PFSweb, Inc.

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PFSweb, Inc.

500 North Central Expressway
Plano, Texas 75074
U.S.A.
Telephone: (972) 881-2900
Toll Free: (800) 920-4959
Fax: (972) 633-2615
Web site: http://www.pfsweb.com

Public Company
Incorporated: 1996 as Priority Fulfillment Services, Inc.
Employees: 881
Sales: $321.67 million (2004)
Stock Exchanges: NASDAQ SmallCap
Ticker Symbol: PFSW
NAIC: 423420 Office Equipment Merchant Wholesalers; 423430 Computer and Computer Peripheral Equipment and Software Merchant Wholesalers; 488510 Freight Transportation Arrangement; 493110 General Warehousing and Storage; 511210 Software Publishers; 522320 Financial Transactions Processing, Reserve, and Clearinghouse Activities; 541614 Process, Physical Distribution, and Logistics Consulting Services; 561499 All Other Business Support Services

PFSweb, Inc. is a leading business-to-business and business-to-consumer order fulfillment and call-service provider for such clients as IBM, Raytheon Aircraft Corporation, Hewlett-Packard, Xerox, the Smithsonian Institution, and the U.S. Mint. The company's services include processing and shipping orders; billing; managing inventory; light assembly; and creating and hosting web sites. PFSweb also offers the Entente Suite of software, which can perform a full range of tasks for e-commerce businesses. About four-fifths of the firm's revenue is derived from subsidiary Supplies Distributors, Inc., which performs work for IBM.

Beginnings

PFSweb, Inc. was founded in 1996 as Priority Fulfillment Services, Inc. (PFS) by Texas-based Daisytek International Corporation, a leading wholesale distributor of computer and office automation supplies such as printer ribbons, toner cartridges, and computer disks. The new unit was initially created to perform order-processing, fulfillment, and telemarketing services for other companies, due to a growing demand for outsourcing in this area. Soon after its formation, PFS was chosen to perform telemarketing and distribution services for IBM Printing Systems' Network Printer product line throughout North America.

PFS soon began to take on additional clients, and Daisytek doubled the size of its own "superhub" warehouse/shipping center in Memphis (strategically located near the main shipping hub of Federal Express) in part because of the unit's success. By mid-1997 PFS was distributing close to $200 million worth of goods per year for more than 20 clients.

In the latter half of 1997 the firm opened a new call center in Memphis, which would take incoming calls and perform telemarketing. PFS was also operating call centers in Dallas, Miami, Sydney, Toronto, and Mexico City at Daisytek sites.

In January 1999 the company formed a European division, PFS Europe, which would employ ten at a call- and fulfillment center in Maastricht, Netherlands, and also launched a new division to offer order fulfillment services to Internet-based retailers. It was targeted toward both web-based startups and bricks-and-mortar firms who were adding web ordering capabilities and needed to quickly get systems and staff in place.

PFS was now growing rapidly, and the firm recorded revenues of $101.2 million for the year ended March 31, 1999, double the figure of a year earlier. It had 30 customers, including new web-based firms such as YardMart.com and Bargain Bid.com, as well as established companies including Hewlett-Packard. PFS's primary client continued to be IBM, which accounted for 93 percent of its business.

Initial Public Offering in 1999

At this time many thought the Internet would soon radically change the way Americans did business, and investors were frantically trying to get in on the ground floor of any company that had a connection to "e-commerce." With Daisytek's business model appearing dull in comparison to the "sexier" web-fulfillment services offered by PFS, the parent firm decided to capitalize on the market frenzy for Internet stocks by selling part of it on the NASDAQ.

In early December 1999 one-fifth of the company, now bearing the name PFSweb, Inc. to highlight its e-commerce capabilities, was sold in an initial public offering (IPO). Mark Layton, the 40-year-old CEO of Daisytek, who had recently published a book called .coms or .bombs … Strategies for Profit in e-Business, took the titles of president, CEO, and chairman of PFSweb, while remaining board chairman of the parent firm.

The IPO was an unqualified success, and raised $52.7 million for the firm to help fund growth and pay off $22.3 million worth of assets acquired from Daisytek. PFSweb stock had initially been priced at $17, but closed at $44 on the first day, giving the company a market valuation double that of its parent, and it continued to rise in the following weeks.

Shortly after the successful IPO, the Christmas gift-buying season exposed several cracks in the relatively untested e-commerce model, which caused some firms, including several of PFSweb's clients, to go out of business. The company began looking for more stable firms to work with, and reached an agreement with IBM for the computer maker to promote the company's services to its established e-commerce clients. PFSweb's share price took a beating in the months after Christmas, and by the spring of 2000 had fallen to less than one-third of its opening price.

After PFSweb's IPO Daisytek announced plans to spin off the remaining stock to its own shareholders, and despite the efforts of some to block the move, the deal went forward in the summer, with 14.3 million shares of PFSweb stock distributed. Afterwards, Daisytek would continue to outsource some of its functions to the firm, and several shared assets and board members were gradually disentangled.

In late July 2000 PFSweb introduced the Entente Suite of software, which offered full e-commerce support from web site interface to back-office accounting functions, customizable to meet each customer's needs. In August the firm also formed the Professional Consulting Service Group, which would advise clients about technology and distribution logistics. During the year the company signed new contracts with Adidas, Avaya Communications, Mary Kay Cosmetics, and Pharmacia/Upjohn. For fiscal 2000, the firm reported revenues of $86.6 million.

