PFSWEB INC, 10-K405, 2000-06-29

PFSWEB INC
10-K405, 2000-06-29
BUSINESS SERVICES, NEC

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

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FOR THE FISCAL YEAR ENDED MARCH 31, 2000

COMMISSION FILE NUMBER 000-28275

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PFSWEB LOGO
(Exact name of registrant as specified in its charter)

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<S> <C>
DELAWARE 75-2837058
(State or other jurisdiction of (I.R.S. Employer Number)
incorporation or organization)

500 NORTH CENTRAL EXPRESSWAY, PLANO, TEXAS 75074
(Address of principal executive offices) (Zip code)
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Registrant's Telephone Number, Including Area Code: 972-881-2900

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Securities Registered Pursuant to Section 12(b) of the Act: NONE

Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE

Indicate by a 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 [ ]

Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes [X] No [ ]

The aggregate market value of the voting stock held by non-affiliates of
the registrant as of June 19, 2000 (based on the closing price as reported by
the National Association of Securities Dealers Automated Quotation System) was
$26,410,688.

As of June 19, 2000, there were 17,870,000 shares outstanding of the
registrant's Common Stock, $.001 par value.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of this Annual Report, to the extent
not set forth herein, is incorporated herein by reference from the registrant's
definitive proxy statement relating to the annual meeting of stockholders to be
held in 2000, which definitive proxy statement shall be filed with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year to which this Annual Report relates.

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INDEX

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PAGE
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PART 1
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 25
Item 3. Legal Proceedings........................................... 26
Item 4. Submission of Matters to a Vote of Security Holders......... 26

PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 27
Item 6. Selected Consolidated Financial Data........................ 27
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 29
Item 7a. Quantitative and Qualitative Disclosure about Market Risk... 38
Item 8. Financial Statements and Supplementary Data................. 39
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 58

PART III
Item 10. Directors and Executive Officers of the Registrant.......... 58
Item 11. Executive Compensation...................................... 58
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 58
Item 13. Certain Relationships and Related Transactions.............. 58

PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 58
SIGNATURES............................................................ 61
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Unless otherwise indicated, all references to "PFSweb," "we," "us" and
"our" refer to PFSweb, Inc., a Delaware corporation, and its subsidiaries. All
references to "Daisytek" refer to Daisytek International Corporation, a Delaware
corporation, and its subsidiaries. Reference in this Report to the Company's
fiscal year means the 12 months period ending on March 31 of such year.

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PART I

ITEM 1. BUSINESS

GENERAL

We provide proven, fast and secure business infrastructure solutions for
manufacturers, distributors and retailers that enable the rapid development and
deployment of traditional and e-business strategies. Our solutions are flexible,
dynamic and specific to each individual client business case, allowing us to
offer a complete array of services to support our clients current and future
business initiatives.

Our solutions envelop much more than a one-time selection of a service,
they encompass working with the evolution of a client's business strategies.
With the ever-changing market environment, it is difficult to predict with 100
percent certainty exactly where businesses will be going next. By making our
company virtually an extension of our clients, we can easily adapt and evolve
with them, extending to them our professional direction and support along the
way. One key differentiating factor is our ability to consult with our clients
and work together toward defining their business strategies and provide them
with an ever changing and adaptable resource to develop whatever solution they
may require next.

Our team of experts design diverse solutions for Fortune 500, Global 1000
and brand name clients around a flexible core business infrastructure that
includes:

- Professional consulting services, including a consultative team of
experts that tailor solutions to each client and consistently seek out
ways to increase efficiencies and produce benefits for the client.

- Order management, including real-time integrated order processing
solutions that specifically allow for complete access and visibility to
inventory availability, credit authorization, order status, and shipment
tracking;

- Web-enabled customer care services, including customer care centers
utilizing voice, e-mail, and Internet chat communications that are fully
integrated with real-time systems and historical data archives to provide
complete customer lifecycle management;

- Billing and collection services, including secure on-line credit card
processing, fraud protection, invoicing, credit management and
collection;

- Information management, including real-time data interfaces, data
exchange services and data mining;

- International fulfillment and distribution services, including warehouse
management, inventory management, product warehousing, order picking and
packing, transportation management and product return administration; and

Our value proposition is to become an extension of our clients' businesses
by delivering a superior e-experience to increase and enhance sales and market
growth, customer satisfaction and customer retention. We act as a virtual arm to
our clients' businesses, which helps them enhance their traditional commerce
operations and meet the operational challenges associated with the deployment of
their e-commerce initiatives. Our integrated solutions enable clients to
introduce new products and business programs, and focus on their core business,
products and services without making substantial investments in fixed assets
systems, facilities and ongoing personnel. Our solutions center around enabling
our clients to change with future trends and providing them with the ability to
do so. Regardless of the size or complexity of the solution, our agility and
flexibility allow for rapid evolution and development of new customizable
technologies to meet their needs.

