these
consolidated financial statements also required management estimates and
assumptions.
7
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
REVENUE AND COST RECOGNITION
The Company recognizes product revenue and product cost upon shipment of
product to customers. The Company permits its customers to return defective
products (that the Company then returns to the manufacturer) and incorrect
shipments for credit against other purchases and provides a reserve for
estimated returns and allowances. The Company offers terms to its customers that
it believes are standard for its industry.
Freight costs billed to customers are reflected as components of product
revenues. Freight costs incurred by the Company are recorded as a component of
cost of goods sold.
Under the Master Distributor Agreements, the Company bills IBM for
reimbursements of certain expenses, including: pass through customer marketing
programs, including rebates and coop funds; certain freight costs; direct costs
incurred in passing on any price decreases offered by IBM to Supplies
Distributors or its customers to cover price protection and certain special
bids; the cost of products provided to replace defective product returned by
customers; and certain other expenses as defined. The Company records a
receivable for these reimbursable amounts as they are incurred with a
corresponding reduction in either inventory or cost of product revenue. The
Company also reflects pass through customer marketing programs as a reduction of
product revenue.
The Company's service fee revenues primarily relate to its (1) distribution
services, (2) order management/customer care services and (3) the reimbursement
of out-of-pocket and third party expenses.
Distribution services relate primarily to inventory management, product
receiving, warehousing and fulfillment (i.e., picking, packing and shipping).
Service fee revenue for these activities is recognized as earned, which is
either (i) on a per transaction basis or (ii) at the time of product
fulfillment, which occurs at the completion of the distribution services.
Order management/customer care services relate primarily to taking customer
orders for the Company's client's products via various channels such as
telephone call-center, electronic or facsimile. These services also entail
addressing customer questions related to orders, as well as
cross-selling/up-selling activities. Service fee revenue for this activity is
recognized as the services are rendered. Fees charged to the client are on a per
transaction basis based on either (i) a pre-determined fee per order or fee per
telephone minutes incurred, or (ii) are included in the product fulfillment
service fees that are recognized on product shipment.
The Company's billings for reimbursement of out-of-pocket expenses, such as
travel, and certain third-party vendor expenses such as shipping and handling
costs and telecommunication charges are included in gross service fee revenue.
The related reimbursable costs are reflected as pass-through charges and reduce
total gross service fee revenue in computing net service fee revenue.
The Company's cost of service fee revenue, representing the cost to provide
the services described above, is recognized as incurred. Cost of service fee
revenue also includes costs associated with technology collaboration and ongoing
technology support that consist of creative internet application development and
maintenance, web hosting, technology interfacing, and other ongoing programming
activities. These activities are primarily performed to support the distribution
and order management/customer care services and are recognized as incurred.
The Company also performs billing services and information management
services for certain of its clients. Billing services and information management
services are typically not billed separately to clients because the activities
are continually performed, and the costs are insignificant and are generally
covered by other fees described above. Therefore, any revenue attributable to
these services is often included in the distribution or order management fees
that are recognized as services are performed. The service fee revenue
associated with these activities are currently not significant and are
incidental to the above-mentioned services.
8
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company recognizes revenue, and records trade accounts receivables,
pursuant to the methods described above, when collectibility is reasonably
assured. Collectibility is evaluated on an individual customer basis taking into
consideration historical payment trends, current financial position, results of
independent credit evaluations and payment terms.
The Company primarily performs its services under one to three year
contracts that can be terminated by either party. In conjunction with these
long-term contracts the Company generally receives start-up fees to cover its
implementation costs, including certain technology infrastructure and
development costs. The Company defers the fees received, and the related costs,
and amortizes them over the life of the contract. The amortization of deferred
revenue is included as a component of service fee revenue. The amortization of
deferred implementation costs is included as a cost of service fee revenue. To
the extent implementation costs, excluding certain technology infrastructure and
development costs, exceed the fees received, excess costs are expensed as
incurred.
Current and non-current deferred implementation costs are a component of
prepaid expenses and other assets, respectively. Implementation costs associated
with technology infrastructure and development costs are a component of property
and equipment. Current and non-current deferred implementation revenues are a
component of deferred revenue and other liabilities, respectively.
CONCENTRATION OF BUSINESS AND CREDIT RISK
The Company's product revenue was primarily generated by sales of product
purchased under master distributor agreements with one supplier. Sales to three
customers accounted for approximately 13% 11% and 11% of the Company's total
product revenues for the three months ended March 31, 2003. Service fee revenue
from two clients accounted for approximately 30% and 22% of net service fee
revenue for the three months ended March 31, 2003. On a consolidated basis,
three clients accounted for approximately 15%, 10% and 10% of the Company's
total revenues for the three months ended March 31, 2003. As of March 31, 2003,
three customers/clients accounted for approximately 41% of accounts receivable.
As of December 31, 2002, three customers/clients accounted for approximately 39%
of accounts receivable.
In conjunction with Supplies Distributors' financing, the Company has
provided certain collaterized guarantees on behalf of Supplies Distributors.
Supplies Distributors' ability to obtain financing on similar terms would be
significantly impacted without these guarantees. Additionally, since Supplies
Distributors has limited personnel and physical resources, its ability to
conduct business could be materially impacted by contract terminations by GMS.
The Company has multiple arrangements with IBM and is dependent upon the
continuation of such arrangements. These arrangements, which are critical to the
Company's ongoing operations, include Supplies Distributors' master distributor
agreements, Supplies Distributors' working capital financing agreements, product
sales to IBM business units, a general contractor relationship through the
Company's largest client, and a term master lease agreement.
CASH AND CASH EQUIVALENTS
Cash equivalents are defined as short-term highly liquid investments with
original maturities of three months or less.
INVENTORIES
Inventories (merchandise, held for resale, all of which are finished goods)
are stated at the lower of weighted average cost or market. Supplies
Distributors assumes responsibility for slow-moving inventory under the Master
Distributor Agreements. The Company reviews inventory for impairment on a
periodic basis, but at a minimum, annually. Recoverability of the inventory on
hand is measured by comparison of the carrying value of the inventory to the
fair value of the inventory. As of March 31, 2003 and December
9
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
31, 2002, the Company's allowance for slow-moving inventory was approximately
$0.2 million and $0.1 million, respectively. Supplies Distributors is able to
return product rendered obsolete by IBM engineering changes after customer
demand for the product ceases. In the event the Company, Supplies Distributors
and IBM do not renew the Master Distributor Agreements, the parties shall
mutually agree on a plan of disposition of Supplies Distributors' then existing
inventory.
Inventories include merchandise in-transit that has not been received by
the Company but that has been shipped and invoiced by Supplies Distributors'
vendors. The corresponding payable for inventories in-transit is included in
debt in the accompanying consolidated financial statements.
PROPERTY AND EQUIPMENT
The Company's property held under capital leases amounted to approximately
$4.1 million and $4.3 million, net of accumulated amortization of approximately
$3.8 million and $3.5 million, at March 31, 2003 and December 31, 2002,
respectively.
STOCK BASED COMPENSATION
The Company accounts for stock options using the intrinsic-value method as
outlined under Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees ("APB No. 25") and related interpretations, including FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation and Interpretation of APB No. 25, issued in March 2000. Under this
method, compensation expense is recorded on the date of the grant only if the
current market price of the underlying stock exceeds the exercise price. The
exercise prices of all options granted during the three months ended March 31,
2003 and 2002 were equal to the market price of the Company's common stock at
the date of grant. As such, no compensation cost was recognized during those
periods for stock options granted to employees. The following table shows the
pro forma effect on the Company's net loss and loss per share as if compensation
cost had been recognized for stock options based on their fair value at the date
of the grant. The pro forma effect of stock options on the Company's net loss
for those years may not be representative of the pro forma effect for future
years due to the impact of vesting and potential future awards.
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2003 2002
------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net loss as reported ........................................ $ (1,774) $ (3,227)
Add: Stock-based non-employee compensation expense
included in reported net loss ........................... -- 24
Deduct: Total stock-based employee and non-employee
compensation expense determined under fair value
based method ............................................ (108) (613)
------------ ------------
Pro forma net loss, applicable to common stock for basic
and diluted computations ................................ $ (1,882) $ (3,816)
============ ============
Loss per common share - basic and diluted
As reported ............................................. $ (0.10) $ (0.18)
============ ============
Pro forma ............................................... $ (0.10) $ (0.21)
============ ============
On April 14, 2003, the Company issued an aggregate of 750,000 options to
purchase shares of common stock at $0.44 to officers and employees of PFSweb.
3. RECENTLY ISSUED ACCOUNTING PRINCIPLES
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which addresses the accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The adoption of this standard did not have a
material impact on the consolidated financial statements.
10
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses the financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The adoption of
this standard did not have a material impact on the consolidated financial
statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS 148 amends SFAS 123, "Accounting
for Stock-Based Compensation," to provide alternative methods of transition for
a voluntary change to the fair value method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the provisions of SFAS 123
to require more prominent disclosure in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results of operations. The Company
adopted the disclosure requirements of SFAS 148 as of December 31, 2002.
In January 2003, the FASB issued FIN No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness of
Others." FIN No. 45 requires a company to recognize a liability for the
obligations it has undertaken in issuing a guarantee. This liability would be
recorded at the inception of a guarantee and would be measured at fair value.
The measurement provisions of this statement apply prospectively to guarantees
issued or modified after December 31, 2002. The disclosure provisions of the
statement apply to financial statements for periods ending after December 15,
2002. The Company adopted the disclosure provisions of the statement as of
December 31, 2002 and the measurement provisions of this statement during the
three months ended March 31, 2003. The adoption of this statement did not have a
material effect on the consolidated financial statements.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities." FIN 46 requires a company to consolidate a variable interest
entity if it is designated as the primary beneficiary of that entity even if the
company does not have a majority of voting interests. A variable interest entity
is generally defined as an entity where its equity is unable to finance its
activities or where the owners of the entity lack the risk and rewards of
ownership. The provisions of this statement apply at inception for any entity
created after January 31, 2003. For an entity created before February 1, 2003,
the provisions of this interpretation must be applied at the beginning of the
first interim or annual period beginning after June 15, 2003. The Company
adopted the provisions of FIN No. 46 during the three months ended March 31,
2003. The adoption of the statement did not have a material effect on the
consolidated financial statements.
The FASB Emerging Issues Task Force issued EITF 00-21, "Accounting for
Revenue Arrangements with Multiple Deliverables," to address certain revenue
recognition issues. The guidance provided from EITF 00-21 addresses both the
timing and classification in accounting for different earnings processes. The
Company does not expect that the adoption of EITF 00-21 will have a material
impact on our consolidated financial condition or operations.
4. COMPREHENSIVE LOSS (IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
----------------------
2003 2002
-------- --------
Net loss ............................... $ (1,774) $ (3,227)
Other comprehensive income (loss):
Foreign currency translation
adjustment ..................... 288 (447)
-------- --------
Comprehensive loss ..................... $ (1,486) $ (3,674)
======== ========
11
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. 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 net loss available to common
stockholders by the weighted-average number of common shares outstanding. During
the three months ended March 31, 2003 and 2002, all outstanding options to
purchase common shares were anti-dilutive and have been excluded from the
weighted diluted average share computation. As of March 31, 2003 and 2002 there
were 4,724,835 and 5,982,391 options outstanding, respectively. There are no
other potentially dilutive securities outstanding.
6. DEBT AND CAPITAL LEASE OBLIGATIONS:
Debt and capital lease obligations consist of the following (in thousands):
MARCH 31, DECEMBER 31,
2003 2002
------------ ------------
Term master lease agreement ............................ $ 4,338 $ 4,627
Inventory and working capital financing agreements:
United States ..................................... 27,299 28,147
Europe ............................................ 10,441 15,219
Loan and security agreements:
Supplies Distributors ............................. 15,552 12,552
PFSweb ............................................ -- --
Factoring agreement, Europe ............................ 3,621 3,202
Other .................................................. 216 210
------------ ------------
Total ............................................. 61,467 63,957
Less current portion of long-term debt ................. 58,706 60,863
------------ ------------
Long-term debt, less current portion .............. $ 2,761 $ 3,094
============ ============
INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT, UNITED STATES - SUPPLIES
DISTRIBUTORS
On September 27, 2001, Supplies Distributors entered into a short-term
credit facility with IBM Credit LLC (formerly IBM Credit Corporation) to finance
its distribution of IBM products in the United States, which has subsequently
been amended. The amended asset based credit facility provides financing for
purchasing IBM inventory and for certain other receivables up to $27.5 million
($30.5 million at December 31, 2002) through its expiration on March 29, 2004.
The credit facility contains cross default provisions, various restrictions upon
the ability of Supplies Distributors to, among others, merge, consolidate, sell
assets, incur indebtedness, make loans and payments to related parties, provide
guarantees, make investments and loans, pledge assets, make changes to capital
stock ownership structure and pay dividends, as well as financial covenants,
such as annualized revenue to working capital, net profit after tax to revenue,
cash flow from operations, and total liabilities to tangible net worth, as
defined, and are secured by all of the assets of Supplies Distributors, as well
as collateralized guaranties of Holdings and PFSweb. Additionally, PFSweb is
required to maintain a minimum subordinated note receivable balance from
Supplies Distributors of $8.0 million and a minimum shareholders' equity, as
modified, of $18.0 million. Borrowings under the credit facility accrue
interest, after a defined free financing period, at prime rate plus 1%. The
facility accrues a quarterly commitment fee of 0.375% on the unused portion of
the commitment, and a monthly service fee.
INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT, EUROPE - SUPPLIES
DISTRIBUTORS
On September 27, 2001, Supplies Distributors S.A. ("SDSA"), a Belgium
corporation and wholly-owned subsidiary of Supplies Distributors, entered into a
short-term credit facility with IBM Belgium Financial Services S.A. ("IBM
Belgium") to finance its distribution of IBM products in Europe, which has
subsequently been amended. The amended asset based credit facility with IBM
Belgium provides up to 12.5 million Euros (approximately $13.5 million) (19.0
million euros, or approximately $20.5 million at December 31, 2002) in financing
for purchasing IBM inventory and for certain other receivables. The IBM Belgium
facility remains in force until not less than 60 days written notice by any
party, but no sooner than March 29, 2004. The credit facility contains cross
default provisions, various restrictions upon the ability of Supplies
Distributors to, among others, merge, consolidate, sell assets, incur
indebtedness, make loans and
12
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
payments to related parties, provide guarantees, make investments and loans,
pledge assets, make changes to capital stock ownership structure and pay
dividends, as well as financial covenants, such as annualized revenue to working
capital, net profit after tax to revenue, cash flow from operations and total
liabilities to tangible net worth, as defined, and are secured by all of the
assets of Supplies Distributors, as well as collateralized guaranties of
Holdings and PFSweb. Additionally, PFSweb is required to maintain a minimum
subordinated note receivable balance from Supplies Distributors of $8.0 million
and a minimum shareholders' equity, as modified, of $18.0 million. Borrowings
under the credit facility accrue interest, after a defined free financing
period, at Euribor plus 4%. SDSA pays a monthly service fee on the commitment.
LOAN AND SECURITY AGREEMENT - SUPPLIES DISTRIBUTORS
On March 29, 2002, Supplies Distributors entered into a loan and security
agreement with Congress Financial Corporation (Southwest) ("Congress") to
provide financing for up to $25 million of eligible accounts receivable in the
U.S. and Canada. The Congress facility expires on the earlier of three years or
the date on which the parties to the IBM Master Distributor Agreement shall no
longer operate under the terms of such agreement and/or IBM no longer supplies
products pursuant to such agreement. Borrowings under the Congress facility
accrue interest at prime rate plus 0.25% or Eurodollar rate plus 3.0% or on an
adjusted basis, as defined. This agreement contains cross default provisions,
various restrictions upon the ability of Supplies Distributors to, among other
things, merge, consolidate, sell assets, incur indebtedness, make loans and
payments to related parties, provide guarantees, make investments and loans,
pledge assets, make changes to capital stock ownership structure and pay
dividends, as well as financial covenants, such as minimum net worth, as
defined, and is secured by all of the assets of Supplies Distributors, as well
as collateralized guaranties of Holdings and PFSweb. Additionally, PFSweb is
required to maintain a subordinated loan to Supplies Distributors of no less
than $6.5 million and restricted cash of less than $5.0 million, and is
restricted with regard to transactions with related parties, indebtedness and
changes to capital stock ownership structure. Supplies Distributors entered into
Blocked Account Agreements with its banks and Congress whereby a security
interest was granted to Congress for all customer remittances received in
specified bank accounts.
LOAN AND SECURITY AGREEMENT - PFSWEB
On March 28, 2003, Priority Fulfillment Services, Inc. and Priority
Fulfillment Services of Canada, Inc., (both wholly-owned subsidiaries of PFSweb
and collectively the "Borrowers") entered into a two year Loan and Security
Agreement with Comerica Bank ("Comerica") to provide financing for up to $7.5
million of eligible accounts receivable in the U.S. and Canada. Borrowings under
the Comerica facility will accrue interest at prime rate plus 1%. The agreement
contains cross default provisions, various restrictions upon the Borrowers'
ability to, among other things, merge, consolidate, sell assets, incur
indebtedness, make loans and payments to related parties, make investments and
loans, pledge assets, make changes to capital stock ownership structure, as well
as financial covenants of a minimum tangible net worth, as defined, and a
minimum liquidity ratio, as defined. The agreement restricts the amount of the
Subordinated Demand Note to a maximum of $8.0 million. The agreement is secured
by all of the assets of the Borrowers, as well as a guarantee of PFSweb. There
were no amounts outstanding under this facility as of March 31, 2003.
FACTORING AGREEMENT - SUPPLIES DISTRIBUTORS
On March 29, 2002, SDSA entered into a two year factoring agreement with
Fortis Commercial Finance N.V. ("Fortis") to provide factoring for up to 7.5
million euros (approximately $8.1 million) (originally 10 million euros, amended
in October 2002) of eligible accounts receivables. Borrowings under this
agreement can be either cash advances or straight loans, as defined. Cash
advances accrue interest at 8.5%, or on an adjusted basis as defined, and
straight loans accrue interest at Euribor plus 1.4% for the agreement's first
year and Euribor plus 1.3% for the agreement's second year. This agreement
contains various restrictions upon the ability of SDSA to, among other things,
merge, consolidate, incur indebtedness, as well as financial covenants, such as
minimum net worth. This agreement is secured by a guarantee of Supplies
Distributors, up to a maximum of 200,000 euros.
13
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DEBT COVENANTS
To the extent the Company or Supplies Distributors fail to comply with its
covenants, including the monthly financial covenant requirements and required
level of consolidated stockholders' equity ($18.0 million), and the lenders
accelerate the repayment of the credit facility obligations, the Company would
be required to repay all amounts outstanding thereunder. Any acceleration of the
repayment of the credit facilities would have a material adverse impact on the
Company's financial condition and results of operations and no assurance can be
given that the Company would have the financial ability to repay all of such
obligations. At March 31, 2003, the Company and Supplies Distributors were in
compliance with all debt covenants.
PFSweb has also provided a guarantee of the obligations of Supplies
Distributors and SDSA to IBM, excluding the trade payables that are financed by
IBM credit.
7. SUPPLIES DISTRIBUTORS AND OTHER RELATED PARTIES
SUPPLIES DISTRIBUTORS
In September 2001, the Company made an equity investment of $0.75 million
in Supplies Distributors, for a 49% voting interest, and IFP made an equity
investment of $0.25 million in Supplies Distributors for a 51% voting interest.
Certain officers and directors of the Company owned, individually, a 9.8%
non-voting interest, and, collectively, a 49% non-voting interest, in IFP.
Effective October 1, 2002, the Company purchased the remaining 51% interest in
Supplies Distributors from IFP for $0.3 million.
Pursuant to the terms of the Company's transaction management services
agreement with Supplies Distributors, the Company earned service fees, which,
prior to the consolidation effective October 1, 2002 are reported as service fee
revenue, affiliate in the accompanying consolidated financial statements, of
approximately $1.5 million for the three months ended March 31, 2002.
Pursuant to Supplies Distributors' operating agreement, prior to the
October 1, 2002 acquisition date, Supplies Distributors allocated its earning
and distributed its cash flow, as defined, in the following order of priority:
first, to IFP until it received a one-time amount equal to its capital
contribution of $0.25 million; second, to IFP until it received an amount equal
to a 35% cumulative annual return on its capital contribution; third, to PFSweb
until it received a one-time amount equal to its capital contribution of $0.75
million; fourth, to PFSweb until it received an amount equal to a 35% cumulative
annual return on its capital contribution; and fifth, to PFSweb and IFP, pro
rata, in accordance with their respective capital accounts. The Company recorded
$0.5 million of equity in the earnings of Supplies Distributors, prior to the
October 1, 2002 acquisition, for the three months ended March 31, 2002. As a
result of the Company's 100% ownership of Supplies Distributors, future earnings
and dividends will be allocated and paid 100% to the Company. Under the terms of
its amended credit agreements, Supplies Distributors is currently restricted
from paying annual cash dividends without the prior approval of its lenders. In
March 2003, Supplies Distributors received lender approval for a distribution to
PFSweb of up to $600,000, none of which has been declared.
OTHER RELATED PARTIES
In August 2001, Supplies Distributors entered into an Agreement for Sales
Forces Services ("ASFS") with IBM, whereby Supplies Distributors is to actively
generate demand for and promote brand loyalty for IBM products. The ASFS expires
on the earlier of December 31, 2003 or the termination of the Master Distributor
Agreements. The ASFS automatically renews for successive one-year periods unless
either party provides prior written notice. Pursuant to the ASFS, IBM pays to
Supplies Distributors a quarterly service fee as agreed to by both parties.
Supplies Distributors has subcontracted with GMS to provide the sales force
activities required under the ASFS for an amount equal to the fees received by
Supplies Distributors from IBM under the ASFS. The principal officer of GMS
owned 46% of IFP, prior to PFSweb's purchase of IFP's interest in Supplies
Distributors.
14
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. RESTRUCTURING
In September 2002, the Company implemented a restructuring plan that
resulted in the termination of approximately 60 employees, of which 20 were
hourly employees. The Company recorded $1.2 million for severance and other
termination costs, of which $0.8 million was paid during the year ended December
31, 2002, and $0.2 million was paid during the three months ended March 31,
2003. The remaining $0.2 million at March 31, 2003 is included in accrued
expenses and is expected to be paid by March 2004. The Company did not finalize
all restructuring activities as of December 31, 2002, and expects to incur an
additional amount totaling $0.5 million to $1.0 million of restructuring charges
during calendar year 2003.
9. COMMITMENTS AND CONTINGENCIES
In June 2002, the NASDAQ approved our transition from the NASDAQ National
Market System to the NASDAQ SmallCap Market. Our securities began trading on the
NASDAQ SmallCap Market on June 10, 2002.
This transition occurred in response to NASDAQ Marketplace Rule 4450(a)(5),
which requires a minimum bid price of $1.00 for continued listing on the NASDAQ
National Market. The SmallCap Market also has a minimum bid price of $1.00 per
share. However, as compared to the 90 day grace period provided by the NASDAQ
National Market, the SmallCap Market currently has a longer minimum bid price
grace period of 180 days from receipt of NASDAQ Delisting Notification (February
14, 2002 for the Company). This grace period extended us through August 13,
2002.
Due to the Company's compliance with the initial listing requirements for
the NASDAQ SmallCap Market, on August 14, 2002 PFSweb was provided an additional
180 day grace period, or until February 10, 2003 to regain compliance. In March
2003, the Company was provided an additional 90 day grace period, or until May
12, 2003, to regain compliance. On May 14, 2003, we received a NASDAQ Staff
Determination letter, indicating that the Company no longer complies with the $1
minimum bid price requirement for continued listing and that the Company's
common stock is, therefore, subject to delisting from the NASDAQ SmallCap Market
at the opening of business on May 23, 2003. The Company will request a hearing
to appeal this notice. The Company's hearing request will defer delisting until
the NASDAQ Listing Qualifications Panel reaches a decision. Until then, the
Company's common stock will remain listed and will continue to trade on the
NASDAQ SmallCap Market. There can be no assurance as to when the Panel will
reach a decision or that such a decision will be favorable to the Company. If
the Company subsequently decides not to appeal the delisting notice, or if the
Panel denies the appeal, the Company's securities may be immediately eligible
for quotation on the OTC Bulletin Board. The delisting of the Company's common
stock could have a material adverse effect on the market price of, and the
efficiency of the trading market for, PFSweb's common stock.
The Company is involved in certain litigation arising in the ordinary
course of business. Management believes that such litigation will be resolved
without material effect on the Company's financial position or results of
operations.
10. SEGMENT INFORMATION
The Company is organized into two operating segments: PFSweb is an
international provider of integrated business process outsourcing solutions and
operates as a service fee business; Supplies Distributors is a master
distributor of primarily IBM products, and recognizes revenues and costs when
product is shipped.
15
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2003 2002
------------ ------------
Revenues (in thousands):
PFS ................................ $ 8,528 $ 8,318
Supplies Distributors .............. 59,719 --
Eliminations ....................... (1,920) --
------------ ------------
$ 66,327 $ 8,318
============ ============
MARCH 31, DECEMBER 31,
2003 2002
------------ ------------
Long-lived assets (in thousands):
PFS ................................. $ 10,949 $ 11,710
Supplies Distributors .............. 28 35
------------ ------------
$ 10,977 $ 11,745
============ ============
16
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 and our Form 10-K for the
year ended December 31, 2002, could cause our results to differ materially from
those expressed in our forward-looking statements. These factors include:
o our ability to retain and expand relationships with existing clients
and attract new clients;
o our reliance on the fees generated by the transaction volume or
product sales of our clients;
o our reliance on our clients' projections or transaction volume or
product sales;
o our dependence upon our agreements with IBM;
o our client mix and the seasonality of their business;
o our ability to finalize pending contracts;
o the impact of strategic alliances and acquisitions;
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 our ability to generate more revenue and achieve sustainable
profitability;
o effects of changes in profit margins;
o the customer concentration of our business;
o the unknown effects of possible system failures and rapid changes in
technology;
o trends in government regulation both foreign and domestic;
o foreign currency risks and other risks of operating in foreign
countries;
o potential litigation involving our e-commerce intellectual property
rights;
o our dependency on key personnel;
o our ability to raise additional capital or obtain additional
financing;
o our relationship with and our guarantees of the working capital
indebtedness of our subsidiary, Supplies Distributors;
o our ability or the ability of our subsidiaries to borrow under current
financing arrangements and maintain compliance with debt covenants;
and
o the continued listing of our common stock on the NASDAQ SmallCap
Market.