PFSweb's stock price had never been able to regain its initial spark, and in April 2001 the firm narrowly avoided being delisted by the NASDAQ after it had fallen below $1 per share for an extended period of time. The spring also saw the company sell Daisytek one-third of its 1.2 million-square-foot Memphis superhub facility for $11 million, transferring the employees who had worked there on outsourced Daisytek assignments back to the former parent firm. PFSweb continued to use some 800,000 square feet of the Memphis facility and other sites in Toronto, Canada, and Liege, Belgium, as well as its headquarters in Plano, Texas, to perform services for its clients.

In August PFSweb added managed hosting and web site development services to its offerings. To accomplish the former, the firm established uninterruptible, redundant power supplies and a secure data center. The company also launched a buyback of two million of its 18 million shares of stock in an effort to boost share value, and unveiled a new corporate logo.

Formation of Supplies Distributors: 2001

October 2001 saw the creation of a new affiliate firm, Supplies Distributors, Inc., which would use funds from IBM Global Finance to buy parts from IBM for distribution by PFSweb. The company invested $750,000 and would retain 49 percent ownership. New work was added during the year for several clients, including cosmetics maker Lancome USA, while existing contracts with Hewlett-Packard and Overtoom International were expanded.

In February 2002 PFSweb began offering customized light manufacturing and supplier inventory services to further support its clients. In June, still in danger of NASDAQ delisting, the company's stock was transferred to the exchange's Small-Cap market from the National Market. The same month saw PFSweb sign a five-year, $14 million contract with the Smithsonian Institution's Business Ventures unit to provide fulfillment services for catalog and web orders. The firm had earlier begun assisting the U.S. Mint. The company was now working to cut costs, and in the summer laid off 60, paring its total staff to about 550.

In October, an alliance was formed with eBay that would allow PFSweb's clients to distribute their products via that firm's online auction site. The month also saw acquisition of the remaining 51 percent of Supplies Distributors, Inc.

The second quarter of 2003 was the company's first profitable one since 1999, and the stock price soon crept above $1, saving it from NASDAQ delisting yet again. In September PFSweb added a new package of services to help customers handle product recalls, and November saw a new contract signed with Shell Energy Services Company to support that firm's new web initiative, Shell HomeGenie, which would allow customers to monitor their homes and control some appliances remotely from the Internet. For 2003 PFSweb recorded revenues of $285.8 million and a net loss of $3.7 million.

Company Perspectives:

PFSweb Continuing Strategy: Ensure high quality service for existing clients. Select clients with founded business strategies and financial stability. Hire, train and retain high quality professionals. Invent new technology and operational capabilities. Control overhead costs while we focus on adding new business.

In the spring of 2004 the firm introduced the Ecometry Commerce Suite, a new direct-marketing software package purchased from an outside vendor, as well as GlobalMerchant CommerceWare 2.0 Software Suite, a simple, low-cost e-commerce program. Spring also saw the company sign service agreements with several new clients including CHiA'SSO, a home design products firm, and Raytheon Aircraft Company, for which a new 150,000-square-foot parts distribution facility would be opened in Belgium. Soon afterwards PFSweb was tapped to distribute parts to Raytheon's Western hemisphere customers out of that firm's Grapevine, Texas facility.

Distribution Operations Beginning Shift to Mississippi in 2004

In August 2004 the company signed a lease on a 435,000-square-foot warehouse/shipping center in Southaven, Mississippi, which was located near its Memphis superhub site. The firm had been in a dispute with Memphis officials since 2003, when former parent Daisytek had gone bankrupt and tax breaks for the Memphis site that had been granted to that firm ended, raising PFSweb's costs. When an appeal to the Shelby County Industrial Development Board was denied, the firm had begun seeking a new location outside of Memphis.

The new Mississippi facility was soon put to use providing services for a major corporate retailer that the company was contractually obligated not to reveal. Other new clients included Rene Furterer USA, FLAVIA Beverage Systems, and several other unnamed firms. To help fund its expansion, PFSweb issued $5 million in industrial revenue bonds through the State of Mississippi and boosted its credit facility with Comerica Bank. For 2004 the company's revenues increased to $321.7 million, and it recorded its first profitable year, with net income of $226,000. The firm now had nearly 900 employees, and was shipping approximately $1 billion worth of products per year for its customers.

February 2005 saw PFSweb expand its Southaven capacity by 167,000 square feet to accommodate more work for a consumer electronics firm's spare parts unit, and in April the company announced it would begin moving most Memphis operations to Southaven, where it had now leased a total of 908,000 square feet in two buildings. Some jobs would remain in Memphis at an expanded call center there.

The history of PFSweb, Inc. encompassed both the highs and lows of the late 1990s/early 2000s dot.com boom and bust, which the firm had survived to become profitable. In just five years of independent operation, the company had grown into a $320 million business, and had built a reputation for solid performance that put it on the road to brighter days ahead.

Principal Subsidiaries

Supplies Distributors, Inc.; Priority Fulfillment Services, Inc.; PFSweb B.V. (Belgium).

Principal Competitors

Ingram Micro, Inc.; Menlo Worldwide, LLC; United Parcel Service Inc.; GENCO Distribution System, Inc.; ClientLogic Corp.; DSC Logistics; Exel Plc; Affiliated Computer Services, Inc.

Key Dates:

1996:: Daisytek International Corp. forms Priority Fulfillment Services (PFS).
1996:: PFS signs contract with IBM Printing Systems.
1999:: Daisytek sells one-fifth of renamed PFSweb, Inc. on the NASDAQ.
2000:: Daisytek spins off rest of firm to its stockholders.
2000:: Entente Suite of software is introduced.
2001:: Firm adds web development and hosting; Supplies Distributors is formed.
2004:: PFSweb begins relocating most distribution operations to Southaven, Mississippi.
2004:: Company records first profitable year since initial public offering.