We offer complete, tailored solutions based around a core infrastructure.
Our infrastructure is seamlessly integrated with our clients' systems, thereby
making us transparent to our clients' customers while we handle the lifecycle of
the transaction "from the click of the mouse, to the knock at the house"(SM).

We offer our services as integrated solutions, which enable our clients to
outsource their traditional and e-business infrastructure needs to a single
source allowing for greater focus on their core competencies. We

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operate and manage distribution centers and customer service centers in multiple
international locations. Our automated fulfillment and distribution services are
integrated with multiple order entry systems, allowing for real-time pick, pack
and ship capabilities. We currently provide traditional and e-business
infrastructure solutions to over 30 clients that are positioned as market
leaders in a range of industries, including apparel, computer products,
printers, sporting goods, cosmetics and consumer electronics, among others.

We are currently a subsidiary of Daisytek International Corporation
("Daisytek"), one of the world's largest wholesale distributors of computer
supplies, office products, and film and tape media. Our business unit was formed
in 1991 to leverage Daisytek's core competencies in customer service, order
management, product fulfillment and distribution. Since 1996, the operations of
our business unit have been primarily focused in several Daisytek subsidiaries
operating collectively as Priority Fulfillment Services, Inc. ("PFS"). In June
1999, Daisytek created a separate wholly-owned subsidiary named PFSweb, Inc., a
Delaware corporation, to become a holding company for PFS in contemplation of an
initial public offering (the "Offering") of PFSweb. Daisytek contributed $20,000
for 14,305,000 shares of common stock of PFSweb. In December 1999, we sold
3,565,000 shares of common stock, including the underwriters' over-allotment, at
a price of $17 per share. Simultaneous with the completion of the Offering,
Daisytek contributed to us all the assets, liabilities and equity comprising
PFS. Daisytek has announced that it plans to effect the complete separation of
PFSweb from Daisytek on July 6, 2000 through a pro rata distribution to its
common stockholders of all of the shares of our common stock which Daisytek then
holds (which is also known as a "spin-off").

Upon completion of the Offering, we entered into a number of agreements
with Daisytek relating to our business and our proposed spin-off from Daisytek.
Under these agreements, Daisytek will continue to provide us with certain
administrative services and facilities, and we will provide Daisytek with
certain transaction management services. See "Spin-off of PFSweb from Daisytek"
and "Risk Factors -- Risks Related to Daisytek".

INDUSTRY OVERVIEW

Businesses today operate in an environment of rapid technological
advancements, increasing competition and continuous pressure to improve
operating efficiency. In response to these developments, two significant trends
have emerged. The first is the accelerating use of the Internet to conduct
e-commerce in both business-to-business and business-to-consumer applications.
The second is the strategic decision of a growing number of companies, in a
variety of industries, to outsource one or more business functions that are not
within their core business competencies.

E-COMMERCE TREND

As the Internet has become an increasingly important communications medium,
businesses and consumers alike have begun to use the Internet to buy and sell
goods and services. For the business-to-business environment, a recent Forrester
Research ("Forrester") study indicates that more than 90% of firms expressed
plans to buy and sell goods on the Internet over the next two years. This figure
highlights the growing business-to-business e-commerce marketplace. In fact,
Forrester predicts that by the year 2004, business-to-business e-commerce will
hit $2.7 trillion. Of that $2.7 trillion, e-marketplaces are expected to
represent 53% of the total online business trade. In order for companies to keep
pace with the industry they will need to look at outsourcing as a viable option
to building internal operations. For the business-to-consumer market, according
to Forrester, the number of households shopping on-line will jump to nearly 40
million by the year 2003, which will contribute to the dynamic growth in
business-to-consumer commerce conducted over the Internet. They expect the
market will increase from $7.8 billion in 1998 to nearly $108 billion in 2003.

To succeed on-line, a merchant must attract customers to its Web site and
provide an appealing and easy-to-use environment that encourages customers to
place an order. Once the customer places an order, the merchant must then
process the order by executing numerous transactions, such as confirming product
availability, authorizing a credit card purchase, calculating sales tax,
fulfilling the order and, when necessary, processing returns. These
"behind-the-scenes" activities are critical to complete the entire transaction.