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. In addition, some forward-looking
statements are based upon assumptions as to future events that may not prove to
be accurate. Therefore, actual outcomes and results may differ materially from
what is expected or forecasted in such forward-looking statements. We undertake
no obligation to update publicly any forward-looking statement for any reason,
even if new information becomes available or other events occur in the future.
There may be additional risks that we do not currently view as material or that
are not presently known.
17
OVERVIEW
We are an international outsourcing provider of integrated business process
outsourcing solutions to major brand name companies seeking to maximize their
supply chain efficiencies and to extend their e-commerce initiatives. We derive
our revenues from a broad range of services, including professional consulting,
technology collaboration, order management, managed web hosting and web
development, customer relationship management, financial services including
billing and collection services and working capital solutions, options kitting
and assembly services, information management and international fulfillment and
distribution services. We offer our services as an integrated solution, which
enables our clients to outsource their complete infrastructure needs to a single
source and to focus on their core competencies. Our distribution services are
conducted at our warehouses and include real-time inventory management and
customized picking, packing and shipping of our clients' customer orders. We
currently provide infrastructure and distribution solutions to clients that
operate in a range of vertical markets, including technology manufacturing,
computer products, printers, cosmetics, fragile goods, high security
collectibles, pharmaceuticals, housewares, apparel, telecommunications 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). Our billings for reimbursements of these and other
'out-of-pocket' expenses, such as travel, shipping and handling costs and
telecommunication charges are included in gross service fee revenue. The related
reimbursable costs are reflected as pass-through charges and reduce total gross
service fee revenue in computing net service fee revenue.
For the periods subsequent to October 1, 2002 and currently, our services
include purchasing and reselling client product inventory under our master
distributor agreements with IBM and certain other clients. In these
arrangements, our product revenue is recognized at the time product is shipped.
Product revenue includes freight costs billed to customers and is reduced for
pass through customer marketing programs. For the period from January 1, 2002,
to September 30, 2002, these IBM and other agreements were structured to provide
transaction management services only on a service fee basis based on a
percentage of shipped revenue.
Our expenses are comprised of:
o subsequent to October 1, 2002 and currently, cost of product revenue,
which consists of the price of product sold and freight costs and is
reduced by certain reimbursable expenses such as pass through customer
marketing programs, direct costs incurred in passing on any price
decreases offered by IBM to Supplies Distributors customers to cover
price protection and certain special bids, the cost of products
provided to replace defective product returned by customers and
certain other expenses as defined under the master distributor
agreements;
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, for the
periods subsequent to October 1, 2002 and currently, certain direct
contract costs related to our IBM and other master distributor
agreements are reflected as selling and administrative expenses.
18
RESULTS OF OPERATIONS
The following table sets forth certain historical financial information
from our unaudited interim condensed consolidated statements of operations
expressed as a percent of revenue.
Three Months Ended
March 31,
------------------------
2003 2002
-------- --------
(Unaudited) (Unaudited)
Product revenue ......................................... 90.0% --%
-------- --------
Gross service fee revenue ............................... 10.9 94.1
Gross service fee revenue, affiliate .................... -- 18.8
-------- --------
Total gross service fee revenue .................. 10.9 112.9
Pass-through charges .................................... (0.9) (12.9)
-------- --------
Net service fee revenue ................................. 10.0 100.0
Total net revenues ............................... 100.0 100.0
-------- --------
Cost of product revenue (as % of product revenue) ....... 94.5 --
Cost of service fee revenue (as % of net service fee
revenue) .............................................. 74.3 63.8
Total costs of revenues .......................... 92.5 63.8
-------- --------
Gross profit ..................................... 7.5 36.2
Selling, general and administrative expenses ............ 9.2 84.4
-------- --------
Loss from operations ............................. (1.7) (48.2)
Equity in earnings of affiliate ......................... -- 6.2
Interest expense ........................................ 1.0 1.0
Interest income ......................................... (0.1) (4.2)
-------- --------
Loss before income taxes ......................... (2.6) (38.8)
Income tax expense (benefit) ............................ 0.1 --
-------- --------
Net loss ......................................... (2.7)% (38.8)%
======== ========
RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED MARCH 31, 2003 AND 2002
Product Revenue. Product revenue was $59.7 million for the three months
ended March 31, 2003, which reflects product sales for Supplies Distributors
subsequent to its consolidation effective October 1, 2002 (see "Supplies
Distributors"). Supplies Distributors had $53.1 million of product revenue for
the three months ended March 31, 2002 prior to consolidation. Based on Supplies
Distributors' current business plan, we expect to report future product revenue
of approximately $60 million per quarter in calendar year 2003.
Net Service Fee Revenue (including service fee revenue, affiliate). Net
service fee revenue was $6.6 million for the three months ended March 31, 2003
as compared to $8.3 million for the three months ended March 31, 2002, a
decrease of $1.7 million or 20.6%. We earned $1.2 million of service fee
revenues in the three months ended March 31, 2003, applicable to new service
contract relationships. However, this increase was more than offset primarily by
(i) $1.5 million applicable to the elimination of service fee revenue, affiliate
earned from our arrangements with Supplies Distributors, subsequent to its
consolidation effective October 1, 2002, (ii) the prior year period including
service fees of $0.9 million applicable to an incremental project for a certain
client which did not recur this year, and (iii) the impact of certain client
terminations in calendar year 2002, which had generated $0.5 million of net
service fee revenue in the prior year period. Net service fee revenue during the
March quarter is seasonably lower than other quarters due to the seasonality of
our largest client, which is expected to be followed by a higher second quarter.
Cost of Product Revenue. Cost of product revenue was $56.4 million for the
three months ended March 31, 2003, which reflects cost of product sales for
Supplies Distributors subsequent to its consolidation effective October 1, 2002.
Cost of product revenue as a percent of product revenue was 94.5% during the
three months ended March 31, 2003. The resulting gross profit margin was 5.5%
for the three months ended March 31, 2003. Supplies Distributors had $50.1
million of cost of product revenue, prior to
19
consolidation, for the three months ended March 31, 2002. Based on Supplies
Distributors' current business plan, we expect to report future cost of product
revenue of approximately $57 million per quarter in calendar year 2003.
Cost of Net Service Fee Revenue. Cost of net service fee revenue was $4.9
million for the three months ended March 31, 2003, as compared to $5.3 million
during the three months ended March 31, 2002, a decrease of $0.4 million or
7.4%. The resulting service fee gross profit was $1.7 million or 25.7% of net
service fee revenue, during the three months ended March 31, 2003 as compared to
$3.0 million, or 36.2% of net service fee revenue for the three months ended
March 31, 2002. Our gross profit as a percent of net service fee revenue
decreased in the current period primarily as a result of the elimination of the
service fee revenue affiliate and resulting gross profit, from services provided
under our arrangements with Supplies Distributors and due to the seasonality of
our largest client. As we add new service fee revenue in the future, we
currently intend to target the underlying contracts to earn an average gross
profit percentage of 35-40%.
Selling, General and Administrative Expenses. SG&A expenses were $6.1
million for the three months ended March 31, 2003, or 9.2% of total net
revenues, as compared to $7.0 million, or 84.4% of total net revenues, for the
three months ended March 31, 2002. SG&A expenses as a percentage of total net
revenues decreased from the prior year due to the increase in total net
revenues, resulting from the inclusion of product sales subsequent to the
consolidation of Supplies Distributors effective October 1, 2002. SG&A expenses
decreased from the prior year due to the restructuring actions, including
personnel reductions, which occurred in September 2002. In addition, the prior
year SG&A expense included certain incremental sales and marketing costs. These
items were partially offset as due to the consolidation of Supplies
Distributors, we reclassify certain costs previously characterized as cost of
service fee revenue to SG&A. We are targeting our future consolidated SG&A
expenses to be between approximately $6.0 million to $7.0 million on a quarterly
basis for calendar year 2003.
Equity in Earnings of Affiliate. For the three months ended March 31, 2002,
we recorded $0.5 million of equity in earnings of affiliate that represents our
allocation of Supplies Distributors' earnings prior to October 1, 2002. Due to
the consolidation of Supplies Distributors, effective October 1, 2002, we no
longer report equity in earnings of affiliate, on a consolidated basis, for our
ownership of Supplies Distributors in the future.
Interest Expense. Interest expense was $0.6 million for the three months
ended March 31, 2003 as compared to $0.1 million for the three months ended
March 31, 2002. The increase in interest expense is due to the consolidation of
Supplies Distributors. Based on current estimates of interest rates and
borrowing levels, we expect interest expense to be approximately $0.6 million to
$0.8 million on a quarterly basis for calendar year 2003.
Interest Income. Interest income was $0.03 million and $0.3 million for the
three months ended March 31, 2003 and 2002, respectively. Effective October 1,
2002 we now report lower consolidated interest income resulting from the
elimination of interest income from the Subordinated Note due to PFS from
Supplies Distributors upon consolidating Supplies Distributors. Interest income,
prior to the consolidation of Supplies Distributors, would have been $0.2
million for the three months ended March 31, 2003. Interest income decreased as
compared to the three months ended March 31, 2003, attributable to lower
interest rates earned by our cash and cash equivalents and lower balances of
cash and cash equivalents.
Income Taxes. For the three months ended March 31, 2003, we recorded a tax
provision of $0.1 million primarily associated with Supplies Distributors'
Canadian and European operations. We did not record an income tax benefit
associated with our consolidated net loss in our U.S. operations. A valuation
allowance has been provided for our net deferred tax assets as of December 31,
2002, which are primarily related to our net operating loss carryforwards. For
the three months ended March 31, 2002, we did not record an income tax benefit.
We did not record an income tax benefit for our European pre-tax losses in the
current or prior period. Due to the consolidation of Supplies Distributors, in
the future we anticipate that we will continue to record an income tax provision
associated with Supplies Distributors' Canadian and European results of
operations.
20
SUPPLIES DISTRIBUTORS
In July 2001, we and Inventory Financing Partners, LLC ("IFP") formed
Business Supplies Distributors Holdings, LLC ("Holdings"), and Holdings formed a
wholly-owned subsidiary, Supplies Distributors ("SD"). Concurrently, SD formed
its wholly-owned subsidiaries Supplies Distributors of Canada, Inc. ("SDC") and
Supplies Distributors S.A. ("SDSA"), a Belgium corporation (collectively with
Holdings, SD, SDC and SDSA, "Supplies Distributors"). Supplies Distributors acts
as master distributors of various IBM and other products and, pursuant to a
transaction management services agreement between us and Supplies Distributors,
we provide transaction management and fulfillment services to Supplies
Distributors. We made an initial equity investment in Holdings for a 49% voting
interest, and IFP made an equity investment for a 51% voting interest. Certain
officers and directors of PFSweb owned, individually, a 9.8% non-voting
interest, and, collectively, a 49% non-voting interest, in IFP. In addition to
our equity investment in Holdings, we have also provided Supplies Distributors
with a subordinated loan that, as of March 31, 2003, had an outstanding balance
of $8.0 million and accrued interest at a rate of approximately 10%.
On September 27, 2001, Supplies Distributors entered into short-term credit
facilities with IBM Credit Corporation ("IBM Credit") and IBM Belgium Financial
Services S.A. ("IBM Belgium") to finance its distribution of IBM products. We
provided a collateralized guaranty to secure the repayment of these credit
facilities. As of March 31, 2003, the subsequently amended asset-based credit
facilities provided financing for up to $27.5 million and up to 12.5 million
Euros (approximately $13.5 million) with IBM Credit and IBM Belgium,
respectively. These agreements expire in March 2004
In March 2002, Supplies Distributors also entered into a loan and security
agreement with Congress Financial Corporation (Southwest) ("Congress") to
provide financing for up to $25 million of eligible accounts receivables in the
U.S. and Canada. The Congress facility expires on the earlier of three years or
the date on which the parties to the IBM Master Distributor Agreement shall no
longer operate under the terms of such agreement and/or IBM no longer supplies
products pursuant to such agreement. In March 2002, SDSA entered into a two year
factoring agreement with Fortis Commercial Finance N.V. ("Fortis") to provide
factoring for up to 7.5 million Euros (approximately $8.1 million) of eligible
accounts receivables. Borrowings under this agreement can be either cash
advances or straight loans, as defined.
These credit facilities contain cross default provisions, various
restrictions upon the ability of Holdings, SD and SDSA to, among other things,
merge, consolidate, sell assets, incur indebtedness, make loans and payments to
related parties, provide guarantees, make investments and loans, pledge assets,
make changes to capital stock ownership structure and pay dividends, as well as
financial covenants, such as cash flow from operations, annualized revenue to
working capital, net profit after tax to revenue, minimum net worth and total
liabilities to tangible net worth, as defined, and are secured by all of the
assets of Supplies Distributors, as well as collateralized guaranties of
Holdings and PFSweb. Additionally, we are required to maintain a subordinated
loan to Supplies Distributors of no less than $8.0 million, maintain restricted
cash of less than $5.0 million, are restricted with regard to transactions with
related parties, indebtedness and changes to capital stock ownership structure
and a minimum shareholders' equity of at least $18.0 million. Furthermore, we
are obligated to repay any over-advance made to Supplies Distributors or SDSA
under these facilities if SD, SDC or SDSA is unable to do so. We have also
provided a guarantee of the obligations of SD and SDSA to IBM, excluding the
trade payables that are financed by IBM credit.
Effective October 1, 2002, we purchased the remaining 51% interest in
Holdings from IFP.
Pursuant to the terms of our transaction management services agreement with
Supplies Distributors, we earned service fees, which are reported as service fee
revenue, affiliate in the accompanying unaudited interim condensed consolidated
financial statements (prior to the consolidation of Supplies Distributors'
results of operations effective October 1, 2002), of approximately $1.5 million
for the three months ended March 31, 2002.
Prior to the consolidation of Supplies Distributors' operating results
effective October 1, 2002, we recorded our interest in Supplies Distributors'
net income, which was allocated and distributed to the owners pursuant to the
terms of Supplies Distributors' operating agreement, under the modified equity
method, which resulted in us recording our allocated earnings of Supplies
Distributors or 100% of Supplies Distributors' losses and our proportionate
share of Supplies Distributors' cumulative foreign currency
21
translation adjustments. Pursuant to Supplies Distributors' operating agreement,
Supplies Distributors allocated its earning and distributed its cash flow, as
defined, in the following order of priority: first, to IFP until it received a
one-time amount equal to its capital contribution of $0.25 million; second, to
IFP until it received an amount equal to a 35% cumulative annual return on its
capital contribution; third, to PFSweb until it received a one-time amount equal
to its capital contribution of $0.75 million; fourth, to PFSweb until it
received an amount equal to a 35% cumulative annual return on its capital
contribution; and fifth, to PFSweb and IFP, pro rata, in accordance with their
respective capital accounts. We recorded $0.5 million of equity in the earnings
of Supplies Distributors for the three months ended March 31, 2002. As a result
of our 100% ownership of Supplies Distributors, future earnings and dividends
will be allocated and paid 100% to PFSweb. Notwithstanding the foregoing, no
distribution could be made if, after giving effect thereto, the net worth of
Supplies Distributors would be less than $1.0 million. Under terms of the credit
agreements described above, Supplies Distributors is currently limited to annual
cash dividends of $0.6 million.
In the future, as a result of the purchase, we will consolidate 100% of
Supplies Distributors financial position and results of operations into our
consolidated financial statements. Pro forma net revenues and pro forma net loss
for the three months ended March 31, 2002, assuming our purchase of the
remaining 51% interest in Supplies Distributors from IFP had occurred in January
2002, would have been $59.9 million and $2.9 million, respectively. The pro
forma data includes a $0.2 million extraordinary gain on the purchase from IFP,
primarily as a result of the purchase price being less than IFP's capital
account. The unaudited pro forma net revenue and pro forma net loss are not
necessarily indicative of the consolidated results of operations for future
periods or the results of operations that would have been realized had we
consolidated Supplies Distributors during the period noted.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $4.0 million for the three
months ended March 31, 3003, and primarily resulted from a $7.2 million decrease
in inventory, partially offset by cash used to fund operating losses and an
increase in accounts receivable of $2.0 million and decrease in accounts payable
and accrued expenses of $0.9 million. Net cash used in operating activities was
$0.8 million for the three months ended March 31, 2002, and primarily resulted
from cash used to fund operating losses and an increase in accounts receivable,
partially offset by a decrease in prepaid expenses and other current assets and
a decrease in accounts payable, accrued expenses, and deferred income.
Net cash used in investing activities for the three months ended March 31,
2003 totaled $0.3 million, representing capital expenditures. Net cash used by
investing activities totaled $0.6 million for the three months ended March 31,
2002, which primarily included $0.3 million of capital expenditures. 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 and upgrades to our
facilities, both domestic and foreign. We expect to incur 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 the upcoming twelve months will be
approximately $2 to $4 million, although additional capital expenditures may be
necessary to support the infrastructure requirements of new clients. A portion
of these expenditures may be financed through operating or capital leases. We
may elect to modify or defer a portion of such anticipated investments in the
event that we do not achieve the revenue necessary to support such investments.
Net cash used in financing activities was approximately $3.4 million for
the three months ended March 31, 2003, primarily representing $0.3 million of
payments on our long-term debt and capital lease obligations and $2.8 million of
payments on debt.
During the three months ended March 31, 2003, our working capital decreased
to $15.0 million from $16.1 million at December 31, 2002 primarily as a result
of our operating losses. To obtain additional financing in the future, in
addition to our current cash position, we plan to evaluate various financing
alternatives including utilizing capital or operating leases, borrowing under
our own credit facility, or transferring a portion of our subordinated loan
balances, due from Supplies Distributors, to third-parties. In conjunction with
certain of these alternatives, we may be required to provide certain letters of
credit to secure these arrangements. No assurances can be given that we will be
successful in obtaining any
22
additional financing or the terms thereof. We currently believe that our cash
position, financing available under our credit facilities and funds generated
from operations (including our anticipated revenue growth and/or cost reductions
to offset lower than anticipated revenue growth) will satisfy our presently
known operating cash needs, our working capital and capital expenditure
requirements, our lease obligations, and additional subordinated loans to
Supplies Distributors, if necessary, for at least the next twelve months.
The following is a schedule of our total contractual cash and other
obligations, which is comprised of operating leases, other obligations, which
represents $0.1 million of contingent obligations we believe will be paid in the
next twelve months, long-term debt and capital leases, including interest (in
millions):
TOTAL
CONTRACTUAL
DEBT AND CONTRACTUAL CASH AND
OPERATING CAPITAL OTHER
LEASES LEASES OBLIGATIONS
---------- ---------- -----------
Twelve Months Ended March 31,
2003 .......................................... $ 63,609 $ 1,385 $ 64,994
2004 .......................................... 3,840 763 4,603
2005 .......................................... 3,150 501 3,651
2006 .......................................... 2,717 441 3,158
2007 .......................................... 1,172 425 1,597
Thereafter .................................... 732 71 803
---------- ---------- -----------
Total contractual cash obligations .... $ 75,220 $ 3,586 $ 78,806
========== ========== ===========
In support of certain debt instruments and leases, as of March 31, 2003, we
had $2.9 million of cash restricted as collateral for letters of credit. The
letters of credit currently expire at various dates through July 2004, but
require renewal through the related debt and lease obligations termination
dates. In addition, as described above, we have provided collateralized
guarantees to secure the repayment of certain Supplies Distributors' credit
facilities. As of March 31, 2003, the outstanding balance of our senior credit
facilities was approximately $58.4 million. To the extent we fail to comply with
our debt covenants, including the monthly financial covenant requirements and
our required level of stockholders' equity, and the lenders accelerate the
repayment of the credit facility obligations, we would be required to repay all
amounts outstanding thereunder. Any requirement to accelerate the repayment of
the credit facility obligations would have a material adverse impact on our
financial condition and results of operations. We can provide no assurance that
we will have the financial ability to repay all of such obligations. As of March
31, 2003, we were in compliance with all debt covenants and we believe that we
will maintain such compliance throughout calendar year 2003. Furthermore, we are
obligated to repay any over-advance made to Supplies Distributors or its
subsidiaries by its lenders, in the event that Supplies Distributors or its
subsidiaries are unable to do so. An over-advance would arise in the event
borrowings exceeded the maximum amount available under the eligible borrowing
base, as defined. We are also required to maintain a minimum subordinated loan
to Supplies Distributors of $8.0 million. We have to seek lender approval to
increase or decrease this amount. We do not have any other material financial
commitments.
In September 2002, we implemented a restructuring plan and terminated
approximately 10% of our workforce. As a result of the terminations and certain
asset write-offs recorded during the three months ended September 30, 2002, we
believe we have reduced our annual operating expenses by approximately $5
million to $6 million. We also continue to seek out other non-payroll related
operating expense reductions that could impact this amount further.
We currently believe that we are still operating with and incurring costs
applicable to excess physical capacity in our North American and European
operations. We believe that based on our current cost structure, as we add
revenue, we will be able to cover our reduced infrastructure costs and reach
profitability. We currently estimate that the net service fee revenue needed to
leverage our existing infrastructure and cost structure and reach profitability
is approximately between $12 million to $13 million per quarter. No assurance
can be given that we can achieve such operating levels, or that, if achieved, we
will be profitable in any particular fiscal period. We will reevaluate the
carrying value of certain of the excess long-lived warehouse operation and
information technology infrastructure assets for impairment in
23
2003, in conjunction with our future operating plans, and determine if
additional asset impairment costs should be recognized.
In the future, we may attempt to acquire other businesses or seek an equity
or strategic partner to generate capital or expand our services or capabilities
in connection with our efforts to grow our business. Acquisitions involve
certain risks and uncertainties and may require additional financing. Therefore,
we can give no assurance with respect to whether we will be successful in
identifying businesses to acquire or an equity or strategic partner, whether we
or they will be able to obtain financing to complete a transaction, or whether
we or they will be successful in operating the acquired business.
On March 28, 2003, Priority Fulfillment Services, Inc. and Priority
Fulfillment Services of Canada, Inc., (both wholly-owned subsidiaries of PFSweb
and collectively the "Borrowers") entered into a two year Loan and Security
Agreement with Comerica Bank ("Comerica") to provide financing for up to $7.5
million of eligible accounts receivable in the U.S. and Canada. We entered this
agreement to supplement our existing cash position, and provide funding for our
future operations, including our targeted growth. Borrowings under the Comerica
facility will accrue interest at prime rate plus 1%. The agreement contains
cross default provisions, various restrictions upon the Borrowers' ability to,
among other things, merge, consolidate, sell assets, incur indebtedness, make
loans and payments to related parties, make investments and loans, pledge
assets, make changes to capital stock ownership structure, as well as financial
covenants of a minimum tangible net worth, as defined, and a minimum liquidity
ratio, as defined. The agreement also limits our ability to increase the
subordinated loan to Supplies Distributors without the lender's approval. The
agreement is secured by all of the assets of the Borrowers, as well as a
guarantee of PFSweb.
CONTINUED LISTING ON NASDAQ SMALLCAP MARKET
In June 2002, the NASDAQ approved our transition from the NASDAQ National
Market System to the NASDAQ SmallCap Market. Our securities began trading on the
NASDAQ SmallCap Market on June 10, 2002.
This transition occurred in response to NASDAQ Marketplace Rule 4450(a)(5),
which requires a minimum bid price of $1.00 for continued listing on the NASDAQ
National Market. The SmallCap Market also has a minimum bid price of $1.00 per
share. However, as compared to the 90 day grace period provided by the NASDAQ
National Market, the SmallCap Market currently has a longer minimum bid price
grace period of 180 days from receipt of NASDAQ Delisting Notification (February
14, 2002 for the Company). This grace period extended us through August 13,
2002.
Due to our compliance with the initial listing requirements for the NASDAQ
SmallCap Market, on August 14, 2002 we were provided an additional 180 day grace
period, or until February 10, 2003 to regain compliance. In March 2003, we were
provided an additional 90 day grace period, or until May 12, 2003, to regain
compliance. On May 14, 2003, we received a NASDAQ Staff Determination letter,
indicating that we no longer comply with the $1 minimum bid price requirement
for continued listing and that our common stock is, therefore, subject to
delisting from the NASDAQ SmallCap Market at the opening of business on May 23,
2003. We will request a hearing to appeal this notice. Our hearing request will
defer delisting until the NASDAQ Listing Qualifications Panel reaches a
decision. Until then, our common stock will remain listed and will continue to
trade on the NASDAQ SmallCap Market. There can be no assurance as to when the
Panel will reach a decision or that such a decision will be favorable to us. If
we subsequently decide not to appeal the delisting notice, or if the Panel
denies the appeal, our securities may be immediately eligible for quotation on
the OTC Bulletin Board. The delisting of our common stock could have a material
adverse effect on the market price of, and the efficiency of the trading market
for, our common stock.
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 service fee
business activity will be at it lowest in the quarter ended March 31 and at its
highest in the quarter ended June 30. We expect our Supplies Distributors
business to be seasonally strong in the December quarter of each year.
24
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 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which addresses the accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The adoption of this standard did not have a
material impact on the consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses the financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The adoption of
this standard did not have a material impact on the consolidated financial
statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS 148 amends SFAS 123, "Accounting
for Stock-Based Compensation," to provide alternative methods of transition for
a voluntary change to the fair value method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the provisions of SFAS 123
to require more prominent disclosure in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results of operations. We adopted
the disclosure requirements of SFAS 148 as of December 31, 2002.
In January 2003, the FASB issued FIN No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness of
Others." FIN No. 45 requires a company to recognize a liability for the
obligations it has undertaken in issuing a guarantee. This liability would be
recorded at the inception of a guarantee and would be measured at fair value.
The measurement provisions of this statement apply prospectively to guarantees
issued or modified after December 31, 2002. The disclosure provisions of the
statement apply to financial statements for periods ending after December 15,
2002. We adopted the disclosure provisions of the statement as of December 31,
2002 and the measurement provisions of this statement during the three months
ended March 31, 2003. The adoption of this statement did not have a material
effect on the consolidated financial statements.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities." FIN 46 requires a company to consolidate a variable interest
entity if it is designated as the primary beneficiary of that entity even if the
company does not have a majority of voting interests. A variable interest entity
is generally defined as an entity where its equity is unable to finance its
activities or where the owners of the entity lack the risk and rewards of
ownership. The provisions of this statement apply at inception for any entity
created after January 31, 2003. For an entity created before February 1, 2003,
the provisions of this interpretation must be applied at the beginning of the
first interim or annual period beginning after June 15, 2003. We adopted the
provisions of FIN No. 46 during the three months ended March 31, 2003. The
adoption of the statement did not have a material effect on the consolidated
financial statements.