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E-commerce creates the opportunity to facilitate transactions, improve
operating efficiencies, and significantly affect the supply chain.

For the manufacturer, e-commerce creates multiple opportunities.
Manufacturers can sell directly to the end-user customer, bypassing the
traditional model of selling to wholesalers and distributors who then resell to
mass merchants and other retailers. By selling directly to the end-user
customer, the manufacturer can retain a portion of its product revenue which
otherwise would have been paid to middlemen in the traditional distribution
channel. Direct sales can also provide the manufacturer with valuable end-user
customer information, including buying patterns, feature and function
preferences and customer support requirements. This information can be used by
the manufacturer to design better products, tailor production schedules based on
projected demand, and improve overall customer satisfaction.

Another opportunity is that manufacturers can allow their resellers to tap
into an increased number of products for their end-consumer by providing an
infrastructure that seamlessly links to the manufacturers system and physical
infrastructure, so that the manufacturer can distribute the product in the name
of the reseller. The resellers have the ability to sell the product to the
end-user without ever touching the product in the sales process and then not
have to pay the manufacturer until their normal payment terms, after the product
is actually sold to the end-consumer. This process creates a winning situation
for both the manufacturer and the reseller by increasing cash flow and
decreasing inventory costs to the reseller while increasing the product depth
and breadth sold to the end-consumer from the manufacturer.

For the traditional retailer, e-commerce offers the opportunity to attract
new customers and introduce new merchandise while avoiding substantial
investment in physical retail locations. At the same time, consumer preferences
and customer data can be compiled and analyzed to spot trends and demographic
shifts.

To succeed on-line and in e-commerce, companies need an array of
capabilities to support their e-business. Designing an attractive Web page is
only the beginning. In order to retain and satisfy their on-line customers,
businesses must be able to:

- Accept and process customer orders 24 hours a day, seven days a week;

- Develop an operating and technology infrastructure that can be expanded
as volumes increase;

- Administer, on a secure basis, credit card payments and collections;

- Calculate applicable sales tax for numerous taxing authorities and
various product types;

- Quickly and courteously respond to customer inquiries by e-mail, phone,
Web chat or fax;

- Pick, pack and ship customer orders promptly and accurately;

- Process product returns and customer refunds; and

- Address supply chain management and reconfiguration.

Traditional manufacturers and retailers entering the e-commerce arena must
be able to satisfy the expanding needs of on-line customers, which differ from
their traditional commerce customers. The efficiency and quality of the on-line
shopping experience from accessing product information with real-time product
availability, ordering and paying for the product to receiving the product and,
if necessary, returning the product, are critical elements in successfully
implementing e-commerce initiatives.

These challenges are particularly difficult for the traditional
manufacturer whose distribution infrastructure is designed for large
pallet-sized orders to regional retailer distribution centers, and is not
generally equipped to handle high-volume package distribution to individual
customers. Similarly, retailers must ensure that their electronic shopping
customers are not disappointed by experiencing product distribution problems and
delays. Virtual companies, as well, are dependent upon an efficient order
processing and distribution system to deliver their products to customers.

Today if an end-user or reseller is not pleased with a company's service,
within minutes, if not within seconds, they are able to find another provider
who can meet their needs. The key for these companies is not to

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lose the customer on factors that can be prevented. In order to prevent customer
attrition, companies need to provide top quality services that have the
flexibility and visibility to communicate to customers information that is vital
to them through Web-enabled customer support, real time inventory access, and
instant visibility to order status.

OUTSOURCING TREND

In response to growing competitive pressures and technological innovations,
we believe many companies, both large and small, are focusing their critical
resources on the core competencies of their business and utilizing third-party
outsourcing to accelerate their business plans in a cost-effective manner and
perform non-core business functions. Outsourcing provides many key benefits,
including the ability to:

- Capitalize on skills, expertise and technology infrastructure that would
otherwise be unavailable or expensive given the scale of the business;

- Reduce capital and personnel investments and convert fixed investments to
variable costs;

- Increase flexibility to meet changing business conditions and demand for
products and services;

- Enhance customer satisfaction and gain competitive advantage;

- Improve operating performance and efficiency; and

- Rapidly enter new business markets or geographic areas.

As a result, the market for outsourcing services has experienced
significant growth. International Data Corporation expects that worldwide
spending on outsourcing services will grow from nearly $100 billion in 1998 to
more than $151 billion in 2003.

Typically, outsourcing service providers are focused on a single function,
such as information technology, call center management, credit card processing,
warehousing or package delivery. This focus creates several challenges for
companies looking to outsource more than one of these functions, including the
need to manage multiple outsourcing service providers, sharing information with
service providers and integrating that information into their internal systems.
Additionally, the delivery of these multiple services must be transparent to the
customer and enable the client to maintain brand recognition and customer
loyalty.

Furthermore, traditional commerce outsourcers are frequently providers of
domestic only services versus international solutions, which requires the
company to establish additional relationships with other outsourcing parties.

THE PFSWEB SOLUTION

As e-commerce has emerged, merchants and consumers have embraced using the
Internet to buy and sell goods and services. Only recently have they defined
requirements for successful e-business practices. Effective e-commerce demands a
constant stream of communication, thereby allowing the consumer to remain in
control. Requirements include real-time order information, access to customer
service functions such as order tracking and Web-enabled customer service
interaction, and superior order accuracy rates.

Once the customer places an order, the merchant must then process the order
by executing numerous transactions, such as confirming product availability,
authorizing a credit card purchase, calculating sales tax, fulfilling the order
and, when necessary, processing returns. These "behind the scenes" activities
are critical to the completion of the transaction. PFSweb provides this complete
functionality.

Initially we served as a solution for manufacturers that did not have an
appropriate distribution model in place. Over the past four years, we have seen
traditional business-to-business clients transition into the e-commerce
marketplace. We had a fulfillment and distribution model with advanced
technological support and a focus on the customer experience that easily
transitioned into a premier e-commerce solution. As traditional business models
transition to electronic methods, companies will require outsourced expertise to
migrate into this environment. We have a strong history of creating diverse
client solutions for both

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business-to-business and business-to-consumer clients. We are an international
leader in our industry and are uniquely positioned to benefit from the growing
use and acceptance of e-commerce.

While early adopters of e-commerce business models often developed in-house
business infrastructure systems, many of today's thriving e-businesses look to
outsource their business infrastructure needs to lower operating costs, increase
revenues, and keep their focus on core competencies. Our business model is built
to scale with our clients' businesses, targeting optimum accuracy to provide
superior customer experiences and using our world-class capabilities,
infrastructure and technology to deliver a superior solution.

Our solutions enable our clients to quickly and efficiently implement
traditional and e-commerce business initiatives. By utilizing our solutions, our
clients are able to:

Quickly Capitalize on Market Opportunities. Our solutions empower clients
to rapidly implement their e-commerce strategies and take advantage of
opportunities without lengthy start-up and integration efforts. These solutions
allow our clients to deliver consistent quality of service as transaction
volumes grow and to handle daily and seasonal peak periods. Through our
international locations and capabilities, our clients can use the broad reach of
the Internet and e-commerce to sell their products anywhere in the world.

Improve the Customer Experience. We enable our clients to provide their
customers with a positive buying experience thereby maintaining and promoting
brand loyalty. Through our use of advanced technology, we can respond directly
to customer inquiries by e-mail, voice or data communication and assist them
with on-line ordering and product information. We offer our clients a "world
class" level of service, including 24-hour, seven-day-a-week Web-enabled
customer care service centers and exceptional order accuracy.

Minimize Investment and Improve Operating Efficiencies. We provide our
clients with access to a wide array of services and tailored solutions that
cover a broad spectrum of e-commerce business infrastructure issues, eliminating
their need to expend management time and resources to coordinate these services
from different providers. By utilizing our services, our clients can capitalize
on our economies of scale and expertise to grow their e-commerce business
without incurring the substantial fixed costs necessary to create and maintain
their own transaction management infrastructure. Our clients also have the
flexibility to purchase any or all of our offered services according to their
transaction volume and existing transaction management infrastructure so that
they do not have to invest scarce capital resources as their business grows.

Access a Sophisticated Technology Infrastructure. We provide our clients
with ready access to a sophisticated technology infrastructure, which is
designed to interface seamlessly with their systems. We provide our clients with
vital product and customer information which can be immediately available to
them on their own systems for use in data mining, analyzing sales and marketing
trends, monitoring inventory levels and performing other management functions.

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THE PFSWEB STRATEGY

Our objective is to grow rapidly by being an international provider of
business-to-business and business-to-consumer infrastructure solutions for both
traditional and e-commerce businesses. The key elements of our business strategy
are to:

Target Major Brand Manufacturers. We intend to aggressively expand our
business by targeting major brand manufacturers that are seeking to enter the
e-commerce marketplace or introduce new products or business programs into their
existing business. We believe these companies will be the leaders in electronic
commerce marketplaces, and this focus will provide us with opportunities to grow
along with our clients' e-commerce initiatives. We also seek to expand our
business within large brand name retailers seeking to open Web sites or
attempting to increase their efficiencies in their traditional business model
through our streamlined processes.