The FASB Emerging Issues Task Force issued EITF 00-21, "Accounting for
Revenue Arrangements with Multiple Deliverables," to address certain revenue
recognition issues. The guidance provided from EITF 00-21 addresses both the
timing and classification in accounting for different earnings processes. We do
not expect that the adoption of EITF 00-21 will have a material impact on our
consolidated financial condition or operations.
25
CRITICAL ACCOUNTING POLICIES
A description of critical accounting policies is included in Note 2 to the
accompanying unaudited interim condensed consolidated financial statements. For
other significant accounting policies, see Note 2 to the consolidated financial
statements in our December 31, 2002 Annual Report on Form 10-K.
I
TEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to various market risks including interest rates on its
financial instruments and foreign exchange rates.
Interest Rate Risk
Our interest rate risk is limited to our outstanding balances on our inventory
and working capital financing agreements, loan and security agreement and
factoring agreement for the financing of inventory, accounts receivable and
certain other receivables, which amounted to $57.1 million at March 31, 2003. A
100 basis point movement in interest rates would result in approximately $0.2
million annualized increase or decrease in interest expense based on the
outstanding balance of these agreements at March 31, 2003.
Foreign Exchange Risk
Currently, our foreign currency exchange rate risk is primarily limited to
the Canadian Dollar and the Euro. In the future, our foreign currency exchange
risk may also include other currencies applicable to certain of our
international operations. We may, from time to time, employ derivative financial
instruments to manage our exposure to fluctuations in foreign currency rates. To
hedge our net investment and intercompany payable or receivable balances in
foreign operations, we may enter into forward currency exchange contracts. We do
not hold or issue derivative financial instruments for trading purposes or for
speculative purposes.
ITEM 4. CONTROLS AND PROCEDURES
We maintain a system of controls and procedures designed to provide
reasonable assurance as to the reliability of the financial statements and other
disclosures included in this report, as well as to safeguard assets from
unauthorized use or disposition. We evaluated the effectiveness of the design
and operation of our disclosure controls and procedures under the supervision
and with the participation of management, including our Chief Executive Officer
and Principal Financial and Accounting Officer, within 90 days prior to the
filing date of this report. Based upon the evaluation, our Chief Executive
Officer and Principal Financial and Accounting Officer concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information required to be included in our periodic Securities and
Exchange Commission filings. No significant changes were made to our internal
controls or other factors that could significantly affect these controls
subsequent to the date of their evaluation.
26
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
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** Loan and Security Agreement by and between Comerica Bank -
California ("Bank") and Priority Fulfillment Services, Inc.
("Priority") and Priority Fulfillment Services of Canada, Inc.
("Priority Canada")
10.2** Unconditional Guaranty of PFSweb, Inc. to Comerica
Bank-California
10.3** Security Agreement of PFSweb, Inc. to Comerica Bank-California
10.4** Intellectual Property Security Agreement between Priority
Fulfillment Services, Inc. and Comerica Bank-California
10.5** Amendment 2 to Amended and Restated Platinum Plan Agreement
(with Invoice Discounting) by and among Supplies Distributors,
S.A., Business Supplies Distributors B.V., PFSweb B.V., and
IBM Belgium Financial Services S.A.
10.6** Amendment to Agreement for Inventory Financing by and among
Business Supplies Distributors Holdings, LLC, Supplied
Distributors, Inc., Priority Fulfillment Services, Inc.,
PFSweb, Inc., and IBM Credit LLC
99.1** Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2** Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
27
----------
* Incorporated by reference from PFSweb, Inc. Registration Statement on
Form S-1 (Commission File No. 333-87657).
** Filed herewith
b) Reports on Form 8-K:
Form 8-K/A filed on January 8, 2003 reporting Item 2, Acquisition or
Disposition of Assets, that on October 25, 2002, Priority Fulfillment
Services, Inc. (the "Company") acquired the remaining 51% ownership
interest in Business Supplies Distributors Holdings, LLC ("Holdings")
for $331,758. Also reporting Item 7, Financial Statements of Holdings
and the Pro Forma Financial Information of the Company.
28
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: May 15, 2003
PFSweb, Inc.
By: /s/ Thomas J. Madden
-------------------------
Thomas J. Madden
Chief Financial Officer,
Chief Accounting Officer,
Executive Vice President
29
CERTIFICATIONS OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
I, Mark Layton, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PFSweb, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the periods covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operation and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize, and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
-----------------------
By: /s/ Mark C. Layton
-----------------------
Chief Executive Officer
30
CERTIFICATIONS OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
I, Tom Madden, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PFSweb, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the periods covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operation and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize, and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
---------------------------
By: /s/ Thomas J. Madden
---------------------------
Chief Financial Officer and
Chief Accounting Officer
31
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
------- -----------------------
3.1* Amended and Restated Certificate of Incorporation
3.2* Amended and Restated Bylaws
10.1** Loan and Security Agreement by and between Comerica Bank -
California ("Bank") and Priority Fulfillment Services, Inc.
("Priority") and Priority Fulfillment Services of Canada, Inc.
("Priority Canada")
10.2** Unconditional Guaranty of PFSweb, Inc. to Comerica
Bank-California
10.3** Security Agreement of PFSweb, inc. to Comerica Bank-California
10.4** Intellectual Property Security Agreement between Priority
Fulfillment Services, Inc. and Comerica Bank-California
10.5** Amendment 2 to Amended and Restated Platinum Plan Agreement (with
Invoice Discounting) by and among Supplies Distributors, S.A.,
Business Supplies Distributors B.V., PFSweb B.V., and IBM Belgium
Financial Services S.A.
10.6** Amendment to Agreement for Inventory Financing by and among
Business Supplies Distributors Holdings, LLC, Supplied
Distributors, Inc., Priority Fulfillment Services, Inc., PFSweb,
Inc., and IBM Credit LLC
99.1** Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2** Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
---------
* Incorporated by reference from PFSweb, Inc. Registration Statement on Form
S-1 (Commission File No. 333-87657).
** Filed herewith
32
EXHIBIT 10.1
--------------------------------------------------------------------------------
PRIORITY FULFILLMENT SERVICES, INC.
AND
PRIORITY FULFILLMENT SERVICES OF CANADA, INC.
LOAN AND SECURITY AGREEMENT
--------------------------------------------------------------------------------
This LOAN AND SECURITY AGREEMENT is entered into as of March 28, 2003, by and
between Comerica Bank - California ("Bank") and Priority Fulfillment Services,
Inc. ("Priority") and Priority Fulfillment Services of Canada, Inc. ("Priority
Canada"; Priority and Priority Canada are sometimes collectively referred to in
this Agreement as "Borrower" and each individually as "Borrower").
RECITALS
Borrowers wish to obtain credit from time to time from Bank, and Bank desires to
extend credit to Borrowers. This Agreement sets forth the terms on which Bank
will advance credit to Borrowers, and Borrowers will repay the amounts owing to
Bank.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION.
1.1 Definitions. As used in this Agreement, all capitalized terms shall
have the definitions set forth on Exhibit A. Any term used in the Code and not
defined herein shall have the meaning given to the term in the Code.
1.2 Accounting Terms. Any accounting term not specifically defined on
Exhibit A shall be construed in accordance with GAAP and all calculations shall
be made in accordance
with GAAP. The term "financial statements" shall include
the accompanying notes and schedules.
2. LOAN AND TERMS OF PAYMENT.
2.1 Credit Extensions.
(a) Promise to Pay. Each Borrower jointly and severally promises to
pay to Bank, in lawful money of the United States of America, the aggregate
unpaid principal amount of all Credit Extensions made by Bank to Borrowers,
together with interest on the unpaid principal amount of such Credit Extensions
at rates in accordance with the terms hereof.
(b) Revolving Advances.
(i) Amount. Subject to and upon the terms and conditions of
this Agreement (1) Borrowers may request Advances in an aggregate outstanding
amount not to exceed the lesser of (A) the Committed Revolving Line or (B) the
Borrowing Base, less any amounts outstanding under the Letter of Credit
Sublimit, and (2) amounts borrowed pursuant to this Section 2.1(b) may be repaid
and reborrowed at any time prior to the Revolving Maturity Date, at which time
all Advances under this Section 2.1(b) shall be immediately due and payable.
Borrowers may prepay any Advances without penalty or premium.
(ii) Form of Request. Whenever Borrowers desire an Advance,
Borrowers will notify Bank by facsimile transmission or telephone no later than
3:00 p.m. Pacific time, on the Business Day that the Advance is to be made. Each
such notification shall be promptly confirmed by a Payment/Advance Form in
substantially the form of Exhibit C. Bank is authorized to make Advances under
this Agreement, based upon instructions received from a Responsible Officer or a
designee of a Responsible Officer, or without instructions, but upon prior
notice to Borrower, if in Bank's discretion such Advances are necessary to meet
Obligations which have become due and remain unpaid. Bank shall be entitled to
rely on any telephonic notice given by a person who Bank reasonably believes to
be a Responsible Officer or a designee thereof, and Borrowers shall indemnify
and hold Bank harmless for any damages or loss suffered by Bank as a result of
such reliance. Bank will credit the amount of Advances made under this Section
2.1(b) to Borrowers' deposit account.
Comerica Bank-California - Loan and Security Agreement Page 1
(iii) Letter of Credit Sublimit. Subject to the availability
under the Committed Revolving Line, and in reliance on the representations and
warranties of Borrowers set forth herein, at any time and from time to time from
the date hereof through the Business Day immediately prior to the Revolving
Maturity Date, Bank shall issue for the account of Borrowers such Letters of
Credit as Borrowers may request by delivering to Bank a duly executed letter of
credit application on Bank's standard form; provided, however, that the
outstanding and undrawn amounts under all such Letters of Credit (i) shall not
at any time exceed the Letter of Credit Sublimit, and (ii) shall be deemed to
constitute Advances for the purpose of calculating availability under the
Committed Revolving Line. Any drawn but unreimbursed amounts under any Letters
of Credit shall be charged as Advances against the Committed Revolving Line. All
Letters of Credit shall be in form and substance acceptable to Bank in its sole
discretion and shall be subject to the terms and conditions of Bank's form
application and letter of credit agreement. Borrowers will pay any standard
issuance and other fees that Bank notifies Borrowers will be charged for issuing
and processing Letters of Credit. Unless Borrowers shall have deposited with
Bank cash collateral in an amount sufficient to cover all undrawn amounts under
each such Letter of Credit and Bank shall have agreed in writing, no Letter of
Credit shall have an expiration date that is later than the Revolving Maturity
Date. If Borrowers have not secured to Bank's satisfaction its obligations with
respect to any Letters of Credit by the Revolving Maturity Date, then, effective
as of such date, the balance in any deposit accounts held by Bank and the
certificates of deposit issued by Bank in either Borrower's name (and any
interest paid thereon or proceeds thereof, including any amounts payable upon
the maturity or liquidation of such certificates), shall automatically secure
such obligations to the extent of the then outstanding and undrawn Letters of
Credit. Borrowers authorize Bank to hold such balances in pledge and to decline
to honor any drafts thereon or any requests by Borrowers or any other Person to
pay or otherwise transfer any part of such balances for so long as the Letters
of Credit are outstanding.
2.2 Overadvances. If the aggregate amount of the outstanding Advances
exceeds the lesser of the Committed Revolving Line or the Borrowing Base at any
time, Borrowers shall immediately pay to Bank, in cash, the amount of such
excess.
2.3 Interest Rates, Payments, and Calculations.
(a) Interest Rates. Except as set forth in Section 2.3(b), the
Advances shall bear interest, on the outstanding daily balance thereof, at a
variable rate equal to 1% above the Prime Rate.
(b) Late Fee; Default Rate. If any payment is not made within 10
days after the date such payment is due, Borrower shall pay Bank a late fee
equal to the lesser of (i) 5% of the amount of such unpaid amount or (ii) the
maximum amount permitted to be charged under applicable law. All Obligations
shall bear interest, from and after the occurrence and during the continuance of
an Event of Default, at a rate equal to 5 percentage points above the interest
rate applicable immediately prior to the occurrence of the Event of Default.
(c) Payments. Interest hereunder shall be due and payable on the
15th calendar day of each month during the term hereof. Bank shall, at its
option, charge such interest, all Bank Expenses, and all Periodic Payments
against any of Borrower's deposit accounts or against the Committed Revolving
Line, in which case those amounts shall thereafter accrue interest at the rate
then applicable hereunder. Any interest not paid when due shall be compounded by
becoming a part of the Obligations, and such interest shall thereafter accrue
interest at the rate then applicable hereunder.
(d) Computation. In the event the Prime Rate is changed from time
to time hereafter, the applicable rate of interest hereunder shall be increased
or decreased, effective as of the day the Prime Rate is changed, by an amount
equal to such change in the Prime Rate. All interest chargeable under the Loan
Documents shall be computed on the basis of a 360 day year for the actual number
of days elapsed.
(e) Limitation on Interest. Borrowers and Bank intend to contract
in strict compliance with applicable usury law from time to time in effect. In
furtherance thereof such persons stipulate and agree that none of the terms and
provisions contained in the Loan Documents shall ever be construed to provide
for interest in excess of the maximum amount of interest permitted to be charged
by applicable usury law from time to time in
Comerica Bank-California - Loan and Security Agreement Page 2
effect. If, notwithstanding the foregoing, any amount constituting interest is
nonetheless charged or collected in excess of the maximum amount of interest
permitted to be charged by applicable usury law from time to time in effect,
then such excess shall, at the option of the payee thereof, be credited on the
amount of the obligations owed to such payee or refunded by such payee to the
payor thereof.
2.4 Crediting Payments. Prior to the occurrence of an Event of Default,
Bank shall credit a wire transfer of funds, check or other item of payment to
such deposit account or Obligation as Borrowers specify. After the occurrence of
an Event of Default, the receipt by Bank of any wire transfer of funds, check,
or other item of payment shall be immediately applied to conditionally reduce
Obligations, but shall not be considered a payment on account unless such
payment is of immediately available federal funds or unless and until such check
or other item of payment is honored when presented for payment. Notwithstanding
anything to the contrary contained herein, any wire transfer or payment received
by Bank after 12:00 noon Pacific time shall be deemed to have been received by
Bank as of the opening of business on the immediately following Business Day.
Whenever any payment to Bank under the Loan Documents would otherwise be due
(except by reason of acceleration) on a date that is not a Business Day, such
payment shall instead be due on the next Business Day, and additional fees or
interest, as the case may be, shall accrue and be payable for the period of such
extension.
2.5 Fees. Borrowers shall pay to Bank the following:
(a) Unused Fee. An unused commitment fee in an amount equal to the
product of (a) .5% multiplied by (b) the difference between (i) the Committed
Revolving Line and (ii) the sum of the aggregate outstanding principal balance
of all Advances and the undrawn amount of all outstanding Letters of Credit.
Such fee shall be computed on a daily basis and shall be payable quarterly in
arrears as of the end of each of Borrowers' fiscal quarters. Bank shall invoice
Borrowers for such fees, which invoice shall be due and payable within 15 days
after receipt;
(b) Bank Expenses. On the Closing Date, all Bank Expenses incurred
through the Closing Date, and, after the Closing Date, all Bank Expenses, as and
when they become due.
2.6 Term. This Agreement shall become effective on the Closing Date
and, subject to Section 12.7, shall continue in full force and effect for so
long as any Obligations remain outstanding or Bank has any obligation to make
Credit Extensions under this Agreement. Notwithstanding the foregoing, Bank
shall have the right to terminate its obligation to make Credit Extensions under
this Agreement immediately and without notice upon the occurrence and during the
continuance of an Event of Default.
3. CONDITIONS OF LOANS.
3.1 Conditions Precedent to Initial Credit Extension. The obligation of
Bank to make the initial Credit Extension is subject to the condition precedent
that Bank shall have received, in form and substance satisfactory to Bank, the
following:
(a) this Agreement;
(b) an officer's certificate of each Borrower with respect to
incumbency and resolutions authorizing the execution and delivery of this
Agreement;
(c) a financing statement (Form UCC-1);
(d) an intellectual property security agreement from each Borrower;
(e) agreement to provide insurance;
(f) payment of the fees and Bank Expenses then due specified in
Section 2.5;
(g) current SOS Reports indicating that except for Permitted Liens,
there are no other security interests or Liens of record in the Collateral;
Comerica Bank-California - Loan and Security Agreement Page 3
(h) an audit of the Collateral, the results of which shall be
satisfactory to Bank;
(i) current financial statements, including audited statements for
Borrowers' fiscal year 2001, together with an unqualified opinion, in accordance
with Section 6.2;
(j) a guarantee executed and delivered by Guarantor;
(k) a pledge agreement executed and delivered by Guarantor pursuant
to which Guarantor pledges all of its ownership interest in Borrowers;
(l) an officer's certificate of Guarantor with respect to
incumbency and resolutions authorizing the execution and delivery of the Loan
Documents to which Guarantor is a party;
(m) subordination agreements duly executed and delivered by each of
IBM Credit Corporation, IBM Belgium Financial Services S.A., and Congress
Financial Corporation (Southwest);
(n) within ninety (90) days of the date hereof, a lockbox agreement
with Bank establishing a post office box (the "Lockbox") in Bank's name; and
(o) such other documents or certificates, and completion of such
other matters, as Bank may reasonably deem necessary or appropriate.
3.2 Conditions Precedent to all Credit Extensions. The obligation of
Bank to make each Credit Extension, including the initial Credit Extension, is
further subject to the following conditions:
(a) timely receipt by Bank of the Payment/Advance Form as provided
in Section 2.1; and
(b) the representations and warranties contained in Section 5 shall
be true and correct in all material respects on and as of the date of such
Payment/Advance Form and on the effective date of each Credit Extension as
though made at and as of each such date, and no Event of Default shall have
occurred and be continuing, or would exist after giving effect to such Credit
Extension (provided, however, that those representations and warranties
expressly referring to another date shall be true, correct and complete in all
material respects as of such date). The making of each Credit Extension shall be
deemed to be a representation and warranty by Borrowers on the date of such
Credit Extension as to the accuracy of the facts referred to in this Section
3.2.
4. CREATION OF SECURITY INTEREST.
4.1 Grant of Security Interest. Each Borrower grants and pledges to
Bank a continuing security interest in the Collateral to secure prompt repayment
of any and all Obligations and to secure prompt performance by such Borrower of
each of its covenants and duties under the Loan Documents. Except as set forth
in the Schedule, such security interest constitutes a valid, first priority
security interest in the presently existing Collateral, and will constitute a
valid, first priority security interest in later-acquired Collateral.
Notwithstanding any termination, Bank's Lien on the Collateral shall remain in
effect for so long as any Obligations are outstanding.
4.2 Perfection of Security Interest. Each Borrower authorizes Bank to
file at any time financing statements, continuation statements, and amendments
thereto that describe the Collateral and to describe the Collateral as all
assets of such Borrower of the kind pledged hereunder and which contain any
other information required by the Code for the sufficiency of filing office
acceptance of any financing statement, continuation statement, or amendment,
including whether such Borrower is an organization, the type of organization and
any organizational identification number issued to such Borrower, if applicable.
Each Borrower shall from time to time execute and deliver to Bank, at the
request of Bank, all Negotiable Collateral and other documents that Bank may
reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
Borrower shall have possession of the Collateral, except where expressly
otherwise provided in this Agreement or
Comerica Bank-California - Loan and Security Agreement Page 4
where Bank chooses to perfect its security interest by possession in addition to
the filing of a financing statement. Where Collateral is in possession of a
third party bailee, each Borrower shall take such steps as Bank reasonably
requests for Bank to (i) obtain an acknowledgment, in form and substance
satisfactory to Bank, of the bailee that the bailee holds such Collateral for
the benefit of Bank, (ii) obtain "control" of any Collateral consisting of
investment property, deposit accounts, letter-of-credit rights or electronic
chattel paper (as such items and the term "control" are defined in Revised
Article 9 of the Code) by causing the securities intermediary or depositary
institution or issuing bank to execute a control agreement in form and substance
satisfactory to Bank. No Borrower will create any chattel paper without placing
a legend on the chattel paper acceptable to Bank indicating that Bank has a
security interest in the chattel paper.
4.3 Right to Inspect. Bank (through any of its officers, employees, or
agents) shall have the right, upon reasonable prior notice, from time to time
during Borrowers' usual business hours but no more than twice a year (unless an
Event of Default has occurred and is continuing), to inspect Borrowers' Books
and to make copies thereof and to check, test, and appraise the Collateral in
order to verify Borrowers' financial condition or the amount, condition of, or
any other matter relating to, the Collateral.
4.4 Lockbox. Within ninety (90) days of the date of this Agreement,
each Borrower shall notify all account debtors (other than account debtors of
Priority Canada which have their principal place of business in Canada) to make
payments with respect to its Accounts directly to the Lockbox. Any payments
received by a Borrower with respect to its Accounts by wire transfer shall be
deposited directly in Borrowers' primary deposit accounts held with Bank. Bank
shall have exclusive and unrestricted access to the Lockbox. So long as no Event
of Default has occurred and is continuing, Bank shall transfer all funds
received in the Lockbox in accordance with Borrowers' instructions. During the
continuation of an Event of Default, all funds received in the Lockbox shall be
applied to reduce the Obligations, subject to the terms of Section 2.4. Within
ninety (90) days of the date of this Agreement, Priority Canada shall establish
a lockbox in Canada with Bank or one of its Affiliates for deposit of payments
made by account debtors of Priority Canada which have their principal place of
business in Canada.
5. REPRESENTATIONS AND WARRANTIES.
Each Borrower represents and warrants as follows except as set forth in the
Schedule:
5.1 Due Organization and Qualification. Each Borrower and each
Subsidiary is a corporation (or limited liability company) duly existing under
the laws of its respective Organizational Jurisdiction and qualified and
licensed to do business in any state in which the conduct of its business or its
ownership of property requires that it be so qualified, except where the failure
to do so would not reasonably be expected to cause a Material Adverse Effect.
5.2 Due Authorization; No Conflict. The execution, delivery, and
performance of the Loan Documents are within Borrowers' powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrowers' organizational documents, nor will they
constitute an event of default under any material agreement by which either
Borrower is bound. Borrowers are not in default under any agreement by which it
is bound, except to the extent such default would not reasonably be expected to
cause a Material Adverse Effect.
5.3 Collateral. Each Borrower has rights in or the power to transfer
the Collateral, and its title to the Collateral is free and clear of Liens,
adverse claims, and restrictions on transfer or pledge except for Permitted
Liens. All Collateral is located solely in the Collateral States. The Eligible
Accounts are bona fide existing obligations. The property or services giving
rise to such Eligible Accounts has been delivered or rendered to the account
debtor or its agent for immediate shipment to and unconditional acceptance by
the account debtor subject to the audit, disputes and other rights of the
account debtor arising in the ordinary course of business of Borrowers.
Borrowers have not received notice of actual or imminent Insolvency Proceeding
of any account debtor whose accounts are included in any Borrowing Base
Certificate as an Eligible Account. All Inventory is in all material respects of
good and merchantable quality, free from all material defects, except for
Inventory for which adequate reserves have been made. Except as set forth in the
Schedule, no securities account or deposit account of either Borrower (excluding
the Third Party Deposit Accounts) is maintained or invested with a Person other
than Bank or Bank's affiliates.
Comerica Bank-California - Loan and Security Agreement Page 5
5.4 Intellectual Property Collateral. Each Borrower is the sole owner
of its Intellectual Property Collateral, except for Permitted Liens and licenses
granted by such Borrower to its customers in the ordinary course of business. To
the best of Borrowers' knowledge, each of the Copyrights, Trademarks and Patents
is valid and enforceable, and no part of the Intellectual Property Collateral
has been judged invalid or unenforceable, in whole or in part, and no claim has
been made to Borrowers that any part of the Intellectual Property Collateral
violates the rights of any third party except to the extent such claim would not
reasonably be expected to cause a Material Adverse Effect. Except as set forth
in the Schedule, sublicensing fees received or to be received by Borrower with
respect to intellectual property do not give rise to more than 5% of its gross
revenue in any given month.
5.5 Name; Location of Chief Executive Office. Except as disclosed in
the Schedule, neither Borrower has done business under any name other than that
specified on the signature page hereof, and its exact legal name is as set forth
in the first paragraph of this Agreement. The chief executive office of each
Borrower is located in its respective Chief Executive Office.
5.6 Litigation. Except as set forth in the Schedule, there are no
actions or proceedings pending by or against either Borrower or any Subsidiary
before any court or administrative agency in which a likely adverse decision
would reasonably be expected to have a Material Adverse Effect, or a material
adverse effect on either Borrower's interest or Bank's security interest in the
Collateral.
5.7 No Material Adverse Change in Financial Statements. All
consolidating and consolidated financial statements related to Guarantor,
Borrowers and any Subsidiary that are delivered by Borrowers to Bank fairly
present in all material respects Guarantor's and Borrowers' consolidating and
consolidated financial condition as of the date thereof and Guarantor's and
Borrowers' consolidating and consolidated results of operations for the period
then ended. There has not been a material adverse change in the consolidated
financial condition of Guarantor or the financial condition of Borrowers since
the date of the most recent of such financial statements submitted to Bank,
except for ordinary seasonal fluctuations in the ordinary course of business.
5.8 Solvency, Payment of Debts. Each Borrower is able to pay its debts
(including trade debts) as they mature; the fair saleable value of such
Borrower's assets (including goodwill minus disposition costs) exceeds the fair
value of its liabilities; and such Borrower is not left with unreasonably small
capital after the transactions contemplated by this Agreement.
5.9 Compliance with Laws and Regulations. Each Borrower and each of
their Subsidiaries have met the minimum funding requirements of ERISA with
respect to any employee benefit plans subject to ERISA. No event has occurred
resulting from either Borrower's failure to comply with ERISA that is reasonably
likely to result in such Borrower's incurring any liability that could have a
Material Adverse Effect. Neither Borrower is an "investment company" or a
company "controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940. Neither Borrower is engaged principally, or as
one of the important activities, in the business of extending credit for the
purpose of purchasing or carrying margin stock (within the meaning of
Regulations T and U of the Board of Governors of the Federal Reserve System).