Expand Existing Client Relationships. By providing superior operating
results, we believe we can expand relationships with existing clients to serve
additional products and business segments and to provide additional services.
Our objective is to integrate ourselves as our clients' physical infrastructure
so that we become a critical component of their business infrastructure process
across the enterprise. Based upon our clients' needs, we will continue to
introduce new services. We also intend to continue our commitment to invest in
state-of-the-art technology, equipment and systems to provide new, high-quality,
innovative solutions to our existing clients and to attract new clients.

Promote Our PFSweb Brand. We intend to build PFSweb brand awareness by
expanding the number of satisfied clients, continuing to advertise in
publications and other print media, and by further participating in trade shows
and similar expositions. We also intend to continue our Internet advertising and
search engine presence.

Seek Strategic Alliances and Acquisitions. We intend to pursue strategic
alliances with Web site designers, Web hosting services, e-commerce software
companies and other providers of Internet related services to assist in
developing relationships with major brand names that are entering the e-commerce
marketplace. We may also consider acquisitions of synergistic e-commerce
businesses in order to offer a complete Internet implementation solution to
clients looking to introduce the sale of their products over the Internet.

Expand Our International Presence. We intend to expand the availability of
our services throughout the world so that we can enhance our international
business infrastructure solutions. For example, in response to market
opportunities, we intend to expand our multi-lingual call center services and
foreign currency order processing.

In order to execute our strategy, we must, among other things, continue to
incur significant operating and marketing expenses, invest in additional
technology infrastructure and maintain sufficient capacity. In addition, if our
spin-off from Daisytek does not occur, our ability to grow our business with
some manufacturers and realize other benefits may be adversely affected. See
"Risk Factors -- Risks Related to Daisytek" and "Spin-off of PFSweb from
Daisytek" for a more complete discussion of these and other risk factors.

PFSWEB SERVICES

We offer a comprehensive and integrated set of business infrastructure
solutions that are tailored to our clients' specific needs to enable them to
quickly and efficiently implement their e-commerce and traditional business
initiatives. Our services include:

Professional Consulting Services. As part of the tailored solution for our
clients, we offer a full team of experts designated specifically to focus on our
clients' businesses. They play a consultative role in which they provide
evaluation, analysis and recommendations for the client's business. This team
creates customized solutions and devises customized plans to be implemented, in
order to increase efficiencies and produce benefits for the client.

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Order Management. Our order management solutions provide clients with
interfaces that allow for real-time information retrieval, including information
on product orders, shipment, delivery and customer history. These solutions are
seamlessly integrated with our Web-enabled customer care centers, allowing for
the processing of orders through shopping cart, phone, fax, mail, email, Web
chat, and other order receipt methods. In addition, for the business-to-business
market, our technology platform provides a variety of order receipt methods that
facilitate commerce within e-marketplaces and in various stages of the supply
chain. Our systems provide the ability for both our clients and their customers
to track the status of orders at any time. Our services are transparent to our
clients and their customers and are seamlessly integrated with our clients
internal systems platforms and Web sites. By synchronizing these activities, we
can capture and provide critical customer information, including:

- Statistical measurements critical to creating a quality customer
experience, containing real-time order status, order exceptions, back
order tracking, soft/hard allocation of product based on timing of online
purchase and business rules, the ratio of customer inquiries to
purchases, average order sizes and order response time;

- Business-to-business supply chain management information critical to
evaluating inventory positioning, for the purpose of reducing inventory
turns, product flow through and end-consumer demand;

- Reverse logistics information including customer response and rationale
for the return or rotation of product;

- Detailed marketing information about what was sold and to whom it was
sold, by location and preference; and

- Web traffic reporting showing the number of visits ("hits") received,
areas visited, and products and information requested.

Web-Enabled Customer Care Services. An important feature of e-commerce is
the ability of the customer to talk to a live customer service representative.
Our experience is that a majority of consumers tell us that they visited the Web
location for information, but only a fraction of those consumers chose to order
in that manner. Our customer care services utilize features that integrate
voice, e-mail, data and Internet chat communications to respond to and handle
customer inquiries. Our customer care representatives answer questions in our
clients' name regarding orders, shipping, billing, returns and product
information as well as a variety of other questions. Our Web-enabled customer
care center automatically identifies each customer request and routes it to the
available customer care representative who is specially trained in the client's
business and products. The customer care centers are designed so that our
customer care representatives can handle many different clients and products,
thereby creating economy of scale benefits for our clients. Our advanced
technology also enables our representatives to inform customers of other
products and sales opportunities for our clients. The Web-enabled customer care
center is fully integrated into the data management and order processing system,
allowing for full visibility into customer history and customer trends. Through
this fully integrated system we are able to provide complete customer lifecycle
management.