Each Borrower has complied in all material respects with all the provisions of
the Federal Fair Labor Standards Act. Each Borrower is in compliance with all
environmental laws, regulations and ordinances except where the failure to
comply is not reasonably likely to have a Material Adverse Effect. Neither
Borrower has violated any statutes, laws, ordinances or rules applicable to it,
violation of which could have a Material Adverse Effect. Each Borrower and each
of its Subsidiaries have filed or caused to be filed all tax returns required to
be filed, and have paid, or have made adequate provision for the payment of, all
taxes reflected therein except those being contested in good faith with adequate
reserves under GAAP or where the failure to file such returns or pay such taxes
would not reasonably be expected to have a Material Adverse Effect.
5.10 Subsidiaries. Borrowers do not own any stock, partnership interest
or other equity securities of any Person, except for Permitted Investments.
5.11 Government Consents. Borrowers and each Subsidiary have obtained
all consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all governmental
Comerica Bank-California - Loan and Security Agreement Page 6
authorities that are necessary for the continued operation of each Borrower's
business as currently conducted, except where the failure to do so would not
reasonably be expected to cause a Material Adverse Effect.
5.12 Intentionally Omitted.
5.13 Full Disclosure. No representation, warranty or other statement
made by either Borrower in any certificate or written statement furnished to
Bank taken together with all such certificates and written statements furnished
to Bank contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained in such
certificates or statements not misleading, it being recognized by Bank that the
projections and forecasts provided by Borrowers in good faith and based upon
reasonable assumptions are not to be viewed as facts and that actual results
during the period or periods covered by any such projections and forecasts may
differ from the projected or forecasted results.
6. AFFIRMATIVE COVENANTS.
Each Borrower covenants that, until payment in full of all outstanding
Obligations, and for so long as Bank may have any commitment to make a Credit
Extension hereunder, Borrowers shall do all of the following:
6.1 Good Standing and Government Compliance. Each Borrower shall
maintain its and each of its Subsidiaries' corporate existence and good standing
in its respective Organizational Jurisdiction, shall maintain qualification and
good standing in each jurisdiction in which the failure to so qualify could have
a Material Adverse Effect, and shall furnish to Bank the organizational
identification number issued to such Borrower by the authorities of the state in
which such Borrower is organized, if applicable. Each Borrower shall meet, and
shall cause each Subsidiary to meet, the minimum funding requirements of ERISA
with respect to any employee benefit plans subject to ERISA, except where the
failure to meet such requirements would not reasonably be expected to have a
Material Adverse Effect. Each Borrower shall comply in all material respects
with all applicable Environmental Laws, and maintain all material permits,
licenses and approvals required thereunder where the failure to do so could have
a Material Adverse Effect. Each Borrower shall comply, and shall cause each of
its Subsidiaries to comply, with all statutes, laws, ordinances and government
rules and regulations to which it is subject, and shall maintain, and shall
cause each of its Subsidiaries to maintain, in force all licenses, approvals and
agreements, the loss of which or failure to comply with which would reasonably
be expected to have a Material Adverse Effect, or a material adverse effect on
the Collateral or the priority of Bank's Lien on the Collateral.
6.2 Financial Statements, Reports, Certificates. Borrowers shall
deliver to Bank:
(a) as soon as available, but in any event within 35 days after the
end of each calendar month, a company prepared consolidated and consolidating
balance sheet and income statement of Guarantor covering Borrowers' operations
during such period, in a form reasonably acceptable to Bank and certified by a
Responsible Officer;
(b) as soon as available, but in any event within 90 days after the
end of Guarantor's fiscal year, audited consolidated and unaudited consolidating
financial statements of Guarantor prepared in accordance with GAAP, consistently
applied, together with an opinion which is unqualified or otherwise consented to
in writing by Bank on such consolidated financial statements of an independent
certified public accounting firm reasonably acceptable to Bank
(c) as soon as available, but in any event within 90 days after the
end of BSD's fiscal year, audited consolidated and unaudited consolidating
financial statements of BSD prepared in accordance with GAAP, consistently
applied, together with an opinion which is unqualified or otherwise consented to
in writing by Bank on such consolidated financial statements of an independent
certified public accounting firm reasonably acceptable to Bank;
(d) as soon as available, but in any event within 45 days after the
end of Guarantor's fiscal quarter, all reports on Form 10-Q filed by Guarantor
with the Securities and Exchange Commission;
Comerica Bank-California - Loan and Security Agreement Page 7
(e) as soon as available, but in any event within 90 days after the
end of Guarantor's fiscal year, all reports on Form 10-K filed by Guarantor with
the Securities and Exchange Commission;
(f) if applicable, copies of all other statements, reports and
notices sent or made available generally by Borrowers or Guarantor to its
security holders or to any holders of Subordinated Debt;
(g) promptly upon receipt of notice thereof, a report of any legal
actions pending or threatened against either Borrower or any Subsidiary that
could result in damages or costs to such Borrower or any Subsidiary of $250,000
or more;
(h) such budgets, sales projections, operating plans or other
financial information generally prepared by Borrowers in the ordinary course of
business as Bank may reasonably request from time to time;
(i) within 30 days of the last day of each fiscal quarter, a report
signed by Borrowers, in form reasonably acceptable to Bank, listing any
applications or registrations that either Borrower has made or filed in respect
of any Patents, Copyrights or Trademarks and the status of any outstanding
applications or registrations, as well as any material change in Borrowers'
Intellectual Property Collateral, including but not limited to any subsequent
ownership right of Borrower in or to any Trademark, Patent or Copyright not
specified in Exhibits A, B, and C of the Intellectual Property Security
Agreement delivered to Bank by Borrowers in connection with this Agreement;
(j) within 30 days after the last day of each month, Borrowers
shall deliver to Bank a Borrowing Base Certificate signed by a Responsible
Officer in substantially the form of Exhibit D hereto, together with aged
listings by invoice date of accounts receivable and accounts payable;
(k) within 35 days after the last day of each month, Borrowers
shall deliver to Bank with the monthly financial statements a Compliance
Certificate signed by a Responsible Officer in substantially the form of Exhibit
E hereto; and
(l) as soon as possible and in any event within 3 calendar days
after becoming aware of the occurrence or existence of an Event of Default
hereunder, a written statement of a Responsible Officer setting forth details of
the Event of Default, and the action which Borrower has taken or proposes to
take with respect thereto.
Bank shall have a right from time to time, upon reasonable prior notice,
hereafter to audit Borrowers' Accounts and appraise Collateral at Borrowers'
expense, provided that such audits will be conducted no more often than every 6
months unless an Event of Default has occurred and is continuing.
6.3 Inventory; Returns. Borrowers shall keep all Inventory in good and
merchantable condition, free from all material defects except for Inventory for
which adequate reserves have been made. Returns and allowances, if any, as
between each Borrower and its account debtors shall be on the same basis and in
accordance with the usual customary practices of such Borrower, as they exist on
the Closing Date. Borrowers shall promptly notify Bank of all returns and
recoveries and of all disputes and claims involving more than $100,000.
6.4 Taxes. Borrowers shall make, and cause each Subsidiary to make, due
and timely payment or deposit of all material federal, state, and local taxes,
assessments, or contributions required of it by law, including, but not limited
to, those laws concerning income taxes, F.I.C.A., F.U.T.A. and state disability,
and will execute and deliver to Bank, on demand, proof satisfactory to Bank
indicating that Borrower or a Subsidiary has made such payments or deposits and
any appropriate certificates attesting to the payment or deposit thereof;
provided that Borrowers or a Subsidiary need not make any payment if the amount
or validity of such payment is contested in good faith by appropriate
proceedings and is reserved against (to the extent required by GAAP) by
Borrowers.
Comerica Bank-California - Loan and Security Agreement Page 8
6.5 Insurance.
(a) Each Borrower, at its expense, shall keep the Collateral
insured against loss or damage by fire, theft, explosion, sprinklers, and all
other hazards and risks, and in such amounts, as ordinarily insured against by
other owners in similar businesses conducted in the locations where such
Borrower's business is conducted on the date hereof. Each Borrower shall also
maintain liability and other insurance in amounts and of a type that are
customary to businesses similar to such Borrower's.
(b) All such policies of insurance shall be in such form, with such
companies, and in such amounts as reasonably satisfactory to Bank. All policies
of property insurance shall contain a lender's loss payable endorsement, in a
form satisfactory to Bank, showing Bank as an additional loss payee, and all
liability insurance policies shall show Bank as an additional insured and
specify that the insurer must give at least 20 days notice to Bank before
canceling its policy for any reason. Upon Bank's request, each Borrower shall
deliver to Bank certified copies of the policies of insurance and evidence of
all premium payments. If no Event of Default has occurred and is continuing,
proceeds payable under any casualty policy will, at Borrower's option, be
payable to such Borrower to replace the property subject to the claim, provided
that any such replacement property shall be deemed Collateral in which Bank has
been granted a first priority security interest. If an Event of Default has
occurred and is continuing, all proceeds payable under any such policy shall, at
Bank's option, be payable to Bank to be applied on account of the Obligations.
6.6 Primary Depository. Except for those accounts specified on the
Schedule that support existing letters of credit issued at the application of
Borrowers and the Third Party Deposit Accounts, within ninety (90) days of the
date of this Agreement, all primary depository, operating and investment
accounts of each Borrower (including without limitation, all primary depository,
operating and investment accounts maintained in Canada) shall be maintained with
Bank or Bank's Affiliates.
6.7 Financial Covenants. Borrowers shall at all times maintain the
following financial ratios and covenants, measured as of the last day of each
calendar month unless stated otherwise:
(a) Tangible Net Worth. A consolidated Tangible Net Worth of
Guarantor of not less than $19,000,000.
(b) Liquidity Ratio. A ratio of (i) consolidated Cash of Guarantor
(excluding Business Supplies Distributors Holdings LLC and its Subsidiaries)
plus the Eligible Accounts to (ii) all Obligations of not less than 1.50 to
1.00.
6.8 Registration of Intellectual Property Rights.
(a) Each Borrower shall register or cause to be registered on an
expedited basis (to the extent not already registered) with the United States
Patent and Trademark Office or the United States Copyright Office, as the case
may be, those registerable intellectual property rights now owned or hereafter
developed or acquired by such Borrower, to the extent that such Borrower, in its
reasonable business judgment, deems it appropriate to so protect such
intellectual property rights.
(b) Each Borrower shall promptly give Bank written notice of any
applications or registrations of intellectual property rights filed with the
United States Patent and Trademark Office, including the date of such filing and
the registration or application numbers, if any.
(c) Each Borrower shall (i) give Bank not less than 30 days prior
written notice of the filing of any applications or registrations with the
United States Copyright Office, including the title of such intellectual
property rights to be registered, as such title will appear on such applications
or registrations, and the date such applications or registrations will be filed,
and (ii) prior to the filing of any such applications or registrations, shall
execute such documents as Bank may reasonably request for Bank to maintain its
perfection in such intellectual property rights to be registered by such
Borrower, and upon the request of Bank, shall file such documents simultaneously
with the filing of any such applications or registrations. Upon filing any such
Comerica Bank-California - Loan and Security Agreement Page 9
applications or registrations with the United States Copyright Office, each
Borrower shall promptly provide Bank with (i) a copy of such applications or
registrations, without the exhibits, if any, thereto, (ii) evidence of the
filing of any documents requested by Bank to be filed for Bank to maintain the
perfection and priority of its security interest in such intellectual property
rights, and (iii) the date of such filing.
(d) Each Borrower shall execute and deliver such additional
instruments and documents from time to time as Bank shall reasonably request to
perfect and maintain the priority of Bank's security interest in the
Intellectual Property Collateral.
(e) Each Borrower shall (i) protect, defend and maintain the
validity and enforceability of the trade secrets, Trademarks, Patents and
Copyrights, (ii) use commercially reasonable efforts to detect infringements of
the Trademarks, Patents and Copyrights and promptly advise Bank in writing of
material infringements detected and (iii) not allow any material Trademarks,
Patents or Copyrights to be abandoned, forfeited or dedicated to the public
without the written consent of Bank, which shall not be unreasonably withheld.
(f) Bank may audit Borrowers' Intellectual Property Collateral to
confirm compliance with this Section 6.8, provided such audit may not occur more
often than twice per year, unless an Event of Default has occurred and is
continuing. Bank shall have the right, but not the obligation, to take, at
Borrowers' sole expense, any actions that Borrowers are required under this
Section 6.8 to take but which Borrowers fail to take, after 15 days' notice to
Borrowers.
(g) Borrowers shall reimburse and indemnify Bank for all reasonable
costs and reasonable expenses incurred in the reasonable exercise of its rights
under this Section 6.8.
6.9 Intentionally Omitted.
6.10 Further Assurances. At any time and from time to time each
Borrower shall execute and deliver such further instruments and take such
further action as may reasonably be requested by Bank to effect the purposes of
this Agreement.
6.11 Weekly Reporting. During any period of time that Adjusted Tangible
Net Worth is less than $21,000,000, Borrowers shall deliver the information
described in Section 6.2(j) on the second Business Day of each calendar week for
the immediately preceding calendar week.
7. NEGATIVE COVENANTS.
Each Borrower covenants and agrees that, so long as any credit hereunder
shall be available and until the outstanding Obligations are paid in full or for
so long as Bank may have any commitment to make any Credit Extensions, Borrowers
will not do any of the following without Bank's prior written consent, which
shall not be unreasonably withheld:
7.1 Dispositions. Convey, sell, lease, license, transfer or otherwise
dispose of (collectively, to "Transfer"), or permit any of its Subsidiaries to
Transfer, all or any part of its business or property, other than Permitted
Transfers.
7.2 Change in Name, Location or Executive Office, Change in Business;
Change in Fiscal Year; Change in Control. Change its name, the Organizational
Jurisdiction, or relocate its chief executive office without 30 days prior
written notification to Bank; engage in any business, or permit any of its
Subsidiaries to engage in any business, other than or reasonably related or
incidental to the businesses currently engaged in by Borrowers; change its
fiscal year end; have a Change in Control.
7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of its
Subsidiaries to merge or consolidate, with or into any other business
organization (other than mergers or consolidations of a Subsidiary into another
Subsidiary or into a Borrower or Guarantor), or acquire, or permit any of its
Subsidiaries to acquire, all or substantially all of the capital stock or
property of another Person (other than acquisitions by
Comerica Bank-California - Loan and Security Agreement Page 10
Borrower, Guarantor or a Subsidiary of an existing Subsidiary's capital stock or
property) except where (i) such transactions do not in the aggregate exceed
$250,000 and (ii) no Event of Default has occurred, is continuing or would exist
after giving effect to the transactions.
7.4 Indebtedness. Create, incur, assume, guarantee or be or remain
liable with respect to any Indebtedness, or permit any Subsidiary so to do,
other than Permitted Indebtedness, or prepay any Indebtedness or take any
actions which impose on Borrowers an obligation to prepay any Indebtedness,
except Indebtedness to Bank, if either before or after giving effect to such
prepayment, an Event of Default has occurred and is continuing.
7.5 Encumbrances. Create, incur, assume or allow any Lien with respect
to any of its property, or assign or otherwise convey any right to receive
income, including the sale of any Accounts, or permit any of its Subsidiaries so
to do, except for Permitted Liens, or covenant to any other Person that
Borrowers in the future will refrain from creating, incurring, assuming or
allowing any Lien with respect to any of Borrowers' property.
7.6 Distributions. Pay any dividends or make any other distribution or
payment on account of or in redemption, retirement or purchase of any capital
stock, except that Subsidiaries may pay dividends and make such distributions or
payments to Borrowers and Borrowers may (i) repurchase the stock of former
employees pursuant to stock repurchase agreements as long as an Event of Default
does not exist prior to such repurchase or would not exist after giving effect
to such repurchase, and (ii) repurchase the stock of former employees pursuant
to stock repurchase agreements by the cancellation of indebtedness owed by such
former employees to Borrowers regardless of whether an Event of Default exists.
7.7 Investments. Directly or indirectly acquire or own, or make any
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments, or maintain or invest any of its securities
accounts or deposit accounts with a Person other than Bank or Bank's affiliates
(excluding those existing accounts specified in the Schedule and the Third Party
Deposit Accounts) unless such Person has entered into a control agreement with
Bank, in form and substance satisfactory to Bank, or suffer or permit any
Subsidiary (other than Business Supplies Distributors Holdings, LLC and its
Subsidiaries with respect to their existing Indebtedness owed to IBM Credit
Corporation, IBM Belgium Financial Services S.A. and Congress Financial
Corporation (Southwest)) to be a party to, or be bound by, an agreement that
restricts such Subsidiary from paying dividends or otherwise distributing
property to Borrowers.
7.8 Transactions with Affiliates. Directly or indirectly enter into or
permit to exist any material transaction with any Affiliate of Borrowers except
for (a) the transaction management fees charged to Supplies Distributors, Inc.
and its Subsidiaries by Priority and its Subsidiaries, (b) interest expenses on
intercompany Indebtedness owed to Borrowers or Guarantor, (c) intercompany tax
payments, (d) Permitted Investments, (e) Permitted Indebtedness, and (f)
transactions that are in the ordinary course of Borrowers' business, upon fair
and reasonable terms that are no less favorable to Borrowers than would be
obtained in an arm's length transaction with a non-affiliated Person.
7.9 Subordinated Debt. Make any payment in respect of any Subordinated
Debt, or permit any of its Subsidiaries to make any such payment, except in
compliance with the terms of such Subordinated Debt, or amend any material
provision affecting Bank's rights contained in any documentation relating to the
Subordinated Debt without Bank's prior written consent which shall not be
unreasonably withheld or delayed.
7.10 Inventory and Equipment. Store the Inventory or the Equipment with
a bailee, warehouseman, or similar third party unless the third party has been
notified of Bank's security interest and Bank (a) has received an acknowledgment
from the third party that it is holding or will hold the Inventory or Equipment
for Bank's benefit or (b) is in possession of the warehouse receipt, where
negotiable, covering such Inventory or Equipment. Except for Inventory sold in
the ordinary course of business and except for such other locations as Bank may
approve in writing, Borrowers shall keep the Inventory and Equipment only at the
location set forth in Section 10, the Schedule and such other locations of which
Borrowers give Bank prior written notice and as to which Bank files a financing
statement where needed to perfect its security interest.
Comerica Bank-California - Loan and Security Agreement Page 11
7.11 No Investment Company. Become or be controlled by an "investment
company," within the meaning of the Investment Company Act of 1940, or become
principally engaged in, or undertake as one of its important activities, the
business of extending credit for the purpose of purchasing or carrying margin
stock, or use the proceeds of any Credit Extension for such purpose.
7.12 Capital Expenditures. Make capital expenditures in an aggregate
amount (including all capital expenditures made by Borrower's Subsidiaries)
greater than $3,000,000 in any fiscal year.
8. EVENTS OF DEFAULT.
Any one or more of the following events shall constitute an Event of
Default by Borrowers under this Agreement:
8.1 Payment Default. If Borrowers fail to pay any of the Obligations
when due;
8.2 Covenant Default.
(a) If Borrowers fail to perform any obligation under Section
6.2(j), 6.2(l) or 6.7 or violates any of the covenants contained in Article 7 of
this Agreement; or
(b) If Borrowers fail or neglect to perform or observe any other
material term, provision, condition, covenant contained in this Agreement, in
any of the Loan Documents, or in any other present or future agreement between
Borrowers and Bank and as to any default under such other term, provision,
condition or covenant that can be cured, has failed to cure such default within
10 days after Borrowers receive notice thereof or any officer of Borrowers
becomes aware thereof; provided, however, that if the default cannot by its
nature be cured within the 10 day period or cannot after diligent attempts by
Borrowers be cured within such 10 day period, and such default is likely to be
cured within a reasonable time, then Borrowers shall have an additional
reasonable period (which shall not in any case exceed 30 days) to attempt to
cure such default, and within such reasonable time period the failure to have
cured such default shall not be deemed an Event of Default but no Credit
Extensions will be made;
8.3 Defective Perfection. If Bank shall receive at any time following
the Closing Date an SOS Report indicating that except for Permitted Liens,
Bank's security interest in the Collateral is not prior to all other security
interests or Liens of record reflected in the report;
8.4 Material Adverse Change. If there occurs a material adverse change
in Borrowers' business or financial condition, or if there is a material
impairment of the prospect of repayment of any portion of the Obligations or a
material impairment of the value or priority of Bank's security interests in the
Collateral;
8.5 Attachment. If any material portion of either Borrower's assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within 10 days, or if either Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of either
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of either Borrower's assets by the United States
Government, or any department, agency, or instrumentality thereof, or by any
state, county, municipal, or governmental agency, and the same is not paid
within ten days after such Borrower receives notice thereof, provided that none
of the foregoing shall constitute an Event of Default where such action or event
is stayed or an adequate bond has been posted pending a good faith contest by
the applicable Borrower (provided that no Credit Extensions will be made during
such cure period);
8.6 Insolvency. If either Borrower becomes insolvent, or if an
Insolvency Proceeding is commenced by either Borrower, or if an Insolvency
Proceeding is commenced against either Borrower and is not
Comerica Bank-California - Loan and Security Agreement Page 12
dismissed or stayed within 45 days (provided that no Credit Extensions will be
made prior to the dismissal of such Insolvency Proceeding);
8.7 Other Agreements. If there is a default or other failure to perform
by Borrowers in any agreement to which either Borrower is a party with a third
party or parties resulting in a right by such third party or parties, whether or
not exercised, to accelerate the maturity of any Indebtedness of Borrowers in an
amount in excess of $250,000 or that could have a Material Adverse Effect;
8.8 Subordinated Debt. If either Borrower makes any payment on account
of Subordinated Debt, except to the extent the payment is allowed under any
subordination agreement entered into with Bank;
8.9 Judgments. If a judgment or judgments for the payment of money in
an amount, individually or in the aggregate, of at least $500,000 shall be
rendered against either Borrower and shall remain unsatisfied and unstayed for a
period of 10 days (provided that no Credit Extensions will be made prior to the
satisfaction or stay of the judgment); or
8.10 Misrepresentations. If any material misrepresentation or material
misstatement exists now or hereafter in any warranty or representation set forth
herein or in any certificate delivered to Bank by any Responsible Officer
pursuant to this Agreement or to induce Bank to enter into this Agreement or any
other Loan Document.
8.11 Guaranty. If any guaranty of all or a portion of the Obligations
(a "Guaranty) ceases for any reason to be in full force and effect, or any
guarantor fails to perform any obligation under any Guaranty or a security
agreement securing any Guaranty (collectively, the "Guaranty Documents"), or any
event of default occurs under any Guaranty Document or any guarantor revokes or
purports to revoke a Guaranty, or any material misrepresentation or material
misstatement exists now or hereafter in any warranty or representation set forth
in any Guaranty Document or in any certificate delivered to Bank in connection
with any Guaranty Document, or if any of the circumstances described in Sections
8.3 through 8.9 occur with respect to Guarantor or any other guarantor.
9. BANK'S RIGHTS AND REMEDIES.
9.1 Rights and Remedies. Upon the occurrence and during the continuance
of an Event of Default, Bank may, at its election, without notice of its
election and without demand, do any one or more of the following, all of which
are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this Agreement,
by any of the other Loan Documents, or otherwise, immediately due and payable
(provided that upon the occurrence of an Event of Default described in Section
8.6, all Obligations shall become immediately due and payable without any action
by Bank);
(b) Demand that Borrowers (i) deposit cash with Bank in an amount
equal to the amount of any Letters of Credit remaining undrawn, as collateral
security for the repayment of any future drawings under such Letters of Credit,
and (ii) pay in advance all Letter of Credit fees scheduled to be paid or
payable over the remaining term of the Letters of Credit, and Borrowers shall
promptly deposit and pay such amounts.
(c) Cease advancing money or extending credit to or for the benefit
of Borrowers under this Agreement or under any other agreement between Borrowers
and Bank;
(d) Settle or adjust disputes and claims directly with account
debtors for amounts, upon terms and in whatever order that Bank reasonably
considers advisable;
(e) Make such payments and do such acts as Bank considers necessary
or reasonable to protect its security interest in the Collateral. Borrowers
agree to assemble the Collateral if Bank so requires, and to make the Collateral
available to Bank as Bank may designate. Borrowers authorize Bank to enter the
premises where the Collateral is located, to take and maintain possession of the
Collateral, or any part of it, and to pay,
Comerica Bank-California - Loan and Security Agreement Page 13
purchase, contest, or compromise any encumbrance, charge, or lien which in
Bank's determination appears to be prior or superior to its security interest
and to pay all expenses incurred in connection therewith. With respect to any of
Borrowers' owned premises, Borrowers hereby grant Bank a license to enter into
possession of such premises and to occupy the same, without charge, in order to
exercise any of Bank's rights or remedies provided herein, at law, in equity, or
otherwise;
(f) Set off and apply to the Obligations any and all (i) balances
and deposits of Borrowers held by Bank, and (ii) indebtedness at any time owing
to or for the credit or the account of Borrowers held by Bank;
(g) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Collateral. Bank is hereby granted a license or other right, solely
pursuant to the provisions of this Section 9.1, to use, without charge, each
Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Bank's exercise of its rights under this Section 9.1, each
Borrower's rights under all licenses and all franchise agreements shall inure to
Bank's benefit;
(h) Sell the Collateral at either a public or private sale, or
both, by way of one or more contracts or transactions, for cash or on terms, in
such manner and at such places (including Borrower's premises) as Bank
determines is commercially reasonable, and apply any proceeds to the Obligations
in whatever manner or order Bank deems appropriate. Bank may sell the Collateral
without giving any warranties as to the Collateral. Bank may specifically
disclaim any warranties of title or the like. This procedure will not be
considered adversely to affect the commercial reasonableness of any sale of the
Collateral. If Bank sells any of the Collateral upon credit, Borrowers will be
credited only with payments actually made by the purchaser, received by Bank,
and applied to the indebtedness of the purchaser. If the purchaser fails to pay
for the Collateral, Bank may resell the Collateral and Borrowers shall be
credited with the proceeds of the sale;
(i) Bank may credit bid and purchase at any public sale;
(j) Apply for the appointment of a receiver, trustee, liquidator or
conservator of the Collateral, without notice and without regard to the adequacy
of the security for the Obligations and without regard to the solvency of
Borrowers, any guarantor or any other Person liable for any of the Obligations;
and
(k) Any deficiency that exists after disposition of the Collateral
as provided above will be paid immediately by Borrowers.
Bank may comply with any applicable state or federal law requirements in
connection with a disposition of the Collateral and compliance will not be
considered adversely to affect the commercial reasonableness of any sale of the
Collateral.
9.2 Power of Attorney. Effective only upon the occurrence and during
the continuance of an Event of Default, each Borrower hereby irrevocably
appoints Bank (and any of Bank's designated officers, or employees) as such
Borrower's true and lawful attorney to: (a) send requests for verification of
Accounts or notify account debtors of Bank's security interest in the Accounts;
(b) endorse such Borrower's name on any checks or other forms of payment or
security that may come into Bank's possession; (c) sign such Borrower's name on
any invoice or bill of lading relating to any Account, drafts against account
debtors, schedules and assignments of Accounts, verifications of Accounts, and
notices to account debtors; (d) dispose of any Collateral; (e) make, settle, and
adjust all claims under and decisions with respect to such Borrower's policies
of insurance; (f) settle and adjust disputes and claims respecting the accounts
directly with account debtors, for amounts and upon terms which Bank determines
to be reasonable; (g) to modify, in its sole discretion, any intellectual
property security agreement entered into between Borrower and Bank without first
obtaining such Borrower's approval of or signature to such modification by
amending Exhibits A, B, and C, thereof, as appropriate, to include reference to
any right, title or interest in any Copyrights, Patents or Trademarks acquired
by such Borrower after the execution hereof or to delete any reference to any
right, title or interest in any Copyrights, Patents or Trademarks in which
Borrower no longer has or claims to have any right, title or interest; (h) to
file, in its sole discretion, one or more financing or
Comerica Bank-California - Loan and Security Agreement Page 14
continuation statements and amendments thereto, relative to any of the
Collateral without the signature of such Borrower where permitted by law; and
(i) to transfer the Intellectual Property Collateral into the name of Bank or a
third party to the extent permitted under the California Uniform Commercial
Code; provided Bank may exercise such power of attorney to sign the name of
Borrower on any of the documents described in clauses (g) and (h) above
regardless of whether an Event of Default has occurred. The appointment of Bank
as each Borrower's attorney in fact, and each and every one of Bank's rights and
powers, being coupled with an interest, is irrevocable until all of the
Obligations have been fully repaid and performed and Bank's obligation to
provide advances hereunder is terminated.
9.3 Accounts Collection. At any time after the occurrence and during
the continuation of an Event of Default, Bank may notify any Person owing funds
to either Borrower of Bank's security interest in such funds and verify the
amount of such Account. Each Borrower shall collect all amounts owing to
Borrower for Bank, receive in trust all payments as Bank's trustee, and
immediately deliver such payments to Bank in their original form as received
from the account debtor, with proper endorsements for deposit.
9.4 Bank Expenses. If Borrowers fail to pay any amounts or furnish any
required proof of payment due to third persons or entities, as required under
the terms of this Agreement, then Bank may do any or all of the following after
reasonable notice to Borrowers: (a) make payment of the same or any part
thereof; (b) set up such reserves under the Revolving Facility as Bank deems
necessary to protect Bank from the exposure created by such failure; or (c)
obtain and maintain insurance policies of the type discussed in Section 6.5 of
this Agreement, and take any action with respect to such policies as Bank deems
prudent. Any amounts so paid or deposited by Bank shall constitute Bank
Expenses, shall be immediately due and payable, and shall bear interest at the
then applicable rate hereinabove provided, and shall be secured by the
Collateral. Any payments made by Bank shall not constitute an agreement by Bank
to make similar payments in the future or a waiver by Bank of any Event of
Default under this Agreement.
9.5 Bank's Liability for Collateral. Bank has no obligation to clean up
or otherwise prepare the Collateral for sale. All risk of loss, damage or
destruction of the Collateral shall be borne by Borrowers.
9.6 No Obligation to Pursue Others. Bank has no obligation to attempt
to satisfy the Obligations by collecting them from any other person liable for
them and Bank may release, modify or waive any collateral provided by any other
Person to secure any of the Obligations, all without affecting Bank's rights
against Borrowers. Borrowers waive any right they may have to require Bank to
pursue any other Person for any of the Obligations.
9.7 Remedies Cumulative. Bank's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Bank of one right
or remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrowers' part shall be deemed a continuing waiver. No delay by Bank
shall constitute a waiver, election, or acquiescence by it. No waiver by Bank
shall be effective unless made in a written document signed on behalf of Bank
and then shall be effective only in the specific instance and for the specific
purpose for which it was given. Borrower expressly agrees that this Section 9.7
may not be waived or modified by Bank by course of performance, conduct,
estoppel or otherwise.
9.8 Demand; Protest. Each Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment, notice
of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Bank on which such Borrower may in any way be
liable.
10. NOTICES.
Unless otherwise provided in this Agreement, all notices or demands by any
party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by a recognized overnight
delivery service, certified mail, postage prepaid, return receipt requested, or
by telefacsimile to Borrowers or to Bank, as the case may be, at its addresses
set forth below:
Comerica Bank-California - Loan and Security Agreement Page 15
If to Priority: Priority Fulfillment Services, Inc.
500 N. Central Expressway, 5th Floor
Plano, Texas 75074
Attn: Thomas J. Madden
FAX: (972) 633-3952
If to Priority Canada: Priority Fulfillment Services, of Canada, Inc.
500 N. Central Expressway, 5th Floor
Plano, Texas 75074
Attn: Thomas J. Madden
FAX: (972) 633-3952
If to Bank: Comerica Bank-California
Technology & Life Sciences
800 E. Campbell Road, Suite 254
Richardson, Texas 75081
Attn: Steven Moiles
FAX: (214) 570-7979
with a copy to: Comerica Bank-California
9920 S. LaCienega Blvd., Suite 1401
Inglewood, California 90301
Attn: Manager
FAX: (310) 338-6110
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. This Agreement shall be
governed by, and construed in accordance with, the internal laws of the State of
California, without regard to principles of conflicts of law. Each of Borrowers
and Bank hereby submits to the exclusive jurisdiction of the state and Federal
courts located in the County of Santa Clara, State of California. BANK AND
BORROWERS EACH ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL
ONE, BUT THAT IT MAY BE WAIVED. EACH OF THEM, AFTER CONSULTING OR HAVING HAD THE
OPPORTUNITY TO CONSULT, WITH COUNSEL OF THEIR CHOICE, KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVES ANY RIGHT ANY OF THEM MAY HAVE TO A TRIAL BY JURY IN ANY
LITIGATION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY RELATED INSTRUMENT
OR LOAN DOCUMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR
ANY COURSE OF CONDUCT, DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN), OR ACTION
OF ANY OF THEM. THESE PROVISIONS SHALL NOT BE DEEMED TO HAVE BEEN MODIFIED IN
ANY RESPECT OR RELINQUISHED BY BANK OR BORROWER, EXCEPT BY A WRITTEN INSTRUMENT
EXECUTED BY EACH OF THEM.
12. GENERAL PROVISIONS.
12.1 Successors and Assigns. This Agreement shall bind and inure to the
benefit of the respective successors and permitted assigns of each of the
parties and shall bind all persons who become bound as a debtor to this
Agreement; provided, however, that neither this Agreement nor any rights
hereunder may be assigned by Borrowers without Bank's prior written consent,
which consent may be granted or withheld in Bank's sole discretion. Bank shall
have the right without the consent of or notice to Borrowers to sell, transfer,
negotiate, or grant participation in all or any part of, or any interest in,
Bank's obligations, rights and benefits hereunder.
Comerica Bank-California - Loan and Security Agreement Page 16
12.2 Indemnification. Each Borrower shall defend, indemnify and hold
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by this Agreement, except
for obligations, demands, claims and liabilities caused by Bank's gross
negligence or willful misconduct; and (b) all losses or Bank Expenses in any way
suffered, incurred, or paid by Bank, its officers, employees and agents as a
result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrowers whether under this Agreement, or
otherwise (including without limitation reasonable attorneys fees and expenses),
INCLUDING ANY OBLIGATIONS, DEMANDS, CLAIMS, LIABILITIES AND LOSSES RESULTING
FROM BANK'S OWN NEGLIGENCE OR ARISING OUT OF ANY CLAIM OR THEORY OF STRICT
LIABILITY, except for losses caused by Bank's gross negligence or willful
misconduct.
12.3 Time of Essence. Time is of the essence for the performance of all
obligations set forth in this Agreement.
12.4 Severability of Provisions. Each provision of this Agreement shall
be severable from every other provision of this Agreement for the purpose of
determining the legal enforceability of any specific provision.
12.5 Amendments in Writing, Integration. All amendments to or
terminations of this Agreement must be in writing. All prior agreements,
understandings, representations, warranties, and negotiations between the
parties hereto with respect to the subject matter of this Agreement, if any, are
merged into this Agreement and the Loan Documents.
12.6 Counterparts. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
12.7 Survival. All covenants, representations and warranties made in
this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrowers to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
in Section 12.2 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run.
12.8 Confidentiality. In handling any confidential information, Bank
and all employees and agents of Bank shall exercise the same degree of care that
Bank exercises with respect to its own proprietary information of the same types
to maintain the confidentiality of any non-public information thereby received
or received pursuant to this Agreement except that disclosure of such
information may be made (i) to the subsidiaries or affiliates of Bank in
connection with their present or prospective business relations with Borrower,
(ii) to prospective transferees or purchasers of any interest in the Loans,
provided that they have entered into a comparable confidentiality agreement in
favor of Borrowers and have delivered a copy to Borrowers, (iii) as required by
law, regulations, rule or order, subpoena, judicial order or similar order, (iv)
as may be required in connection with the examination, audit or similar
investigation of Bank and (v) as Bank may determine in connection with the
enforcement of any remedies hereunder. Confidential information hereunder shall
not include information that either: (a) is in the public domain or in the
knowledge or possession of Bank when disclosed to Bank, or becomes part of the
public domain after disclosure to Bank through no fault of Bank; or (b) is
disclosed to Bank by a third party, provided Bank does not have actual knowledge
that such third party is prohibited from disclosing such information.
THIS WRITTEN AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
Comerica Bank-California - Loan and Security Agreement Page 17
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
PRIORITY FULFILLMENT SERVICES, INC.
By:
-------------------------------------
Title:
-----------------------------------
PRIORITY FULFILLMENT SERVICES OF CANADA,
INC.
By:
-------------------------------------
Title:
-----------------------------------
COMERICA BANK-CALIFORNIA
By:
-------------------------------------
Steven Moiles
Vice President
Comerica Bank-California - Loan and Security Agreement Page 18
EXHIBIT A
DEFINITIONS
"Accounts" means all presently existing and hereafter arising accounts, contract
rights, and all other forms of obligations owing to a Borrower arising out of
the sale or lease of goods (including, without limitation, the licensing of
software and other technology) or the rendering of services by such Borrower and
any and all credit insurance, guaranties, and other security therefor, as well
as all merchandise returned to or reclaimed by such Borrower and such Borrower's
Books relating to any of the foregoing.
"Adjusted Tangible Net Worth" means at any date as of which the amount thereof
shall be determined, (a) the consolidated shareholder equity of Guarantor
(excluding foreign currency translation accounts), minus (b) goodwill plus (c)
the Restructuring Charges for the period in which incurred.
"Advance" or "Advances" means a cash advance or cash advances under the
Revolving Facility.
"Affiliate" means, with respect to any Person, any Person that owns or controls
directly or indirectly such Person, any Person that controls or is controlled by
or is under common control with such Person, and each of such Person's senior
executive officers, directors, and partners.
"Bank Expenses" means all reasonable costs or expenses (including reasonable
attorneys' fees and expenses, whether generated in-house or by outside counsel)
incurred in connection with the preparation, negotiation, administration, and
enforcement of the Loan Documents; reasonable Collateral audit fees; and Bank's
reasonable attorneys' fees and expenses (whether generated in-house or by
outside counsel) incurred in amending, enforcing or defending the Loan Documents
(including fees and expenses of appeal), incurred before, during and after an
Insolvency Proceeding, whether or not suit is brought. The initial Bank audit
fee shall not exceed $4,000.
"Borrower's Books" means all of a Borrower's books and records including:
ledgers; records concerning such Borrower's assets or liabilities, the
Collateral, business operations or financial condition; and all computer
programs, or tape files, and the equipment, containing such information.
"Borrowing Base" means an amount equal to 80% of Eligible Accounts, as
determined by Bank with reference to the most recent Borrowing Base Certificate
delivered by Borrowers.
"BSD" means Business Supplies Distributors Holdings, LLC, a Delaware limited
liability company.
"Business Day" means any day that is not a Saturday, Sunday, or other day on
which banks in the State of California are authorized or required to close.
"Cash" means unrestricted cash and cash equivalents.
"Change in Control" shall mean a transaction in which any "person" or "group"
(within the meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act
of 1934) becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934), directly or indirectly, of a sufficient number
of shares of all classes of stock then outstanding of Borrower ordinarily
entitled to vote in the election of directors, empowering such "person" or
"group" to elect a majority of the Board of Directors of Borrower, who did not
have such power before such transaction.
"Chief Executive Office" means (a) with respect to Priority, 500 North Central
Expressway, 5th Floor, Plano, Texas 75074, where Priority's chief executive
office is located, and (b) with respect to Priority Canada, 9133 Leslie Street
Unit 120, Richmond Hill Ontario L4B N41, where Priority Canada's chief executive
office is located.
"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code as amended or supplemented
from time to time.
Comerica Bank-California - Loan and Security Agreement Page 1
"Collateral" means the property described on Exhibit B attached hereto and all
Negotiable Collateral and Intellectual Property Collateral to the extent not
described on Exhibit B, except to the extent any such property (i) is
nonassignable by its terms without the consent of the licensor thereof or
another party (but only to the extent such prohibition on transfer is
enforceable under applicable law, including, without limitation, Sections 9406
and 9408 of the Code), or (ii) the granting of a security interest therein is
contrary to applicable law, provided that upon the cessation of any such
restriction or prohibition, such property shall automatically become part of the
Collateral.
"Collateral State" means the state or states where the Collateral is located,
which are Texas, Tennessee and Ontario, Canada.
"Committed Revolving Line" means a Credit Extension of up to $7,500,000
(inclusive of any amounts outstanding under the Letter of Credit Sublimit).
"Contingent Obligation" means, as applied to any Person (other than as between
Borrowers, Guarantor or any Subsidiary), any direct or indirect liability,
contingent or otherwise, of that Person with respect to (i) any indebtedness,
lease, dividend, letter of credit or other obligation of another, including,
without limitation, any such obligation directly or indirectly guaranteed,
endorsed, co-made or discounted or sold with recourse by that Person, or in
respect of which that Person is otherwise directly or indirectly liable; (ii)
any obligations with respect to undrawn letters of credit issued for the account
of that Person; and (iii) all obligations arising under any interest rate,
currency or commodity swap agreement, interest rate cap agreement, interest rate
collar agreement, or other agreement or arrangement designated to protect a
Person against fluctuation in interest rates, currency exchange rates or
commodity prices; provided, however, that the term "Contingent Obligation" shall
not include endorsements for collection or deposit in the ordinary course of
business. The amount of any Contingent Obligation shall be deemed to be an
amount equal to the stated or determined amount of the primary obligation in
respect of which such Contingent Obligation is made or, if not stated or
determinable, the maximum reasonably anticipated liability in respect thereof as
determined by such Person in good faith; provided, however, that such amount
shall not in any event exceed the maximum amount of the obligations under the
guarantee or other support arrangement.
"Copyrights" means any and all copyright rights, copyright applications,
copyright registrations and like protections in each work or authorship and
derivative work thereof, whether published or unpublished and whether or not the
same also constitutes a trade secret, now or hereafter existing, created,
acquired or held.
"Credit Extension" means each Advance or any other extension of credit by Bank
to or for the benefit of Borrowers hereunder.
"Eligible Accounts" means those Accounts that arise in the ordinary course of
Borrowers' business that comply with all of Borrowers' representations and
warranties to Bank set forth in Section 5.3; provided, that Bank may change the
standards of eligibility by giving Borrowers 30 days prior written notice.
Unless otherwise agreed to by Bank, Eligible Accounts shall not include the
following (all references to percentages shall mean in dollar amount):
(a) Accounts that the account debtor has failed to pay in full within 90 days
of invoice date;
(b) Accounts with respect to an account debtor, 25% of whose Accounts the
account debtor has failed to pay within 90 days of invoice date;
(c) Accounts with respect to which the account debtor is an officer, employee,
or agent of Borrowers;
(d) Accounts arising from the sale of goods by Borrowers and with respect to
which such goods are placed on consignment, guaranteed sale, sale or
return, sale on approval, bill and hold, demo or promotional, or other
terms by reason of which the payment by the account debtor may be
conditional;
(e) Accounts with respect to which the account debtor is an Affiliate of
Borrowers;
(f) Accounts with respect to which the account debtor does not have its
principal place of business in the United States, except for Eligible
Foreign Accounts;
Comerica Bank-California - Loan and Security Agreement Page 2
(g) Accounts with respect to which the account debtor is the United States or
any department, agency, or instrumentality of the United States, except for
Accounts of the United States if the payee has assigned its payment rights
to Bank and the assignment has been acknowledged under the Assignment of
Claims Act of 1940 (31 U.S.C. 3727);
(h) Accounts with respect to which either Borrower is liable to the account
debtor for goods sold or services rendered by the account debtor to such
Borrower, but only to the extent of any amounts owing to the account debtor
against amounts owed to such Borrower (excluding amounts owed to account
debtors for money received in Third Party Deposit Accounts and money
received or to be received in settlement of credit card account receivables
of Borrowers' account debtors);
(i) Accounts with respect to an account debtor (other than IBM), including
Subsidiaries and Affiliates, whose total obligations to Borrowers exceed
25% of all Accounts, to the extent such obligations exceed the
aforementioned percentage, except as approved in writing by Bank;
(j) Accounts with respect to which IBM is the account debtor, to the extent
that its total obligations to Borrowers exceed the 40% of all Accounts,
except as approved in writing by Bank;
(k) Accounts with respect to which the account debtor disputes liability or
makes any claim with respect thereto as to which Bank believes, in its sole
discretion, that there may be a basis for dispute (but only to the extent
of the amount subject to such dispute or claim), or is subject to any
Insolvency Proceeding, or becomes insolvent, or goes out of business
(l) Credit card Accounts; and
(m) Accounts the collection of which Bank reasonably determines after inquiry
and consultation with Borrowers to be doubtful.
"Eligible Foreign Accounts" means Accounts with respect to which the account
debtor does not have its principal place of business in the United States and
that are (i) supported by one or more letters of credit in an amount and of a
tenor, and issued by a financial institution, acceptable to Bank, (ii) insured
by EXIM Bank, (iii) generated by an account debtor with its principal place of
business in Canada, provided that the Bank has perfected its security interest
in the appropriate Canadian province, or (iv) approved by Bank on a case-by-case
basis.
"Environmental Laws" means all laws, rules, regulations, orders and the like
issued by any federal state, local foreign or other governmental or
quasi-governmental authority or any agency pertaining to the environment or to
any hazardous materials or wastes, toxic substances, flammable, explosive or
radioactive materials, asbestos or other similar materials.
"Equipment" means all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended,
and the regulations thereunder.
"Event of Default" has the meaning assigned in Article 8.
"GAAP" means generally accepted accounting principles, consistently applied, as
in effect from time to time.
"Guarantor" means PFSweb, Inc., a Delaware corporation.
"Indebtedness" means (a) all indebtedness for borrowed money or the deferred
purchase price of property or services, including without limitation
reimbursement and other obligations with respect to surety bonds and letters of
credit, (b) all obligations evidenced by notes, bonds, debentures or similar
instruments, (c) all capital lease obligations, and (d) all Contingent
Obligations.
Comerica Bank-California - Loan and Security Agreement Page 3
"Insolvency Proceeding" means any proceeding commenced by or against any Person
or entity under any provision of the United States Bankruptcy Code, as amended,
or under any other bankruptcy or insolvency law, including assignments for the
benefit of creditors, formal or informal moratoria, compositions, extension
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.
"Intellectual Property Collateral" means all of each Borrower's right, title,
and interest, if any, in and to the following to the extent freely assignable or
transferable:
(a) Copyrights, Trademarks and Patents;
(b) Any and all trade secrets, and any and all intellectual property rights in
computer software and computer software products now or hereafter existing,
created, acquired or held;
(c) Any and all design rights which may be available to such Borrower now or
hereafter existing, created, acquired or held;
(d) Any and all claims for damages by way of past, present and future
infringement of any of the rights included above, with the right, but not
the obligation, to sue for and collect such damages for said use or
infringement of the intellectual property rights identified above;
(e) All licenses or other rights to use any of the Copyrights, Patents or
Trademarks, and all license fees and royalties arising from such use to the
extent permitted by such license or rights;
(f) All amendments, renewals and extensions of any of the Copyrights,
Trademarks or Patents; and
(g) All proceeds and products of the foregoing, including without limitation
all payments under insurance or any indemnity or warranty payable in
respect of any of the foregoing.
"Inventory" means all present and future inventory in which a Borrower has any
interest, including merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products intended for sale or
lease or to be furnished under a contract of service, of every kind and
description now or at any time hereafter owned by or in the custody or
possession, actual or constructive, of such Borrower, including such inventory
as is temporarily out of its custody or possession or in transit and including
any returns upon any accounts or other proceeds, including insurance proceeds,
resulting from the sale or disposition of any of the foregoing and any documents
of title representing any of the above, and such Borrower's Books relating to
any of the foregoing. Inventory does not include any of the foregoing which is
now or hereafter held by, or in the possession of, a Borrower for or on behalf
of its customers.
"Investment" means any beneficial ownership of (including stock, partnership or
limited liability company interest or other securities) any Person, or any loan,
advance or capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and the regulations
thereunder.
"Letter of Credit" means a commercial or standby letter of credit or similar
undertaking issued by Bank at Borrower's request in accordance with Section
2.1(b)(iii).
"Letter of Credit Sublimit" means a sublimit for Letters of Credit under the
Committed Revolving Line not to exceed $2,500,000.
"Lien" means any mortgage, lien, deed of trust, charge, pledge, security
interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement, any note or notes executed
by Borrowers, and any other document, instrument or agreement entered into
between Borrowers and Bank in connection with this Agreement, all as amended or
extended from time to time.
Comerica Bank-California - Loan and Security Agreement Page 4
"Material Adverse Effect" means a material adverse effect on (i) the business
operations or condition (financial or otherwise) of Borrowers and their
Subsidiaries taken as a whole or (ii) the ability of Borrowers to repay the
Obligations or otherwise perform their obligations under the Loan Documents.
"Negotiable Collateral" means all of each Borrower's present and future letters
of credit of which it is a beneficiary, drafts, instruments (including
promissory notes), securities, documents of title, and chattel paper, and such
Borrower's Books relating to any of the foregoing.
"Obligations" means all debt, principal, interest, Bank Expenses and other
amounts owed to Bank by Borrowers pursuant to this Agreement or any other
agreement, whether absolute or contingent, due or to become due, now existing or
hereafter arising, including any interest that accrues after the commencement of
an Insolvency Proceeding and including any debt, liability, or obligation owing
from Borrowers to others that Bank may have obtained by assignment or otherwise.
"Organizational Jurisdiction" means (a) with respect to Priority, Delaware, the
state under whose laws Priority is organized, (b) with respect to Priority
Canada, Ontario, the province under whose laws Priority Canada is organized, and
(c) with respect to each Subsidiary, the jurisdiction indicated opposite such
Subsidiary's name on the Schedule.
"Patents" means all patents, patent applications and like protections including
without limitation improvements, divisions, continuations, renewals, reissues,
extensions and continuations-in-part of the same.
"Periodic Payments" means all installments or similar recurring payments that
either Borrower may now or hereafter become obligated to pay to Bank pursuant to
the terms and provisions of any instrument, or agreement now or hereafter in
existence between Borrowers and Bank.
"Permitted Indebtedness" means (without duplication):
(a) Indebtedness of Borrowers in favor of Bank arising under this Agreement or
any other Loan Document;
(b) Indebtedness existing on the Closing Date and disclosed in the Schedule;
(c) Indebtedness not to exceed $3,000,000 in the aggregate in any fiscal year
of Borrowers secured by a lien described in clause (c) of the defined term
"Permitted Liens," provided such Indebtedness does not exceed the lesser of
the cost or fair market value of the equipment financed with such
Indebtedness;
(d) Subordinated Debt and the Indebtedness described in clause (h) of Permitted
Investments (but without duplication thereof);
(e) Indebtedness to, or for the benefit of, trade creditors incurred in the
ordinary course of business;
(f) Indebtedness arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement or
other agreement or arrangement designated to protect a Person against
fluctuation in interest rates, currency exchange rates or commodity prices,
provided that such agreements and arrangements are with counterparties and
on terms reasonably satisfactory to Bank;
(g) Indebtedness of a Borrower owing to the other Borrower;
(h) Indebtedness evidenced by the Subordinated Demand Note;
(i) Indebtedness of PFSM, LLC owing to Priority for the acquisition of
equipment by PFSM, LLC, provided (i) such Indebtedness does not exceed the
lesser of the cost or fair market value of the equipment financed with such
Indebtedness, (ii) the aggregate principal amount of Indebtedness incurred
by PFSM, LLC pursuant to this clause when added to the aggregate amount of
Investments made by Priority pursuant to clause (g) of the definition of
Permitted Investments does not exceed $450,000 in any fiscal year, and
(iii) at the time of incurrence of such Indebtedness and after giving
effect thereto, no Event of Default has occurred and is continuing;
Comerica Bank-California - Loan and Security Agreement Page 5
(j) Indebtedness described in clause (f) of Permitted Investments (but without
duplication thereof);
(k) Intercompany Indebtedness incurred in connection with the allocation of
certain expenses (such as expenses incurred for reports filed with the
Securities and Exchange Commission) to PFSweb, Inc., provided that the
aggregate amount of such allocated expenses does not exceed $100,000 in any
fiscal year; and
(l) Extensions, refinancings and renewals of any items of Permitted
Indebtedness, provided that with respect to such Permitted Indebtedness
(other than trade payables), the principal amount is not increased or the
terms modified to impose materially more burdensome terms upon Borrowers or
their Subsidiary, as the case may be.