Billing and Collections Services. We offer secure credit card processing
for our clients, both directly on-line from their Web site as well as through
our Web-enabled customer care center. Our credit card processing services offer
real-time confirmation of credit card authorization while the customer is in the
shopping-cart checkout process or talking to a customer care representative. We
are able to calculate sales tax, if applicable, for numerous taxing authorities
and on a variety of products. We provide customized computer generated invoices
in our clients' names so that our services remain transparent to the customer.
We also assist our clients in business-to-business accounts receivable
management and collection in accordance with their procedures and guidelines.

Information Management. We have the ability to communicate with and
transfer information to and from our clients through a wide variety of
technologies, including real-time data interfaces, file transferring and
electronic data interchange. Our systems are designed to capture, store and
electronically forward to our clients critical information regarding customer
inquiries and orders, product shipments, inventory levels, product returns and
other information. We maintain for our clients detailed product master files
that can be
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seamlessly integrated with their Web sites. Our systems are capable of providing
our clients with customer and order information for use in analyzing sales and
marketing trends and introducing new products. We also offer customized reports
or data analyses based upon specific client needs to assist them in their
budgeting and business decision process.

International Fulfillment and Distribution Services. An integral part of
our business infrastructure solutions is the warehousing and distribution of
inventory owned by our clients. We currently have over 1.3 million square feet
of warehouse space domestically and internationally to store and process our
clients' inventory. We receive client inventory in our distribution centers,
verify shipment accuracy, unpack, inspect for damage and generally stock for
sale the same day. On behalf of our clients, we pick, pack and ship their
customer orders and can provide customized packaging, inserts and promotional
literature for distribution with customer orders. Based upon our clients' needs,
we are able to take advantage of a variety of shipping and delivery options,
including next day service. In addition, an increasingly important function that
we provide for our clients is product return administration. We offer a wide
array of product return services for our clients, including issuing return
authorizations, receipt of product, crediting credit card accounts, and
disposition of returned product.

Our distribution facilities contain computerized sorting equipment, powered
material handling equipment, scanning and bar-coding systems and automated
conveyors, in-line scales and digital cameras to photograph shipment contents
for automatic accuracy checking.

Our receiving and material handling system in our Memphis distribution
complex includes several advanced technology enhancements, including radio
frequency technology in product receiving processing to ensure accuracy, an
automated package routing system and a "pick to light" paperless order picking
system. Our advanced distribution systems provide us with the capability to
currently warehouse an extensive number of stock keeping units (SKUs) for our
clients ranging from high-end laser printers to wide-leg blue jeans, while at
the same time retaining the ability to pick, pack and ship single SKUs to
individual customers in fulfillment of customer orders.

During the fiscal quarter ended March 31, 2000, we warehoused, managed and
fulfilled approximately $1.2 billion (on an annualized basis) in client
merchandise and transactions. This does not represent our revenue, but rather
the revenue of our clients for whom we provided e-business infrastructure
solutions. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

CLIENTS AND MARKETING

Our target clients include brand name manufacturers looking to quickly and
efficiently implement business initiatives or introduce new products or
programs, without the burden of modifying or expanding their current
infrastructure and technology capabilities. We also target retailers seeking to
open Web sites to expand their sales through new channels and distributors
seeking to reduce costs. Our services are available for a multitude of
industries, including:

- Manufacturers such as International Business Machines ("IBM") (printer
and media supplies), Adaptec (computer accessories), adidas (a sporting
goods manufacturer), Emtec (formerly BASF Magnetics) (data media and
audio visual products), Xerox (printers and printer supplies), Thomson
Consumer Electronics (televisions and consumer electronics), NokiaUSA.com
(cell phone accessories), and Hewlett-Packard (computer networking
equipment);

- Retailers such as American Eagle Outfitters (fashion apparel), and the
Sharper Image (work and home luxury accessories);

- Distributors such as Daisytek (computer supplies, office products, and
film and tape media), ISA Ltd. (computer and office supplies in Western
Europe); and

We reach these clients through a direct sales force, telemarketing, trade
shows, trade journal advertising, our Web site and direct mail programs. We also
pursue strategic marketing alliances with Web design firms and e-commerce
consultants to provide referrals and customer leads.