"Permitted Investment" means:
(a) Investments existing on the Closing Date disclosed in the Schedule;
(b) (i)Marketable direct obligations issued or unconditionally guaranteed by
the United States of America or any agency or any State thereof maturing
within one year from the date of acquisition thereof, (ii) commercial paper
maturing no more than one year from the date of creation thereof and
currently having rating of at least A-2 or P-2 from either Standard &
Poor's Corporation or Moody's Investors Service, (iii) certificates of
deposit maturing no more than one year from the date of investment therein,
and (iv) money market accounts;
(c) Repurchases of stock from former employees or directors of Borrowers under
the terms of applicable repurchase agreements (i) in an aggregate amount
not to exceed $100,000 in any fiscal year, provided that no Event of
Default has occurred, is continuing or would exist after giving effect to
the repurchases, or (ii) in any amount where the consideration for the
repurchase is the cancellation of indebtedness owed by such former
employees to Borrowers regardless of whether an Event of Default exists;
(d) Investments accepted in connection with Permitted Transfers;
(e) Advances by Priority to Supplies Distributors, Inc. pursuant to the
Subordinated Demand Note, so long as (1) the aggregate outstanding
principal amount of such Indebtedness does not exceed $8,005,000 (excluding
accrued and unpaid interest) at any time, and (2) before and after giving
effect to such advances no Event of Default has occurred and is continuing;
(f) Investments in or advances to PFSweb B.V. by Priority after the date hereof
not to exceed $1,000,000 in the aggregate in any fiscal year (excluding
accrued interest), so long as before and after giving effect to such
Investments or advances, no Event of Default has occurred and is
continuing;
(g) Investments by Priority in PFSM, LLC for the acquisition of equipment by
PFSM, LLC, provided (i) each such Investment does not exceed the lesser of
the cost or fair market value of the equipment acquired with such
Investment, (ii) the aggregate amount of Investments made by Priority
pursuant to this clause when added to the Indebtedness incurred by PFSM,
LLC pursuant to clause (i) of the definition of Permitted Indebtedness does
not exceed $450,000 in any fiscal year, and (iii) at the time of each such
Investment and after giving effect thereto, no Event of Default has
occurred and is continuing;
(h) Investments by Priority in Supplies Distributors, Inc. in an amount not to
exceed the aggregate cash dividends paid to Priority by Supplies
Distributors, Inc. after the date hereof, so long as at the time of and
after giving effect to each such Investment, no Event of Default has
occurred and is continuing;
Comerica Bank-California - Loan and Security Agreement Page 6
(i) Investments of Subsidiaries in or to other Subsidiaries or Borrower and
Investments by Borrowers in Subsidiaries (not described in clauses (a),
(d), (e), (f), (g) and (h) above), not to exceed $100,000 in the aggregate
in any fiscal year (excluding increases in either Borrower's Investment in
existing Subsidiaries that arise solely as a result of earnings by such
Subsidiaries that are not distributed to Borrowers);
(j) Investments not to exceed $100,000 outstanding at any time in the aggregate
consisting of (i) travel advances and employee relocation loans and other
employee loans and advances in the ordinary course of business, and (ii)
loans to employees, officers or directors relating to the purchase of
equity securities of Borrowers or its Subsidiaries pursuant to employee
stock purchase plan agreements approved by each Borrower's Board of
Directors;
(k) Investments (including debt obligations) received in connection with the
bankruptcy or reorganization of customers or suppliers and in settlement of
delinquent obligations of, and other disputes with, customers or suppliers
arising in the ordinary course of Borrowers' business;
(l) Investments consisting of notes receivable of, or prepaid royalties and
other credit extensions, to customers and suppliers who are not Affiliates,
in the ordinary course of business, provided that this subparagraph (l)
shall not apply to Investments of Borrowers in any Subsidiary;
(m) (Capitalization of intercompany Indebtedness that is outstanding on the
date of this Agreement; and
(n) Joint ventures or strategic alliances in the ordinary course of Borrowers'
business consisting of the non-exclusive licensing of technology, the
development of technology or the providing of technical support, provided
that any cash Investments by Borrowers do not exceed $100,000 in the
aggregate in any fiscal year.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and disclosed in the Schedule
(excluding Liens to be satisfied with the proceeds of the Advances) or
arising under this Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other governmental charges or levies,
either not delinquent or being contested in good faith by appropriate
proceedings and for which Borrowers maintain adequate reserves, provided
the same have no priority over any of Bank's security interests;
(c) Liens not to exceed $3,000,000 in the aggregate in any fiscal year (i) upon
or in any Equipment acquired or held by Borrowers or any of their
Subsidiaries to secure the purchase price of such Equipment or indebtedness
incurred solely for the purpose of financing the acquisition or lease of
such Equipment, or (ii) existing on such Equipment at the time of its
acquisition, provided that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such Equipment;
(d) Liens incurred in connection with the extension, renewal or refinancing of
the indebtedness secured by Liens of the type described in clauses (a)
through (c) above, provided that any extension, renewal or replacement Lien
shall be limited to the property encumbered by the existing Lien and the
principal amount of the indebtedness being extended, renewed or refinanced
does not increase;
(e) Liens arising from judgments, decrees or attachments in circumstances not
constituting an Event of Default under Sections 8.5 or 8.9;
(f) Liens in favor of other financial institutions arising in connection with
Borrowers' deposit accounts held at such institutions, provided that Bank
has a perfected security interest in the amounts held in such deposit
accounts other than the deposit accounts listed in the Schedule and any
Third Party Deposit Account; and
(g) Other Liens not described above arising in the ordinary course of business
and not having or not reasonably likely to have a Material Adverse Effect
on Borrower and its Subsidiaries taken as a whole.
Comerica Bank-California - Loan and Security Agreement Page 7
"Permitted Transfer" means the conveyance, sale, lease, transfer or disposition
by Borrowers or any Subsidiary of:
(a) Inventory in the ordinary course of business;
(b) licenses and similar arrangements for the use of the property of Borrowers
or its Subsidiaries in the ordinary course of business;
(c) worn-out or obsolete Equipment;
(d) any Equipment under a sale-leaseback transaction approved by Bank;
(e) any transfer of assets made by Borrower to PFSweb B.V. in connection with
the reincorporation of PFSweb B.V. under the laws of Belgium, provided that
such assets were originally transferred to such Borrower by PFSweb B.V. in
connection with its reincorporation; or
(f) other assets of Borrowers or their Subsidiaries the gross sales proceeds of
which do not in the aggregate exceed $250,000 during any fiscal year.
"Person" means any individual, sole proprietorship, partnership, limited
liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or governmental agency.
"Prime Rate" means the variable rate of interest, per annum, most recently
announced by Bank, as its "prime rate," whether or not such announced rate is
the lowest rate available from Bank.
"Responsible Officer" means each of the Chief Executive Officer, the Chief
Operating Officer, the Chief Financial Officer and the Corporate Controller of
Borrowers.
"Restructuring Charges" means restructuring charges which may be incurred by
Priority Canada, not to exceed $750,000 in the aggregate, in connection with the
restructuring activities of Priority Canada. The incurrence of Restructuring
Charges shall not by itself be deemed a material adverse change in the financial
conditions of Borrowers.
"Revolving Facility" means the facility under which Borrowers may request Bank
to issue Advances, as specified in Section 2.1(b) hereof.
"Revolving Maturity Date" means March 28, 2005.
"Schedule" means the schedule of exceptions attached hereto and approved by
Bank, if any.
"SOS Reports" means the official reports from the Secretaries of State or other
applicable governmental official of each Collateral State, Chief Executive
Office and Organizational Jurisdiction and other applicable federal, state or
local government offices identifying all current security interests filed in the
Collateral and Liens of record as of the date of such report.
"Subordinated Debt" means any debt incurred by either Borrower that is
subordinated in writing to the debt owing by Borrower to Bank on terms
reasonably acceptable to Bank (and identified as being such by Borrower and
Bank), including all obligations owing by Borrower to IBM Belgium Financial
Services S.A., Congress Financial Corporation (Southwest) or IBM Credit
Corporation that is expressly subordinated by the Subordination Agreements of
even date herewith, as from time to time amended, modified or restated.
"Subordinated Demand Note" means the promissory note dated November 12, 2002, in
the stated principal amount of $8,000,000, from Supplies Distributor, Inc. to
Priority, which has been subordinated to all obligations of Supplies
Distributors, Inc. owed to IBM Credit Corporation, Congress Financial
Corporation (Southwest) and IBM Belgium Financial Services S.A.
Comerica Bank-California - Loan and Security Agreement Page 8
"Subsidiary" means any corporation, partnership or limited liability company or
joint venture in which (i) any general partnership interest or (ii) more than
50% of the stock, limited liability company interest or joint venture of which
by the terms thereof ordinary voting power to elect the Board of Directors,
managers or trustees of the entity, at the time as of which any determination is
being made, is owned by either Borrower, either directly or through an
Affiliate.
"Tangible Net Worth" means at any date as of which the amount thereof shall be
determined, (a) the consolidated shareholder equity of Guarantor, minus (b)
goodwill.
"Third Party Deposit Accounts" means those deposit accounts now existing or
hereafter established by a Borrower for deposits of funds received by such
Borrower on behalf of its account debtors in payment of such account debtors'
receivables, provided that such deposit accounts are titled to clearly indicate
that Borrower maintains such deposit accounts on behalf of its account debtors.
"Trademarks" means any trademark and servicemark rights, whether registered or
not, applications to register and registrations of the same and like
protections, and the entire goodwill of the business of a Borrower connected
with and symbolized by such trademarks.
Comerica Bank-California - Loan and Security Agreement Page 9
DEBTORS: PRIORITY FULFILLMENT SERVICES, INC.
PRIORITY FULFILLMENT SERVICES, OF CANADA, INC.
SECURED PARTY: COMERICA BANK-CALIFORNIA
EXHIBIT B
COLLATERAL DESCRIPTION ATTACHMENT
TO LOAN AND SECURITY AGREEMENT
All personal property of each Borrower (herein referred to as "Borrower" or
"Debtor") whether presently existing or hereafter created or acquired, and
wherever located, including, but not limited to:
(a) all accounts (including health-care-insurance receivables), chattel paper
(including tangible and electronic chattel paper), deposit accounts (other
than the Third Party Deposit Accounts), documents (including negotiable
documents), equipment (including all accessions and additions thereto),
general intangibles (including payment intangibles and software), goods
(including fixtures), instruments (including promissory notes), inventory
(including all goods held for sale or lease or to be furnished under a
contract of service, and including returns and repossessions), investment
property (including securities and securities entitlements), letter of
credit rights, money, Personal Property of Priority Fulfillment Services of
Canada, Inc. (as the term "Personal Property" is defined in the Personal
Property Security Act, R.S.O. 1990 c. P.10, or similar Canadian provincial
legislation) and all of Debtor's books and records with respect to any of
the foregoing, and the computers and equipment containing said books and
records;
(b) all common law and statutory copyrights and copyright registrations,
applications for registration, now existing or hereafter arising, in the
United States of America or in any foreign jurisdiction, obtained or to be
obtained on or in connection with any of the foregoing, or any parts
thereof or any underlying or component elements of any of the foregoing,
together with the right to copyright and all rights to renew or extend such
copyrights and the right (but not the obligation) of Secured Party to sue
in its own name and/or in the name of the Debtor for past, present and
future infringements of copyright;
(c) all trademarks, service marks, trade names and service names and the
goodwill associated therewith, together with the right to trademark and all
rights to renew or extend such trademarks and the right (but not the
obligation) of Secured Party to sue in its own name and/or in the name of
the Debtor for past, present and future infringements of trademark;
(d) all (i) patents and patent applications filed in the United States Patent
and Trademark Office or any similar office of any foreign jurisdiction, and
interests under patent license agreements, including, without limitation,
the inventions and improvements described and claimed therein, (ii)
licenses pertaining to any patent whether Debtor is licensor or licensee,
(iii) income, royalties, damages, payments, accounts and accounts
receivable now or hereafter due and/or payable under and with respect
thereto, including, without limitation, damages and payments for past,
present or future infringements thereof, (iv) right (but not the
obligation) to sue in the name of Debtor and/or in the name of Secured
Party for past, present and future infringements thereof, (v) rights
corresponding thereto throughout the world in all jurisdictions in which
such patents have been issued or applied for, and (vi) reissues, divisions,
continuations, renewals, extensions and continuations-in-part with respect
to any of the foregoing;
(e) all ownership interests of Debtor in Supplies Distributors Holdings, LLC
and PFSM, LLC, together with all dividends and other distributions at any
time made with respect to such ownership interests. and
(f) any and all cash proceeds and/or noncash proceeds of any of the foregoing,
including, without limitation, insurance proceeds, and all supporting
obligations and the security therefor or for any right to payment. All
terms above have the meanings given to them in the California Uniform
Commercial Code, as amended or supplemented from time to time, including
revised Division 9 of the Uniform Commercial Code-Secured Transactions,
added by Stats. 1999, c.991 (S.B. 45), Section 35, operative July 1, 2001.
EXHIBIT 10.2
UNCONDITIONAL GUARANTY
For and in consideration of the loan by COMERICA BANK-CALIFORNIA
("Bank") to Priority Fulfillment Services, Inc. and Priority Fulfillment
Services of Canada, Inc. (collectively, "Borrower"), which loan is made pursuant
to a Loan and Security Agreement between Borrower and Bank dated as of March 28,
2003, as amended, modified or restated from time to time (the "Agreement"), and
acknowledging that Bank would not enter into the Agreement without the benefit
of this Guaranty, the undersigned guarantor ("Guarantor") hereby unconditionally
and irrevocably guarantees the prompt and complete payment of all amounts that
Borrower owes to Bank and performance by Borrower of the Agreement and any other
agreements between Borrower and Bank, as amended from time to time (collectively
referred to as the "Agreements"), in strict accordance with their respective
terms.
1. If Borrower does not perform its obligations in strict accordance
with the Agreements, Guarantor shall immediately pay all amounts due thereunder
(including, without limitation, all principal, interest, and fees) and otherwise
to proceed to complete the same and satisfy all of Borrower's obligations under
the Agreements.
Without limiting the generality of the foregoing, Guarantor
agrees that its obligations hereunder include all obligations and liabilities
for which Borrower would otherwise be liable to Bank were it not for the
invalidity or unenforceability of them by reason of any proceeding involving
Borrower under any bankruptcy, insolvency or other similar law.
2. If there is more than one guarantor, the obligations hereunder are
joint and several, and whether or not there is more than one Guarantor, the
obligations hereunder are independent of the obligations of Borrower, and a
separate action or actions may be brought and prosecuted against Guarantor
whether action is brought against Borrower or whether Borrower be joined in any
such action or actions. Guarantor waives the benefit of any statute of
limitations affecting its liability hereunder or the enforcement thereof, to the
extent permitted by law. Guarantor's liability under this Guaranty is not
conditioned or contingent upon the genuineness, validity, regularity or
enforceability of the Agreements.
3. Guarantor authorizes Bank, without notice or demand and without
affecting its liability hereunder, from time to time to (a) renew, extend, or
otherwise change the terms of the Agreements or any part thereof; (b) take and
hold security for the payment of this Guaranty or the Agreements, and exchange,
enforce, waive and release any such security; and (c) apply such security and
direct the order or manner of sale thereof as Bank in its sole discretion may
determine.
4. Guarantor waives any right to require Bank to (a) proceed against
Borrower or any other person; (b) proceed against or exhaust any security held
from Borrower; or (c) pursue any other remedy in Bank's power whatsoever. Bank
may, at its election, exercise or decline or fail to exercise any right or
remedy it may have against Borrower or any security held by Bank, including
without limitation the right to foreclose upon any such security by judicial or
nonjudicial sale, without affecting or impairing in any way the liability of
Guarantor hereunder. Guarantor waives any defense arising by reason of any
disability or other defense of Borrower or by reason of the cessation from any
cause whatsoever of the liability of Borrower. Guarantor waives any setoff,
defense or counterclaim that Borrower may have against Bank. Guarantor waives
any defense arising out of the absence, impairment or loss of any right of
reimbursement or subrogation or any other rights against Borrower. Until all of
the amounts that Borrower owes to Bank have been paid in full, Guarantor shall
have no right of subrogation or reimbursement for claims arising out of or in
connection with this Guaranty, contribution or other rights against Borrower,
and Guarantor waives any right to enforce any remedy that Bank now has or may
hereafter have against Borrower. Guarantor waives all rights to participate in
any security now or hereafter held by Bank. Guarantor waives all presentments,
demands for performance, notices of nonperformance, protests, notices of
protest, notices of dishonor, and notices of acceptance of this Guaranty and of
the existence, creation, or incurring of new or additional indebtedness.
Guarantor assumes the responsibility for being and keeping itself informed of
the financial condition of Borrower and of all other circumstances bearing upon
the risk of nonpayment of any indebtedness or nonperformance of any obligation
of Borrower, warrants to Bank that it will keep so informed, and agrees that
absent a request for particular information by Guarantor, Bank shall have no
duty to advise Guarantor of information known to Bank regarding such condition
or any such circumstances. Guarantor waives the benefits of California Civil
Code sections 2809, 2810, 2819, 2845, 2847, 2848, 2849, 2850, 2899 and 3433.
5. Guarantor acknowledges that, to the extent Guarantor has or may have
certain rights of subrogation or reimbursement against Borrower for claims
arising out of this Guaranty, those rights may be
impaired or destroyed if Bank elects to proceed against any real property
security of Borrower by non-judicial foreclosure. That impairment or destruction
could, under certain judicial cases and based on equitable principles of
estoppel, give rise to a defense by Guarantor against its obligations under this
Guaranty. Guarantor waives that defense and any others arising from Bank's
election to pursue non-judicial foreclosure. Without limiting the generality of
the foregoing, Guarantor waives any and all benefits and defenses under
California Code of Civil Procedure Sections 580a, 580b, 580d and 726, to the
extent they are applicable.
6. If Borrower becomes insolvent or is adjudicated bankrupt or files a
petition for reorganization, arrangement, composition or similar relief under
any present or future provision of the United States Bankruptcy Code, or if such
a petition is filed against Borrower, and in any such proceeding some or all of
any indebtedness or obligations under the Agreements are terminated or rejected
or any obligation of Borrower is modified or abrogated, or if Borrower's
obligations are otherwise avoided for any reason, Guarantor agrees that
Guarantor's liability hereunder shall not thereby be affected or modified and
such liability shall continue in full force and effect as if no such action or
proceeding had occurred. This Guaranty shall continue to be effective or be
reinstated, as the case may be, if any payment must be returned by Bank upon the
insolvency, bankruptcy or reorganization of Borrower, Guarantor, any other
guarantor, or otherwise, as though such payment had not been made.
7. Any indebtedness of Borrower now or hereafter held by Guarantor is
hereby subordinated to any indebtedness of Borrower to Bank; and such
indebtedness of Borrower to Guarantor shall be collected, enforced and received
by Guarantor as trustee for Bank and be paid over to Bank on account of the
indebtedness of Borrower to Bank but without reducing or affecting in any manner
the liability of Guarantor under the other provisions of this Guaranty.
8. Guarantor agrees to pay a reasonable attorneys' fee and all other
costs and expenses which may be incurred by Bank in the enforcement of this
Guaranty. No terms or provisions of this Guaranty may be changed, waived,
revoked or amended without Bank's prior written consent. Should any provision of
this Guaranty be determined by a court of competent jurisdiction to be
unenforceable, all of the other provisions shall remain effective. This
Guaranty, together with any agreements (including without limitation any
security agreements or any pledge agreements) executed in connection with this
Guaranty, embodies the entire agreement among the parties hereto with respect to
the matters set forth herein, and supersedes all prior agreements among the
parties with respect to the matters set forth herein. No course of prior dealing
among the parties, no usage of trade, and no parol or extrinsic evidence of any
nature shall be used to supplement, modify or vary any of the terms hereof.
There are no conditions to the full effectiveness of this Guaranty. Bank may
assign this Guaranty without in any way affecting Guarantor's liability under
it. This Guaranty shall inure to the benefit of Bank and its successors and
assigns. This Guaranty is in addition to the guaranties of any other guarantors
and any and all other guaranties of Borrower's indebtedness or liabilities to
Bank.
9. Guarantor represents and warrants to Bank that (i) Guarantor has
taken all necessary and appropriate action to authorize the execution, delivery
and performance of this Guaranty, (ii) execution, delivery and performance of
this Guaranty do not conflict with or result in a breach of or constitute a
default under Guarantor's Certificate of Incorporation or Bylaws or other
organizational documents or agreements to which it is party or by which it is
bound, and (iii) this Guaranty constitutes a valid and binding obligation,
enforceable against Guarantor in accordance with its terms.
10. Guarantor covenants and agrees that Guarantor shall do all of the
following:
10.1. Guarantor shall maintain its corporate existence, remain in
good standing in Delaware, and continue to qualify in each jurisdiction in which
the failure to so qualify could have a material adverse effect on the financial
condition, operations or business of Guarantor. Guarantor shall maintain in
force all licenses, approvals and agreements, the loss of which could have a
material adverse effect on its financial condition, operations or business.
10.2. Guarantor shall comply with all statutes, laws, ordinances,
directives, orders, and government rules and regulations to which it is subject
if non-compliance with such laws could adversely affect the financial condition,
operations or business of Guarantor.
10.3. At any time and from time to time Guarantor shall execute and
deliver such further instruments and take such further action as may reasonably
be requested by Bank to effect the purposes of this Agreement.
10.4. Guarantor shall not transfer, assign, encumber or otherwise
dispose of any shares of capital stock or other equity interest Guarantor may
now have or hereafter acquire in Borrower.
11. This Guaranty shall be governed by the laws of the State of
California, without regard to conflicts of laws principles. GUARANTOR WAIVES ANY
RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT
OF THIS GUARANTY OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING
CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS. Guarantor submits to the exclusive jurisdiction of the state
and federal courts located in Santa Clara County, California.
IN WITNESS WHEREOF, the undersigned Guarantor has executed this
Guaranty as of this 28th day of March, 2003.
PSFWEB, INC.
-----------------------------------------
By:
Title:
EXHIBIT 10.3
As of March 28, 2003, for value received, the undersigned ("Debtor") pledges,
assigns and grants to Comerica Bank-California, a California banking association
("Bank"), whose address is 800 E. Campbell Road, Suite 254, Richardson, Texas
75081, a continuing security interest and lien (any pledge, assignment, security
interest or other lien arising hereunder is sometimes referred to herein as a
"security interest") in the Collateral (as defined below) to secure payment when
due, whether by stated maturity, demand, acceleration or otherwise, of all
existing and future indebtedness ("Indebtedness") to the Bank of Priority
Fulfillment Services, Inc. and Priority Fulfillment Services of Canada, Inc.
(both individually and collectively referred to as "Borrower") and/or Debtor.
Indebtedness includes without limit any and all obligations or liabilities of
the Borrower and/or Debtor to the Bank, whether absolute or contingent, direct
or indirect, voluntary or involuntary, liquidated or unliquidated, joint or
several, known or unknown, originally payable to the Bank or to a third party
and subsequently acquired by the Bank including, without limitation, any late
charges, loan fees or charges, and overdraft indebtedness,
any and all
obligations or liabilities for which the Borrower and/or Debtor would otherwise
be liable to the Bank were it not for the invalidity or unenforceability of them
by reason of any bankruptcy, insolvency or other law, or for any other reason;
any and all amendments, modifications, renewals and/or extensions of any of the
above; all costs incurred by Bank in establishing, determining, continuing, or
defending the validity or priority of any security interest, or in pursuing its
rights and remedies under this Agreement or under any other agreement between
Bank and Borrower and/or Debtor or in connection with any proceeding involving
Bank as a result of any financial accommodation to Borrower and/or Debtor; and
all other costs of collecting Indebtedness, including without limit attorneys'
fees. Debtor agrees to pay Bank all such costs incurred by the Bank, immediately
upon demand, and until paid all costs shall bear interest at the highest per
annum rate applicable to any of the Indebtedness, but not in excess of the
maximum rate permitted by law. Any reference in this Agreement to attorneys'
fees shall be deemed a reference to reasonable fees, costs, and expenses of
counsel and paralegals, whether inside or outside counsel is used, whether or
not a suit or action is instituted, and to court costs if a suit or action is
instituted, and whether attorneys' fees or court costs are incurred at the trial
court level, on appeal, in a bankruptcy, administrative or probate proceeding or
otherwise.
Debtor further covenants, agrees, represents and warrants as follows:
1. COLLATERAL shall mean all of the following property the undersigned now or
later owns or has an interest in, wherever located:
(a) All of the following, whether now or hereafter existing, which are
owned by Debtor or in which Debtor otherwise has any rights: all
shares of stock of Priority Fulfillment Services, Inc., sixty-five
percent (65%) of the ownership interest of Debtor in each of Priority
Fulfillment Services of Canada, Inc. and PFSweb B.V., all certificates
representing any such shares, all options and other rights,
contractual or otherwise, at any time existing with respect to such
shares, and all dividends, cash, instruments and other property now or
hereafter received, receivable or otherwise distributed in respect of
or in exchange for any or all of such shares.
(b) All additions, attachments, accessions, parts, replacements,
substitutions, renewals, interest, dividends, distributions, rights of
any kind (including but not limited to stock splits, stock rights,
voting and preferential rights), products, and proceeds of or
pertaining to the above including, without limit, cash or other
property which were proceeds and are recovered by a bankruptcy trustee
or otherwise as a preferential transfer by the undersigned.
In the definition of Collateral, a reference to a type of collateral shall
not be limited by a separate reference to a more specific or narrower type
of that collateral.
2. WARRANTIES, COVENANTS AND AGREEMENTS. The undersigned warrants, covenants
and agrees as follows:
2.1 The undersigned shall furnish to Bank, in form and at intervals as
Bank may request, any information Bank may reasonably request and
allow Bank to examine, inspect, and copy any of the undersigned's
books and records. The undersigned shall, at the request of Bank, mark
its records and the Collateral to clearly indicate the security
interest of Bank under this Agreement.
2.2 At the time any Collateral becomes, or is represented to be, subject
to a security interest in favor of Bank, the undersigned shall be
deemed to have warranted that (a) the undersigned is the lawful owner
of the Collateral and has the right and authority to subject it to a
security interest granted to Bank; (b) none of the Collateral is
subject to any security interest other than that in favor of Bank, (c)
there are no financing statements on file, other than in favor of
Bank; (d) no person, other than Bank, has possession or control (as
defined in the Uniform Commercial Code) of any Collateral of such
nature that perfection of a security interest may be accomplished by
control; and (e) Debtor acquired its rights in the Collateral in the
ordinary course of its business; provided that Debtor makes no
representation as to the creation, perfection or priority of Bank's
security interest in Debtor's ownership interest in PFSweb B.V.
2.3 The undersigned will keep the Collateral free at all times from all
claims, liens, security interests and encumbrances other than those in
favor of Bank. The undersigned will not, without the prior written
consent of Bank, sell, transfer or lease, or permit to be sold,
transferred or leased, any or all of the Collateral. Bank or its
representatives may at all reasonable times inspect the Collateral and
may enter upon all premises where the Collateral is kept or might be
located.
2.4 The undersigned will do all acts and will execute or cause to be
executed all writings requested by Bank to establish, maintain and
continue an exclusive, perfected and first security interest of Bank
in the Collateral (excluding Debtor's ownership interest in PFSweb
B.V. and all proceeds thereof). The undersigned agrees that Bank has
no obligation to acquire or perfect any lien on or security interest
in any asset(s), whether realty or personalty, to secure payment of
the Indebtedness, and the undersigned is not relying upon assets in
which the Bank may have a lien or security interest for payment of the
Indebtedness.
2.5 The undersigned will pay within the time that they can be paid without
interest or penalty all taxes, assessments and similar charges which
at any time are or may become a lien, charge, or encumbrance upon any
Collateral, except to the extent contested in good faith and bonded in
a manner satisfactory to Bank. If the undersigned fails to pay any of
these taxes, assessments, or other charges in the time provided above,
Bank has the option (but not the obligation) to do so, and the
undersigned agrees to repay all amounts so expended by Bank
immediately upon demand, together with interest at the highest lawful
default rate which could be charged by Bank to Borrower on any
Indebtedness.
2.6 Intentionally omitted.
2.7 The undersigned at all times shall be in strict compliance with all
applicable laws, including without limit any laws, ordinances,
directives, orders, statutes, or regulations an object of which is to
regulate or improve health, safety, or the environment ("Environmental
Laws").
2.8 Intentionally omitted.
2.9 If Bank, acting in its sole discretion, redelivers Collateral to the
undersigned or the undersigned's designee for the purpose of (a) the
ultimate sale or exchange thereof; or (b) presentation, collection,
renewal, or registration of transfer thereof; or (c) loading,
unloading, storing, shipping, transshipping, manufacturing, processing
or otherwise dealing with it preliminary to sale or exchange; such
redelivery shall be in trust for the benefit of Bank and shall not
constitute a release of Bank's security interest in it or in the
proceeds or products of it unless Bank specifically so agrees in
writing. Any proceeds of Collateral coming into the undersigned's
possession as a result of any such redelivery shall be held in trust
for Bank and immediately delivered to Bank for application on the
Indebtedness. Bank may (in its sole discretion) deliver any or all of
the Collateral to the undersigned, and such delivery by Bank shall
discharge Bank from all liability or responsibility for such
Collateral. Bank, at its option, may require delivery of any
Collateral to Bank at any time with such endorsements or assignments
of the Collateral as Bank may request.
2
2.10 At any time after and during the continuation of an Event of Default
and without notice, Bank may (a) cause any or all of the Collateral to
be transferred to its name or to the name of its nominees; (b) receive
or collect by legal proceedings or otherwise all dividends, interest,
principal payments and other sums and all other distributions at any
time payable or receivable on account of the Collateral, and hold the
same as Collateral, or apply the same to the Indebtedness, the manner
and distribution of the application to be in the sole discretion of
Bank; (c) enter into any extension, subordination, reorganization,
deposit, merger or consolidation agreement or any other agreement
relating to or affecting the Collateral, and deposit or surrender
control of the Collateral, and accept other property in exchange for
the Collateral and hold or apply the property or money so received
pursuant to this Agreement; and (d) take such actions in its own name
or in Debtor's name as Bank, in its sole discretion, deems necessary
or appropriate to establish exclusive control (as defined in the
Uniform Commercial Code) over any Collateral (other than Debtor's
ownership interest in PFSweb B.V.) of such nature that perfection of
the Bank's security interest may be accomplished by control.
2.11 Bank may assign any of the Indebtedness and deliver any or all of the
Collateral to its assignee, who then shall have with respect to
Collateral so delivered all the rights and powers of Bank under this
Agreement, and after that Bank shall be fully discharged from all
liability and responsibility with respect to Collateral so delivered.
2.12 The undersigned delivers this Agreement based solely on the
undersigned's independent investigation of (or decision not to
investigate) the financial condition of Borrower and is not relying on
any information furnished by Bank. The undersigned assumes full
responsibility for obtaining any further information concerning the
Borrower's financial condition, the status of the Indebtedness or any
other matter which the undersigned may deem necessary or appropriate
now or later. The undersigned waives any duty on the part of Bank, and
agrees that the undersigned is not relying upon nor expecting Bank to
disclose to the undersigned any fact now or later known by Bank,
whether relating to the operations or condition of Borrower, the
existence, liabilities or financial condition of any guarantor of the
Indebtedness, the occurrence of any default with respect to the
Indebtedness, or otherwise, notwithstanding any effect such fact may
have upon the undersigned's risk or the undersigned's rights against
Borrower. The undersigned knowingly accepts the full range of risk
encompassed in this Agreement, which risk includes without limit the
possibility that Borrower may incur Indebtedness to Bank after the
financial condition of Borrower, or Borrower's ability to pay debts as
they mature, has deteriorated.
2.13 The undersigned agrees that no security or guarantee now or later held
by Bank for the payment of any Indebtedness, whether from Borrower,
any guarantor, or otherwise, and whether in the nature of a security
interest, pledge, lien, assignment, setoff, suretyship, guaranty,
indemnity, insurance or otherwise, shall affect in any manner the
unconditional pledge of the undersigned under this Agreement, and
Bank, in its sole discretion, without notice to the undersigned, may
release, exchange, modify, enforce and otherwise deal with any
security or guaranty without affecting in any manner the unconditional
pledge of the undersigned under this Agreement. The undersigned
acknowledges and agrees that Bank has no obligation to acquire or
perfect any lien on or security interest in any assets, whether realty
or personalty, or to obtain any guaranty to secure payment of the
Indebtedness, and the undersigned is not relying upon any guaranty
which Bank has or may have or assets in which Bank has or may have a
lien or security interest for payment of the Indebtedness.
2.14 Intentionally omitted.
2.15 The undersigned agrees to reimburse Bank upon demand for all costs and
expenses (including, without limit, attorneys' fees) incurred in
enforcing any of the duties or obligations of the undersigned under
this Agreement or in establishing, determining, continuing or
defending the validity or priority of Bank's security interest under
this Agreement (other than with respect to PFSweb B.V.).
2.16 The undersigned shall defend, indemnify and hold harmless Bank, its
employees, agents, shareholders, affiliates, officers, and directors
from and against any and all claims, damages, fines, expenses,
liabilities
3
or causes of action of whatever kind, including without limit
consultant fees, legal expenses, and attorneys' fees, suffered by any
of them as a direct or indirect result of any actual or asserted
violation of any law, including, without limit, Environmental Laws, or
of any remediation relating to any property required by any law,
including without limit Environmental Laws, INCLUDING ANY CLAIMS,
DAMAGES, FINES, EXPENSES, LIABILITIES OR CAUSES OF ACTION OF WHATEVER
KIND RESULTING FROM BANK'S OWN NEGLIGENCE, except to the extent (but
only to the extent) caused by Bank's gross negligence or willful
misconduct.
3. COLLECTION OF PROCEEDS. The undersigned agrees to collect and enforce
payment of all Collateral until Bank shall direct the undersigned to the
contrary. Immediately upon notice to the undersigned by Bank and at all
times after that, the undersigned agrees to fully and promptly cooperate
and assist Bank in the collection and enforcement of all Collateral and to
hold in trust for Bank all payments received in connection with Collateral
and from the sale, lease or other disposition of any Collateral, all rights
by way of suretyship or guaranty and all rights in the nature of a lien or
security interest which the undersigned now or later has regarding
Collateral. Immediately upon and after such notice, the undersigned agrees
to (a) endorse to Bank and immediately deliver to Bank all payments
received on Collateral or from the sale, lease or other disposition of any
Collateral or arising from any other rights or interests of the undersigned
in the Collateral, in the form received by the undersigned without
commingling with any other funds, and (b) immediately deliver to Bank all
property in the undersigned's possession or later coming into the
undersigned's possession through enforcement of the undersigned's rights or
interests in the Collateral. The undersigned irrevocably authorizes Bank or
any Bank employee or agent to endorse the name of the undersigned upon any
checks or other items which are received in payment for any Collateral, and
to do any and all things necessary in order to reduce these items to money.
Bank shall have no duty as to the collection or protection of Collateral or
the proceeds of it, nor as to the preservation of any related rights,
beyond the use of reasonable care in the custody and preservation of
Collateral in the possession of Bank. The undersigned agrees to take all
steps necessary to preserve rights against prior parties with respect to
the Collateral. Nothing in this Section 3 shall be deemed a consent by Bank
to any sale, lease or other disposition of any Collateral.
4. DEFAULTS, ENFORCEMENT AND APPLICATION OF PROCEEDS.
4.1 The occurrence of any "Event of Default" as defined in the Loan and
Security Agreement of even date herewith between Borrowers and Bank,
as from time to time amended, modified or restated, shall be an "Event
of Default" under this Agreement.
4.2 Upon the occurrence of any Event of Default, Bank may at its
discretion and without prior notice to the undersigned declare any or
all of the Indebtedness to be immediately due and payable, and shall
have and may exercise any right or remedy available to it including,
without limitation, any one or more of the following rights and
remedies:
(a) Exercise all the rights and remedies upon default, in foreclosure
and otherwise, available to secured parties under the provisions
of the Uniform Commercial Code and other applicable law;
(b) Institute legal proceedings to foreclose upon the lien and
security interest granted by this Agreement, to recover judgment
against Borrower or any Guarantor for all amounts then due and
owing as Indebtedness, and to collect the same out of any
Collateral or the proceeds of any sale of it;
(c) Institute legal proceedings for the sale, under the judgment or
decree of any court of competent jurisdiction, of any or all
Collateral; and/or
(d) Personally or by agents, attorneys, or appointment of a receiver,
enter upon any premises where Collateral may then be located, and
take possession of all or any of it and/or render it unusable;
and without being responsible for loss or damage to such
Collateral, hold, operate, sell, lease, or dispose of all or any
Collateral at one or more public or private sales, leasings or
other dispositions at places and times and on terms and
conditions as Bank may deem fit, without any previous
4
demand or advertisement; and except as provided in this
Agreement, all notice of sale, lease or other disposition, and
advertisement, and other notice or demand, any right or equity of
redemption, and any obligation of a prospective purchaser or
lessee to inquire as to the power and authority of Bank to sell,
lease, or otherwise dispose of the Collateral or as to the
application by Bank of the proceeds of sale or otherwise, which
would otherwise be required by, or available to the undersigned
under, applicable law are expressly waived by the undersigned to
the fullest extent permitted.
At any sale pursuant to this Section 4.2, whether under the power of
sale, by virtue of judicial proceedings or otherwise, it shall not be
necessary for Bank or a public officer under order of a court to have
present physical or constructive possession of Collateral to be sold.
The recitals contained in any conveyances and receipts made and given
by Bank or the public officer to any purchaser at any sale made
pursuant to this Agreement shall, to the extent permitted by
applicable law, conclusively establish the truth and accuracy of the
matters stated (including, without limit, as to the amounts of the
principal of and interest on the Indebtedness, the accrual and
nonpayment of it and advertisement and conduct of the sale); and all
prerequisites to the sale shall be presumed to have been satisfied and
performed. Upon any sale of any Collateral, the receipt of the officer
making the sale under judicial proceedings or of Bank shall be
sufficient discharge to the purchaser for the purchase money, and the
purchaser shall not be obligated to see to the application of the
money. Any sale of any Collateral under this Agreement shall be a
perpetual bar against the undersigned with respect to that Collateral.
At any sale or other disposition of the Collateral pursuant to this
Section 4.2, Bank disclaims all warranties which would otherwise be
given under the Uniform Commercial Code, including without limit a
disclaimer of any warranty relating to title, possession, quiet
enjoyment or the like, and Bank may communicate these disclaimers to a
purchaser at such disposition. This disclaimer of warranties will not
render the sale commercially unreasonable.
4.3 The undersigned shall at the request of Bank after the occurrence of
an Event of Default, notify the account debtors or obligors of Bank's
security interest in any Collateral and direct payment of it to Bank.
Bank may, itself, upon the occurrence of any Event of Default so
notify and direct any account debtor or obligor. At the request of
Bank, whether or not an Event of Default shall have occurred, Debtor
shall immediately take such actions as the Bank shall request to
establish exclusive control (as defined in the Uniform Commercial
Code) by Bank over any Collateral which is of such a nature that
perfection of a security interest may be accomplished by control.
4.4 The proceeds of any sale or other disposition of Collateral authorized
by this Agreement shall be applied by Bank in such order as the Bank,
in its discretion, deems appropriate including, without limitation,
the following order: first upon all expenses authorized by the Uniform
Commercial Code and all reasonable attorneys' fees and legal expenses
incurred by Bank; second to all amounts, if any, owing by the
undersigned to Bank under this Agreement, and the balance of the
proceeds of the sale or other disposition shall be applied in the
payment of the Indebtedness, first to interest, then to principal,
then to remaining Indebtedness and the surplus, if any, shall be paid
over to the undersigned or to such other person(s) as may be entitled
to it under applicable law. Debtor shall remain liable for any
deficiency, which it shall pay to Bank immediately upon demand. Debtor
agrees that Bank shall be under no obligation to accept any noncash
proceeds in connection with any sale or disposition of Collateral
unless failure to do so would be commercially unreasonable. If Bank
agrees in its sole discretion to accept noncash proceeds (unless the
failure to do so would be commercially unreasonable), Bank may ascribe
any commercially reasonable value to such proceeds. Without limiting
the foregoing, Bank may apply any discount factor in determining the
present value of proceeds to be received in the future or may elect to
apply proceeds to be received in the future only as and when such
proceeds are actually received in cash by Bank.
4.5 Nothing in this Agreement is intended, nor shall it be construed, to
preclude Bank from pursuing any other remedy provided by law or in
equity for the collection of the Indebtedness or for the recovery of
any other sum to which Bank may be entitled for the breach of this
Agreement by the undersigned. Nothing in this Agreement shall reduce
or release in any way any rights or security interests of Bank
contained in any existing agreement between Borrower, the undersigned
or any Guarantor and Bank.
5
4.6 No waiver of default or consent to any act by the undersigned shall be
effective unless in writing and signed by an authorized officer of
Bank. No waiver of any default or forbearance on the part of Bank in
enforcing any of its rights under this Agreement shall operate as a
waiver of any other default or of the same default on a future
occasion or of any rights.
4.7 The undersigned (a) irrevocably appoints Bank or any agent of Bank
(which appointment is coupled with an interest) the true and lawful
attorney of the undersigned (with full power of substitution) in the
name, place and stead of, and at the expense of, the undersigned and
(b) authorizes Bank or any agent of Bank, in its own name, at Debtor's
expense, to do any of the following, as Bank, in its sole discretion,
deems appropriate:
(i) to demand, receive, sue for, and give receipts or acquittances
for any moneys due or to become due with respect to any
Collateral and to endorse any item representing any payment on
or proceeds of the Collateral;
(ii) to execute and file in the name of and on behalf of the
undersigned all U. S. financing statements or other U.S. or
Canadian filings deemed necessary or desirable by Bank to
evidence, perfect, or continue the security interests granted
in this Agreement; and
(iii) to do and perform any act on behalf of the undersigned
permitted or required under this Agreement.
4.8 Upon the occurrence of an Event of Default, the undersigned also
agrees, upon request of Bank, to assemble the Collateral and make it
available to Bank at any place designated by Bank which is reasonably
convenient to Bank and the undersigned.
4.9 The following shall be the basis for any finder of fact's
determination of the value of any Collateral which is the subject
matter of a disposition giving rise to a calculation of any surplus or
deficiency under Section 9.615 (f) of the Uniform Commercial Code (as
in effect on or after July 1, 2001): (a) the Collateral which is the
subject matter of the disposition shall be valued in an "as is"
condition as of the date of the disposition, without any assumption or
expectation that such Collateral will be repaired or improved in any
manner; (b) the valuation shall be based upon an assumption that the
transferee of such Collateral desires a resale of the Collateral for
cash promptly (but no later than 30 days) following the disposition;
(c) all reasonable closing costs customarily borne by the seller in
commercial sales transactions relating to property similar to such
Collateral shall be deducted including, without limitation, brokerage
commissions, tax prorations, attorneys' fees, whether inside or
outside counsel is used, and marketing costs; (d) the value of the
Collateral which is the subject matter of the disposition shall be
further discounted to account for any estimated holding costs
associated with maintaining such Collateral pending sale (to the
extent not accounted for in (c) above), and other maintenance,
operational and ownership expenses; and (e) any expert opinion
testimony given or considered in connection with a determination of
the value of such Collateral must be given by persons having at least
5 years experience in appraising property similar to the Collateral
and who have conducted and prepared a complete written appraisal of
such Collateral taking into consideration the factors set forth above.
The "value" of any such Collateral shall be a factor in determining
the amount of proceeds which would have been realized in a disposition
to a transferee other than a Bank, a person related to a Bank or a
secondary obligor under Section 9-615(f) of the Uniform Commercial
Code.
5. MISCELLANEOUS.
5.1 Until Bank is advised in writing by the undersigned to the contrary,
all notices, requests and demands required under this Agreement or by
law shall be given to, or made upon, the undersigned at the following
address: PFSweb, -- Inc., 500 N. Central Expressway, 5th Floor, Plano,
Texas 75074.
6
5.2 The undersigned will give Bank not less than 30 days prior written
notice of all contemplated changes in the undersigned's name, chief
executive office, principal place of business, and/or location of any
Collateral, but the giving of this notice shall not cure any Event of
Default caused by this change.
5.3 Bank assumes no duty of performance or other responsibility under any
contracts contained within the Collateral.
5.4 Bank has the right to sell, assign, transfer, negotiate or grant
participations or any interest in, any or all of the Indebtedness and
any related obligations, including without limit this Agreement. In
connection with the above, but without limiting its ability to make
other disclosures to the full extent allowable, Bank may disclose all
documents and information which Bank now or later has relating to the
undersigned, the Indebtedness or this Agreement, however obtained. The
undersigned further agrees that Bank may provide information relating
to this Agreement or relating to the undersigned or the Indebtedness
to the Bank's parent, affiliates, subsidiaries, and service providers.
5.5 The undersigned, to the extent not expressly prohibited by applicable
law, waives any right to require the Bank to: (a) proceed against any
person or property; (b) give notice of the terms, time and place of
any public or private sale of personal property security held from
Borrower or any other person, or otherwise comply with the provisions
of Sections 9.611 or 9.621 of the Uniform Commercial Code; or (c)
pursue any other remedy in the Bank's power. The undersigned waives
notice of acceptance of this Agreement and presentment, demand,
protest, notice of protest, dishonor, notice of dishonor, notice of
default, notice of intent to accelerate or demand payment of any
Indebtedness, any and all other notices to which the undersigned might
otherwise be entitled, and diligence in collecting any Indebtedness,
and agree(s) that the Bank may, once or any number of times, modify
the terms of any Indebtedness, compromise, extend, increase,
accelerate, renew or forbear to enforce payment of any or all
Indebtedness, or permit Borrower to incur additional Indebtedness, all
without notice to the undersigned and without affecting in any manner
the unconditional obligation of the undersigned under this Agreement.
The undersigned unconditionally and irrevocably waives each and every
defense and setoff of any nature which, under principles of guaranty
or otherwise, would operate to impair or diminish in any way the
obligation of the undersigned under this Agreement, and acknowledges
that such waiver is by this reference incorporated into each security
agreement, collateral assignment, pledge and/or other document from
the undersigned now or later securing the Indebtedness, and
acknowledges that as of the date of this Agreement no such defense or
setoff exists.
5.6 The undersigned waives any and all rights (whether by subrogation,
indemnity, reimbursement, or otherwise) to recover from Borrower any
amounts paid or the value of any Collateral pledged by the undersigned
pursuant to this Agreement.
5.7 In the event that applicable law shall obligate Bank to give prior
notice to the undersigned of any action to be taken under this
Agreement, the undersigned agrees that a written notice given to the
undersigned at least ten days before the date of the act shall be
reasonable notice of the act and, specifically, reasonable
notification of the time and place of any public sale or of the time
after which any private sale, lease, or other disposition is to be
made, unless a shorter notice period is reasonable under the
circumstances. A notice shall be deemed to be given under this
Agreement when delivered to the undersigned or when placed in an
envelope addressed to the undersigned and deposited, with postage
prepaid, in a post office or official depository under the exclusive
care and custody of the United States Postal Service or delivered to
an overnight courier. The mailing shall be by overnight courier,
certified, or first class mail.
5.8 Notwithstanding any prior revocation, termination, surrender, or
discharge of this Agreement in whole or in part, the effectiveness of
this Agreement shall automatically continue or be reinstated in the
event that any payment received or credit given by Bank in respect of
the Indebtedness is returned, disgorged, or rescinded under any
applicable law, including, without limitation, bankruptcy or
insolvency laws, in which case this Agreement, shall be enforceable
against the undersigned as if the returned, disgorged, or rescinded
payment or credit had not been received or given by Bank, and whether
or not Bank relied upon
7
this payment or credit or changed its position as a consequence of it.
In the event of continuation or reinstatement of this Agreement, the
undersigned agrees upon demand by Bank to execute and deliver to Bank
those documents which Bank determines are appropriate to further
evidence (in the public records or otherwise) this continuation or
reinstatement, although the failure of the undersigned to do so shall
not affect in any way the reinstatement or continuation.
5.9 This Agreement and all the rights and remedies of Bank under this
Agreement shall inure to the benefit of Bank's successors and assigns
and to any other holder who derives from Bank title to or an interest
in the Indebtedness or any portion of it, and shall bind the
undersigned and the heirs, legal representatives, successors, and
assigns of the undersigned. Nothing in this Section 5.9 is deemed a
consent by Bank to any assignment by the undersigned.
5.10 If there is more than one the undersigned, all undertakings,
warranties and covenants made by the undersigned and all rights,
powers and authorities given to or conferred upon Bank are made or
given jointly and severally.
5.11 Except as otherwise provided in this Agreement, all terms in this
Agreement have the meanings assigned to them in Article 9 (or, absent
definition in Article 9, in any other Article) of the Uniform
Commercial Code, as those meanings may be amended, revised or replaced
from time to time. "Uniform Commercial Code" means the California
Commercial Code, as amended, revised or replaced from time to time.
Notwithstanding the foregoing, the parties intend that the terms used
herein which are defined in the Uniform Commercial Code have, at all
times, the broadest and most inclusive meanings possible. Accordingly,
if the Uniform Commercial Code shall in the future be amended or held
by a court to define any term used herein more broadly or inclusively
than the Uniform Commercial Code in effect on the date of this
Agreement, then such term, as used herein, shall be given such
broadened meaning. If the Uniform Commercial Code shall in the future
be amended or held by a court to define any term used herein more
narrowly, or less inclusively, than the Uniform Commercial Code in
effect on the date of this Agreement, such amendment or holding shall
be disregarded in defining terms used in this Agreement.
5.12 No single or partial exercise, or delay in the exercise, of any right
or power under this Agreement, shall preclude other or further
exercise of the rights and powers under this Agreement. The
unenforceability of any provision of this Agreement shall not affect
the enforceability of the remainder of this Agreement. This Agreement
constitutes the entire agreement of the undersigned and Bank with
respect to the subject matter of this Agreement. No amendment or
modification of this Agreement shall be effective unless the same
shall be in writing and signed by the undersigned and an authorized
officer of Bank. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, WITHOUT
REGARD TO CONFLICT OF LAWS PRINCIPLES.
5.13 Debtor represents and warrants that Debtor's exact name is the name
set forth in this Agreement. Debtor further represents and warrants
the following and agrees that Debtor is, and at all times shall be,
located in the following place:
Debtor is a registered organization which is organized under the laws
of one of the states comprising the United States (e.g. corporation,
limited partnership, registered limited liability partnership or
limited liability company), and Debtor is located (as determined
pursuant to the Uniform Commercial Code) in the state under the laws
of which it was organized, which is Delaware.
5.14 A carbon, photographic or other reproduction of this Agreement shall
be sufficient as a financing statement under the Uniform Commercial
Code and may be filed by Bank in any filing office.
5.15 This Agreement shall be terminated only by the filing of a termination
statement in accordance with the applicable provisions of the Uniform
Commercial Code, but the obligations contained in Section 2.16 of this
Agreement shall survive termination.
8
5.16 Debtor agrees to reimburse the Bank upon demand for any and all costs
and expenses (including, without limit, court costs, legal expenses
and reasonable attorneys' fees, whether inside or outside counsel is
used, whether or not suit instituted and, if suit it instituted,
whether at the trial court level, appellate level, in a bankruptcy,
probate or administrative proceeding or otherwise) incurred in
enforcing or attempting to enforce this Agreement or in exercising or
attempting to exercise any right or remedy under this Agreement or
incurred in any other matter or proceeding relating to this Security
Agreement
6. Intentionally omitted.
7. THE UNDERSIGNED AND BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A
CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER CONSULTING
(OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR CHOICE,
KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT WAIVES ANY RIGHT TO
TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR
ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS AGREEMENT OR THE
INDEBTEDNESS.
8. THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS,
OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
9
DEBTOR: BANK:
PFSWEB, INC., a Delaware corporation COMERICA BANK-CALIFORNIA, a
California banking corporation
By:
---------------------------------- By:
Signature of: ---------------------------------
------------------------ Steven Moiles
Its: Vice President
---------------------------------
Title
10
EXHIBIT 10.4
INTELLECTUAL PROPERTY SECURITY AGREEMENT
This Intellectual Property Security Agreement is entered into as of March
28, 2003 by and between COMERICA BANK-CALIFORNIA ("Bank") and PRIORITY
FULFILLMENT SERVICES, INC., a Delaware corporation (collectively, "Grantor").
RECITALS
A. Bank has agreed to make certain advances of money and to extend certain
financial accommodation to Grantor (the "Loans") in the amounts and manner set
forth in that certain Loan and Security Agreement by and between Bank, Grantor
and Priority Fulfillment Services of Canada, Inc. dated of even date herewith
(as the same may be amended, modified or supplemented from time to time, the
"Loan Agreement"; capitalized terms used herein are used as defined in the Loan
Agreement).
B. Bank is willing to make the Loans to Grantor, but only upon the
condition, among others, that Grantor shall grant to Bank a security interest in
certain Copyrights, Trademarks and Patents to secure the obligations of Grantor
under the Loan Agreement.
C. Pursuant to the terms of the Loan Agreement, Grantor has granted to Bank
a security interest in all of Grantor's right, title and interest, whether
presently existing or hereafter acquired, in, to and under all
of the
Collateral.