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Our direct sales force is comprised of dedicated sales professionals whose
compensation is tied to their ability to expand our relationships with existing
clients and attract new clients. We also employ highly trained implementation
managers whose responsibilities include the oversight and supervision of client
projects and maintaining high levels of client satisfaction.

TECHNOLOGY

We maintain advanced management information systems and have automated most
key business functions using on-line, real-time systems. These systems enable us
to provide our clients with information concerning sales, inventory levels,
customer payments and other operations that are essential for our clients to
efficiently manage their electronic commerce business programs. Our systems are
designed to scale rapidly to handle the transaction processing demands of our
clients.

We employ technology from a selected group of partners. For example, we use
IBM AS/400 and Netfinity servers to run both Web site functions as well as order
management and distribution functions, and we use Lucent Technologies for
telephone switch and call center management functions. We also use Lucent
Technologies for our Web-enabled customer care center to interact with customers
via voice, e-mail or chat and to communicate with the customer by sharing Web
pages between customers and our service representatives. The ability to process
voice, data and video simultaneously on the same line is becoming very
effective. We have just begun to implement these technologies in our call
centers. We have seen our clients interested in using this technology to allow
shoppers the ability to consult with known experts prior to purchasing. Our
sophisticated computer-telephony integration has been accomplished by combining
systems software from IBM and Lucent Technologies together with our own
application development. We use AT&T for our private enterprise network and long
distance carrier. We use J.D. Edwards as the software provider for the primary
applications that we use in our operational areas and financial areas. We use
Rapistan/Demag for our warehouse management, automated conveyor and
"pick-to-light" (inventory retrieval) systems and Telxon for our warehouse radio
frequency applications.

We have developed e-commerce technology that is specifically targeted at
quickly integrating our systems with those of our clients with a high degree of
accuracy and reliability. Our e-commerce technology is branded with the name
entente(SM), which alludes to the level of electronic cooperation that is
possible when we construct solutions with our clients using this technology.
There are several products in the entente suite that provide specific
capabilities when we design e-commerce solutions for our clients. The core of
the entente suite is the entente Message Broker ("eMB"). eMB is an open systems
XML-based messaging system that our enterprise resource planning systems
("ERP"), warehouse management systems and customer relationship management
systems use to communicate with the other components of the entente suite. The
other components of the entente suite, entente.Direct, entente.Message and
entente.Web provide the open platform infrastructure that allows us to create
complete e-commerce solutions with our customers. Using the various components
of the entente suite, we can assist our clients in easily integrating their Web
sites or ERP systems to our systems for real-time transaction processing without
regard for their hardware platform or operating system. This high-level of
systems integration allows our clients to automatically process orders, customer
data and other e-commerce information. We can also track information sent to us
by the client as it moves through our systems in the same manner a carrier would
track a package throughout the delivery process. Our systems enable us to track
at a detailed level information received, transmission timing, any errors or
special processing required and information sent back to the client. The
transactional and management information contained within our systems is made
available to the client quickly and easily through the entente suite.

We have also invested in advanced telecommunications, computer telephony,
electronic mail and messaging, automated fax technology, barcode scanning,
wireless technology, fiber optic network communications and automated inventory
management systems. We have also developed and utilize telecommunications
technology that provides for automatic customer call recognition and customer
profile recall for inbound customer service representatives.

Our systems development team of information technology professionals
primary responsibility is directed at implementing custom solutions for new
clients and strengthening existing client solutions. Our development

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team can also produce proprietary systems infrastructure to expand our
capabilities in circumstances where we cannot purchase standard solutions from
commercial providers. We also utilize temporary resources when needed for
additional capacity.

Our information technology operations and infrastructure are built on the
premise of reliability and scalability. We maintain diesel generators and
uninterruptible power supply equipment to provide constant availability to
computer rooms, call centers and warehouses. Multiple Internet service providers
and redundant Web servers provide for a high degree of availability to Web sites
that interface with our systems. Capacity planning and upgrading is performed
regularly to allow for quick implementation of new clients and avoid
time-consuming infrastructure upgrades that could slow growth rates. We also
have a disaster recovery plan for our information systems and maintain a "hot
site" under contract with a major provider.