NOW, THEREFORE, for good and valuable consideration, receipt of which is
hereby acknowledged, and intending to be legally bound, as collateral security
for the prompt and complete payment when due of its obligations under the Loan
Agreement and all other agreements now existing or hereafter arising between
Grantor and Bank, Grantor hereby represents, warrants, covenants and agrees as
follows:
AGREEMENT
To secure its obligations under the Loan Agreement and under any other
agreement now existing or hereafter arising between Bank and Grantor, Grantor
grants and pledges to Bank a security interest in all of Grantor's right, title
and interest in, to and under its Intellectual Property Collateral (including
without limitation those Copyrights, Patents and Trademarks listed on Schedules
A, B and C hereto), and including without limitation all proceeds thereof (such
as, by way of example but not by way of limitation, license royalties and
proceeds of infringement suits), the right to sue for past, present and future
infringements, all rights corresponding thereto throughout the world and all
re-issues, divisions continuations, renewals, extensions and
continuations-in-part thereof.
This security interest is granted in conjunction with the security interest
granted to Bank under the Loan Agreement. The rights and remedies of Bank with
respect to the security interest granted hereby are in addition to those set
forth in the Loan Agreement and the other Loan Documents, and those which are
now or hereafter available to Bank as a matter of law or equity. Each right,
power and remedy of Bank provided for herein or in the Loan Agreement or any of
the Loan Documents, or now or hereafter existing at law or in equity shall be
cumulative and concurrent and shall be in addition to every right, power or
remedy provided for herein and the exercise by Bank of any one or more of the
rights, powers or remedies provided for in this Intellectual Property Security
Agreement, the Loan Agreement or any of the other Loan Documents, or now or
hereafter existing at law or in equity, shall not preclude the simultaneous or
later exercise by any person, including Bank, of any or all other rights, powers
or remedies.
Grantor represents and warrants that Exhibits A, B, and C attached hereto
set forth any and all intellectual property rights in connection to which
Grantor has registered or filed an application with either the United States
Patent and Trademark Office or the United States Copyright Office, as
applicable.
IN WITNESS WHEREOF, the parties have caused this Intellectual Property
Security Agreement to be duly executed by its officers thereunto duly authorized
as of the first date written above.
GRANTOR:
Address of Grantor: PRIORITY FULFILLMENT SERVICES, INC.
500 N. Central Expressway, 5th Floor
Plano, Texas 75074 By:
Attn: Thomas J. Madden ---------------------------------
Title:
------------------------------
BANK:
-------------------------------
COMERICA BANK-CALIFORNIA
Address of Bank:
Comerica Bank-California By:
Commercial Loan Services Department ------------------------------
9920 S. La Cienega Blvd., 14th Floor Title:
Inglewood, CA 90301 ------------------------------
Attn: Loan Documentation
EXHIBIT A
Copyrights
Registration Registration
Number Date
------------ ------------
Description
-----------
NONE
EXHIBIT B
Patents
Registration/ Registration/
Application Application
Description Number Date
----------- ------------ -------------
NONE
EXHIBIT C
Trademarks
REGISTRATIONS
MARK REGISTRATION NUMBER DATE REGISTERED
---- ------------------- ---------------
PFSWEB 2,345,487 4/25/00
FROM THE CLICK 2,643,270 10/31/00
OF THE MOUSE TO
THE KNOCK AT THE
HOUSE
ENTENTEWEB 2,656,989 12/3/02
PENDING APPLICATIONS
MARK SERIAL NUMBER DATE FILED
---- ------------- ----------
THE EVOLUTION 76/271,303 6/14/01
OF OUTSOURCING
PFSWEB AND DESIGN 76/271,304 6/14/01
ENTENTEREPORT 76/405,570 5/10/02
ENTENTE SUITE 76/079,094 6/28/00
ENTENTEDIRECT 76/079,092 6/28/00
ENTENTEMESSAGE 76/079,093 6/28/00
EXECUTION DOCUMENT
EXHIBIT 10.5
AMENDMENT 2
TO
AMENDED AND RESTATEDPLATINUM PLAN AGREEMENT (WITH INVOICE DISCOUNTING)
This Amendment 2 ("Amendment") dated March 28, 2003 is made to the
AMENDED AND RESTATED PLATINUM PLAN AGREEMENT (WITH INVOICE DISCOUNTING) by and
among IBM BELGIUM FINANCIAL SERVICES COMPANY S.A., with a registered number of
R.C. Brussels 451.673 with an address of Avenue du Bourget 42 Brussels 1130 VAT
BE 424300467 ("IBM GF" or "US"), SUPPLIERS DISTRIBUTORS S.A. with a registered
number of RC Liege 208795 with an address of Rue Louis Bleriot 5, B-4460
Grace-Hollogne, Belgium ("SDSA"), and BUSINESS SUPPLIES DISTRIBUTORS EUROPE BV a
Netherlands company registered in Maastricht with a Netherlands trade
registration number of HR Maastricht 14062763 with an address of Dalderhaag 13,
6136 Sittard, The Netherlands ("BSDE") (SDSA and BSDE collectively, "YOU"), PFS
WEB B.V a Netherlands company registered in Maastricht under the number 17109541
with a Belgian trade registration number of R.C. Liege 204162 ("PFS WEB B.V.")
(SDSA, BSDE and PFS Web B.V. collectively, the "LOAN PARTIES")
RECITALS:
A. The Loan Parties and IBM GF have entered into that certain AMENDED
AND RESTATED PLATINUM PLAN AGREEMENT (WITH INVOICE DISCOUNTING)
dated as of
March 29, 2002 (as amended and modified from time to time, the "Agreement");
B. The Loan Parties have requested and IBM GF has agreed to extend the
Agreement for twelve months;
C. The Loan Parties agree to certain financial covenants revisions by
IBM GF; and
D. The parties have agreed to modify the Agreement as more specifically
set forth below, upon and subject to the terms and conditions set forth herein.
AGREEMENT
NOW THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, IBM GF and the Loan Parties hereby agree as follows:
SECTION 1. DEFINITIONS. All capitalized terms not otherwise defined herein shall
have the respective meanings set forth in the Agreement.
SECTION 2. AMENDMENT. Subject to Section 4 hereof, the Agreement is hereby
amended as follows:
A. The Agreement is hereby amended as follows:
(a) Section 1.1 is hereby amended by adding the following definition:
"TERMINATION DATE": means March 29, 2004 or such other date as
to which IBM GF and the Loan Parties may agree from time to
time.
(b) Section 8.2.7 is hereby amended by deleting it in its entirety and
substituting, in lieu thereof, the following:
" FINANCIAL COVENANTS
You agree to comply with the Financial Covenants, if any, set
out in the relevant supplements or the Schedule. You also
agree that you will not, without our consent, make any of the
following payments ("Restricted Payments") without our prior
written consent (i) declare or pay any dividend
Page 1 of 4
EXECUTION DOCUMENT
(other than dividends payable solely in common stock of BSDE
and/or SDSA and the aggregate amount of such dividends under
this Agreement and the AIF does not cause you or Holdings to
violate such Financial Covenants or exceed Six Hundred
Thousand Dollars ($600,000), without duplication, to be paid
in fiscal year 2003 for which consent is hereby given) on, or
make any payment on account of, or set apart assets for a
sinking or other analogous fund for, the purchase, redemption,
defeasance, retirement or other acquisition of, any shares of
any class of capital stock of BSDE and/or SDSA or any
warrants, options or rights to purchase any such capital stock
or Equity Interests, whether now or hereafter outstanding, or
make any other distribution in respect thereof, either
directly or indirectly, whether in cash or property or in
obligations of BSDE and/or SDSA ; or (ii) make any optional
payment or prepayment on or redemption (including, without
limitation, by making payments to a sinking or analogous fund)
or repurchase of any Indebtedness (other than the
Obligations)), except as permitted by the Amended and Restated
Notes Payable Subordination Agreement.
(c) Section 10.1 is hereby amended by deleting it in its entirety
and substituting, in lieu thereof, the following:
"This Agreement will remain in force until the Termination
Date. However following the occurrence of an Event of Default
that we have not waived in writing we may by notice with
immediate effect terminate this Agreement. Upon any
termination of this Agreement we shall have all the rights and
remedies set out in Clause 9.2 until the complete discharge of
all the Loan Parties' obligations to us. Any such termination
shall not affect any right we have in relation to the IBM
Reimbursables and IBM Receivables or the Receivables Rights
and the Supplier Obligations and the Product Rights.
B. The Schedule to the Agreement is hereby amended by deleting such
Schedule in its entirety and substituting, in lieu thereof, the Schedule
attached hereto. Such new Schedule shall be effective as of the date specified
in the new Schedule. The changes contained in the new Schedule include, without
limitation, the following:
CREDIT LINE: E12,500,000
VAT RECEIVABLES: Deleted from Collateral Valuation
PREPAYMENT PERCENTAGE: (i) 80% of Eligible IBM Reimbursables (1) and (ii) 80% or
Eligible IBM Receivables
COLLATERAL VALUE OF STOCK-IN-TRADE: (A) 100% of paid for IBM Printing Systems
Division inventory (other than (a) machines which IBM Printing Systems Division
has declared obsolete at least 60 days prior to the date of determination and
(b) service parts) which (i) we have purchased the associated Supplier Invoice
from the Authorised Supplier on or after the Closing Date (ii) purchased
directly from IBM prior to the Closing Date and not subject to retention of
title, provided, however, we have a first priority security interest in such
inventory, (iii) is repurchasable under a repurchase agreement with the
Authorized Supplier and (iv) is secured and managed through a pledge with
Disposition, with coverage percentage acceptable to us (such acceptable
percentage to be determined by us within 60 days of the date this Schedule is
executed)The value to be assigned to such inventory shall be based upon the
Supplier Invoice net of all applicable credit notes.
FINANCIAL COVENANT DEFINITIONS: Changed for net Profit After Tax, Revenue and
Working Capital Turnover.
Page 2 of 4
FINANCIAL COVENANTS
SDSA and BSDE will be required, on a consolidated basis, to maintain the
following financial ratios, percentages and amounts on a year to date basis as
of the last day of the fiscal period under review (monthly, quarterly and
annually) by us and IBM Credit:
Covenant Covenant Requirement
------------------------------- --------------------------
(i) Debt to Tangible Net Worth Greater than Zero and
Less than 7.0:1.0
(ii) Net Profit after Tax to Revenue Greater than 0.10 percent
(iii) Working Capital Turnover (WCTO) Greater than Zero and
Less than 43.0:1.0
PFSweb, Inc. will be required to maintain the following financial ratios,
percentages and amounts as of the last day of the fiscal period under review
(monthly, quarterly and annually) by IBM Credit:
Covenant
Covenant Requirement Date as of
-------- -------------- ----------
(i) Minimum Tangible Net
Worth $18,000,000.00 03/31/03 and beyond
SECTION 3. CONDITIONS OF EFFECTIVENESS OF CONSENT AND AMENDMENT. This Amendment
shall have been authorized, executed and delivered by each of the parties hereto
and IBM GF shall have received a copy of a fully executed Amendment.
SECTION 4. REPRESENTATIONS AND WARRANTIES. Each Loan Party makes to IBM GF the
following representations and warranties all of which are material and are made
to induce IBM GF to enter into this Amendment.
SECTION 4.1 ACCURACY AND COMPLETENESS OF WARRANTIES AND REPRESENTATIONS. All
representations made by the Loan Party in the Agreement were true and accurate
and complete in every respect as of the date made, and, as amended by this
Amendment, all representations made by the Loan Party in the Agreement are true,
accurate and complete in every material respect as of the date hereof, and do
not fail to disclose any material fact necessary to make representations not
misleading.
SECTION 4.2 VIOLATION OF OTHER AGREEMENTS. The execution and delivery of this
Amendment and the performance and observance of the covenants to be performed
and observed hereunder do not violate or cause any Loan Party not to be in
compliance with the terms of any agreement to which such Loan Party is a party.
SECTION 4.3 LITIGATION. Except as has been disclosed by the Loan Party to IBM GF
in writing, there is no litigation, proceeding, investigation or labor dispute
pending or threatened against any Loan Party, which, if adversely determined,
would materially adversely affect the Loan Party's ability to perform such Loan
Party's obligations under the Agreement and the other documents, instruments and
agreements executed in connection therewith or pursuant hereto.
SECTION 4.4 ENFORCEABILITY OF AMENDMENT. This Amendment has been duly
authorized, executed and delivered by each Loan Party and is enforceable against
each Loan Party in accordance with its terms.
SECTION 5. RATIFICATION OF AGREEMENT.Except as specifically amended hereby, all
of the provisions of the Agreement shall remain unamended and in full force and
effect. Each Loan Party
Page 3 of 4
hereby ratifies, confirms and agrees that the Agreement, as amended hereby,
represents a valid and enforceable obligation of such Loan Party, and is not
subject to any claims, offsets or defenses.
SECTION 6. RATIFICATION OF GUARANTY. Each of Holdings, SDI, PFSweb and PFS
hereby ratify and confirm their respective guaranties in favor of IBM GF and
agree that such guaranties remain in full force and effect and that the term
"Liabilities", as used therein include, without limitation the indebtedness
liabilities and obligations of SDSA and BSDE under the Agreement as amended
hereby. SDI hereby ratifies and confirms its Notes Payable Subordination
Agreement executed by SDI on March 29, 2002 and confirms such Notes Payable
Subordination Agreement remains in full force and effect.
SECTION 7. GOVERNING LAW. This Amendment shall be governed by and interpreted in
accordance with the laws which govern the Agreement.
SECTION 8. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which shall be an original and all of which shall
constitute one agreement.
IN WITNESS WHEREOF, each Loan Party has read this entire Amendment, and
has caused its authorized representatives to execute this Amendment and has
caused its corporate seal, if any, to be affixed hereto as of the date first
written above.
IBM BELGIUM FINANCIAL SERVICES S.A. SUPPLIERS DISTRIBUTORS S.A.
By: By:
--------------------------------------- ---------------------------------------
Print Name: Print Name:
------------------------------- -------------------------------
Title: Title:
------------------------------------ ------------------------------------
BUSINESS SUPPLIES DISTRIBUTORS EUROPE BV PFS WEB B.V.
By: By:
--------------------------------------- ---------------------------------------
Print Name: Print Name:
------------------------------- -------------------------------
Title: Title:
------------------------------------ ------------------------------------
THE FOLLOWING PARTIES AGREE TO SECTION 6 AS APPLICABLE TO THEM.
SUPPLIES DISTRIBUTORS, INC. PRIORITY FULFILLMENT SERVICES, INC.
By: By:
--------------------------------------- ---------------------------------------
Print Name: Print Name:
------------------------------- -------------------------------
Title: Title:
------------------------------------ ------------------------------------
BUSINESS SUPPLIES DISTRIBUTORS HOLDINGS, LLC
By:
---------------------------------------
Print Name:
-------------------------------
Title:
------------------------------------
Page 4 of 4
EXHIBIT 10.6
AMENDMENT
TO
AGREEMENT FOR INVENTORY FINANCING
This Amendment ("Amendment") to the Agreement for Inventory Financing is
made as of March 28, 2003 by and among IBM CREDIT LLC, a Delaware limited
liability company, formerly IBM Credit Corporation ("IBM Credit"), BUSINESS
SUPPLIES DISTRIBUTORS HOLDINGS, LLC, a limited liability company duly organized
under the laws of the state of Delaware ("Holdings"), SUPPLIES DISTRIBUTORS,
INC. (formerly known as BSD Acquisition Corp.), a corporation duly organized
under the laws of the state of Delaware ("Borrower"), PRIORITY FULFILLMENT
SERVICES, INC., a corporation duly organized under the laws of the state of
Delaware ("PFS") and PFSWEB, INC., a corporation duly organized under the laws
of the state of Delaware ("PFSweb") (Borrower, Holdings, IFP, PFS, PFSweb, and
any other entity that executes this Agreement or any Other Document, including
without limitation all Guarantors, are each individually referred to as a "Loan
Party" and collectively referred to as "Loan Parties").
RECITALS:
A. Borrower and IBM Credit have entered into that certain Agreement for
Inventory Financing ("AIF") dated as of March 29, 2002 (the "Agreement");
B. Borrower has requested and IBM Credit agrees to extend the
Termination
Date of the Agreement;
C. Borrower agrees to certain financial covenants revisions by IBM Credit;
and
D. The parties have agreed to modify the Agreement as more specifically set
forth below, upon and subject to the terms and conditions set forth herein.
AGREEMENT
NOW THEREFORE, in consideration of the premises and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
Borrower and IBM Credit hereby agree as follows:
SECTION 1. DEFINITIONS. All capitalized terms not otherwise defined herein shall
have the respective meanings set forth in the Agreement.
SECTION 2. AMENDMENT. Subject to Section 4 hereof, the Agreement is hereby
amended as follows:
A. The AIF is hereby amended as follows:
(a) The definition of "Termination Date" in Section 1.1 of the Agreement is
hereby amended by deleting it in its entirety and substituting, in lieu thereof,
the following definition:
""Termination Date": shall mean March 29, 2004 or such other date as IBM Credit
and the Customer may agree to from time to time in writing."
(b) Section 8.6 is hereby amended in its entirety to read as follows:
"8.6. RESTRICTED PAYMENTS. Borrower will not, directly or indirectly make any of
the following payments ("Restricted Payments") without prior written consent
from IBM Credit, which shall not be unreasonably withheld: (i) declare or pay
any dividend (other than dividends payable solely in common
Page 1 of 5
stock of Borrower and dividends not to exceed $600,000 to be paid in fiscal year
2003 for which consent is hereby given) on, or make any payment on account of,
or set apart assets for a sinking or other analogous fund for, the purchase,
redemption, defeasance, retirement or other acquisition of, any shares of any
class of capital stock of Borrower or any warrants, options or rights to
purchase any such capital stock or Equity Interests, whether now or hereafter
outstanding, or make any other distribution in respect thereof, either directly
or indirectly, whether in cash or property or in obligations of Borrower; or
(ii) make any optional payment or prepayment on or redemption (including,
without limitation, by making payments to a sinking or analogous fund) or
repurchase of any Indebtedness (other than the Obligations or payments of the
revolving loans made by Congress made in the ordinary course administration
thereof pursuant to the Congress Credit Agreement)), except as permitted by the
Amended and Restated Notes Payable Subordination Agreement."
B. Attachment A to the AIF is hereby amended by deleting such Attachment A
in its entirety and substituting, in lieu thereof, the Attachment A attached
hereto. Such new Attachment A shall be effective as of the date specified in the
new Attachment A. The changes contained in the new Attachment A include, without
limitation, the following:
(a) The following definitions of "Total Assets" and "Total Net Worth" in
Section IV of Attachment A are amended in their entirety to read as follows:
"Total Assets" shall mean the total of Current Assets and Long Term Assets.
For the purpose of calculating Total Assets for Borrower, the accumulated
earnings and foreign currency translation adjustments applicable to
Borrower's Canadian and European subsidiaries should be excluded.
"Total Net Worth" (the amount of owner's or stockholder's ownership in an
enterprise) is equal to Total Assets minus Total Liabilities. For the
purpose of calculating Total Net Worth of Borrower, the following shall be
excluded (i) accumulated earnings and foreign currency translation
adjustments applicable to Borrower's Canadian and European subsidiaries and
(ii) all income and losses applicable to foreign currency adjustments for
each period but not excluding such foreign currency adjustments for annual
periods that must comply with GAAP.
(b) Section IV of Attachment A is amended and restated by replacing the
applicable subsections to read as follows:
1. Borrower will be required to maintain the following financial
ratios, percentages and amounts as of the last day of the fiscal period under
review (monthly, quarterly, annually) by IBM Credit:
Covenant
Covenant Requirement
-------- -----------
(ii) Net Profit after Tax to Revenue** Equal to or Greater than
**Excluding all income and losses applicable to 0.20 percent
(a) 100% ownership in Canadian and European
subsidiaries and (b) foreign currency
adjustments for each period but not excluding
such foreign currency adjustments for annual
periods that must comply with GAAP and
excluding revenue from intercompany sales.
2. Business Supplies Distributors Holdings, LLC will be required
to maintain the following financial ratios, percentages and amounts as of the
last day of the fiscal period under review (monthly, quarterly, annually) by IBM
Credit:
Page 2 of 5
Covenant
Covenant Requirement
-------- -----------
(ii) Net Profit after Tax to Revenue* Equal to or Greater than
*Excluding all (a) income and losses applicable 0.15 percent
to foreign currency adjustments for each period
but not excluding such foreign currency
adjustments for annual periods that must comply
with GAAP and (b) revenue from intercompany sales.
(iv) Cash Flow from Operations per quarter Greater than $0
C. Attachment C-1 to the AIF is hereby amended by deleting such Attachment
C-1 in its entirety and substituting, in lieu thereof, the Attachment C-1
attached hereto. Such new Attachment C-1 shall be effective as of the date
specified in the new Attachment C-1. The changes contained in the new Attachment
C-1 include, without limitation, the following:
Section I of Attachment C-1 is amended and restated by replacing the
applicable subsections to read as follows:
"I. FINANCIAL COVENANTS:
SUPPLIES DISTRIBUTORS, INC.
Covenant Covenant Requirement Covenant Actual
-------- -------------------- ---------------
(ii) Net Profit after Tax to Revenue** Equal to or Greater
than 0.20 percent
**Excluding all income and losses
applicable to (a) 100% ownership in
Canadian and European subsidiaries
and (b) foreign currency adjustments
for each period but not excluding
such foreign currency adjustments
for annual periods that must comply
with GAAP and excluding revenue from
intercompany sales.
BUSINESS SUPPLIES DISTRIBUTORS HOLDINGS, LLC
Covenant Covenant Requirement Covenant Actual
-------- -------------------- ---------------
(ii) Net Profit after Tax to Revenue* Equal to or Greater
*Excluding all (a) income and losses than 0.15 percent
applicable to foreign currency
adjustments for each period but not
excluding such foreign currency
adjustments for annual periods that
must comply with GAAP and (b)
revenue from intercompany sales.
(iv) Cash Flow from Operations per Greater than $0
quarter
Page 3 of 5
SECTION 3. CONDITIONS OF EFFECTIVENESS OF CONSENT AND AMENDMENT.
(a) This Amendment shall have been authorized, executed and delivered by
each of the parties hereto and IBM Credit shall have received a copy of a fully
executed Amendment.
SECTION 4. REPRESENTATIONS AND WARRANTIES. Each Loan Party makes to IBM Credit
the following representations and warranties all of which are material and are
made to induce IBM Credit to enter into this Amendment.
SECTION 4.1 ACCURACY AND COMPLETENESS OF WARRANTIES AND REPRESENTATIONS. All
representations made by the Loan Party in the Agreement were true and accurate
and complete in every respect as of the date made, and, as amended by this
Amendment, all representations made by the Loan Party in the Agreement are true,
accurate and complete in every material respect as of the date hereof, and do
not fail to disclose any material fact necessary to make representations not
misleading.
SECTION 4.2 VIOLATION OF OTHER AGREEMENTS. The execution and delivery of this
Amendment and the performance and observance of the covenants to be performed
and observed hereunder do not violate or cause any Loan Party not to be in
compliance with the terms of any agreement to which such Loan Party is a party.
SECTION 4.3 LITIGATION. Except as has been disclosed by the Loan Party to IBM
Credit in writing, there is no litigation, proceeding, investigation or labor
dispute pending or threatened against any Loan Party, which, if adversely
determined, would materially adversely affect the Loan Party's ability to
perform such Loan Party's obligations under the Agreement and the other
documents, instruments and agreements executed in connection therewith or
pursuant hereto.
SECTION 4.4 ENFORCEABILITY OF AMENDMENT. This Amendment has been duly
authorized, executed and delivered by each Loan Party and is enforceable against
each Loan Party in accordance with its terms.
SECTION 5. RATIFICATION OF AGREEMENT. Except as specifically amended hereby, all
of the provisions of the Agreement shall remain unamended and in full force and
effect. Each Loan Party hereby ratifies, confirms and agrees that the Agreement,
as amended hereby, represents a valid and enforceable obligation of such Loan
Party, and is not subject to any claims, offsets or defenses.
SECTION 6. RATIFICATION OF GUARANTY AND NOTES PAYABLE SUBORDINATION AGREEMENT.
Each of Holdings, PFSweb and PFS hereby ratify and confirm their respective
guaranties in favor of IBM Credit and agree that such guaranties remain in full
force and effect and that the term "Liabilities", as used therein include,
without limitation the indebtedness liabilities and obligations of the Borrower
under the Agreement as amended hereby. PFS hereby ratifies and confirms its
Notes Payable Subordination Agreement executed by PFS on November 12, 2002 in
favor of IBM Credit and confirms such agreement remains in full force and
effect.
SECTION 7. GOVERNING LAW.This Amendment shall be governed by and interpreted in
accordance with the laws which govern the Agreement.
SECTION 8. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which shall be an original and all of which shall
constitute one agreement.
Page 4 of 5
IN WITNESS WHEREOF, each Loan Party has read this entire Amendment, and has
caused its authorized representatives to execute this Amendment and has caused
its corporate seal, if any, to be affixed hereto as of the date first written
above.
IBM CREDIT LLC SUPPLIES DISTRIBUTORS, INC.
By: By:
------------------------------ ------------------------------
Print Name: Print Name:
---------------------- ----------------------
Title: Title:
--------------------------- ---------------------------
BUSINESS SUPPLIES DISTRIBUTORS HOLDINGS, LLC PRIORITY FULFILLMENT SERVICES, INC.
By: __________________ as Managing Member
By: By:
---------------------------------------- ------------------------------
Print Name: Print Name:
-------------------------------- ----------------------
Title: Title:
------------------------------------- ---------------------------
PFSWEB, INC.
By:
--------------------------------------
Print Name:
------------------------------
Title:
-----------------------------------
Page 5 of 5
EXHIBIT 99.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of PFSweb, Inc. (the "Company") on Form
10-Q for the period ended March 31, 2003 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Mark C. Layton, Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Mark C. Layton
--------------------------------
Mark C. Layton
Chief Executive Officer
May 15, 2003
A signed original of this written statement required by Section 906 has been
provided to PFSweb, Inc. and will be retained by PFSweb, Inc. and furnished to
the Securities and Exchange Commission or its staff upon request.
EXHIBIT 99.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of PFSweb, Inc. (the "Company") on Form
10-Q for the period ended March 31, 2003 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Thomas J. Madden,
Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Thomas J. Madden
----------------------
Thomas J. Madden
Chief Financial Officer
May 15, 2003
A signed original of this written statement required by Section 906 has been
provided to PFSweb, Inc. and will be retained by PFSweb, Inc. and furnished to
the Securities and Exchange Commission or its staff upon request.