COMPETITION

Many companies offer, on an individual basis, one or more of the same
services we do, and we face competition from many different sources depending
upon the type and range of services requested by a potential client. Our
competitors include vertical outsourcers, which are companies that offer a
single function, such as call centers, public warehouses or credit card
processors, and many of these companies have greater capabilities than we do for
the function they provide. We also compete against transportation logistics
providers who offer product management functions as an ancillary service to
their primary transportation services. In many instances, our competition is the
in-house operations of our potential clients themselves. The in-house operations
departments of potential clients often believe that they can perform the same
services we do, while others are reluctant to outsource business functions which
involve direct customer contact. We cannot be certain that we will be able to
compete successfully against these or other competitors in the future.

Although many of our competitors can offer one or more of our services, we
believe our primary competitive advantage is our ability to offer a wide array
of services that cover a broad spectrum of e-commerce transaction management
functions, including order processing and shipment, credit card payment and
customer service, thereby eliminating any need for our clients to coordinate
these services from different providers. We believe we are unique in offering
our clients an adaptable consultative solution that also provides physical
infrastructure for their business to handle all of their order processing,
customer care service, billing, information management and product warehousing
and distribution needs.

We also compete on the basis of certain additional factors, including:

- operating performance and reliability;

- ease of implementation and integration; and

- price.

We believe that we presently compete favorably with respect to each of
these factors. However, the market for our services is becoming more competitive
and still evolving, and we may not be able to compete successfully against
current and future competitors.

EMPLOYEES

As of March 31, 2000, we had 770 full-time employees and 52 part-time
employees. 689 of these were located in the United States. We are not a party to
any collective bargaining agreements, and we have never suffered an interruption
of business as a result of a labor dispute. We consider our relationship with
our employees to be good.

Our success in recruiting, hiring and training large numbers of skilled
employees and obtaining large numbers of hourly employees during peak periods
for distribution and call center operations is critical to our ability to
provide high quality distribution and support services. Call center
representatives and distribution personnel receive feedback on their performance
on a regular basis and, as appropriate, are recognized for superior performance
or given additional training. Generally, our clients provide specific product
training for our customer service representatives and, in certain instances,
on-site client personnel to provide specific
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technical support. To maintain good employee relations and to minimize employee
turnover, we offer competitive pay, hire primarily full-time employees who are
eligible to receive a full range of employee benefits, and provide employees
with clear, visible career paths.

REGULATION

Our business may be affected by current and future governmental regulation.
For example, the Internet Tax Freedom Act bars state and local governments from
imposing taxes on Internet access or that would subject buyers and sellers of
electronic commerce to taxation in multiple states. This act is in effect
through October 2000. If legislation to extend this act or similar legislation
is not enacted, Internet access and sales across the Internet may be subject to
additional taxation by state and local governments, thereby discouraging
purchases over the Internet and adversely affecting the market for our services.

SPIN-OFF OF PFSWEB FROM DAISYTEK

History

The PFSweb business unit was formed in 1991 as a subsidiary of Daisytek
named "Working Capital of America" whose purpose was to provide inventory
management, direct shipping to end-users, and accounts receivable collections
for Daisytek customers and other third parties. Until 1996, this business unit
was comprised of operations both at Working Capital of America and at Daisytek.
As the business gradually developed, this business unit recognized an
opportunity to expand its business and capitalize on Daisytek's strengths in
customer service, order management, product fulfillment and distribution, and
provide these services on an outsourcing basis. Since 1996, the operations of
this business unit have been primarily focused in PFS. PFSweb was formed in 1999
to be a holding company for PFS and to facilitate the Offering and spin-off from
Daisytek. In December 1999, we completed the Offering and entered into various
agreements with Daisytek relating to the spin-off. Under these agreements, the
spin-off was conditioned upon, among other things, the receipt of a ruling by
the Internal Revenue Service ("IRS") that, among certain other tax consequences
of the transaction, the spin-off will qualify as a tax-free distribution for
U.S. federal income tax purposes and will not result in the recognition of
taxable gain or loss for U.S. federal income tax purposes to Daisytek or its
shareholders (the "IRS Ruling"). On June 8, 2000, Daisytek received the IRS
Ruling and the Daisytek board of directors approved the spin-off and authorized
the distribution of 14,305,000 shares of PFSweb common stock to the holders of
Daisytek common stock. The distribution is payable at the close of business on
July 6, 2000 to Daisytek stockholders of record as of June 19, 2000.

PFSweb's Ongoing Relationship With Daisytek

PFSweb and Daisytek will continue to have significant ongoing relationships
following the spin-off. PFSweb and Daisytek are parties to various agreements
providing for the separation of their respective business operations. These
agreements govern various interim and ongoing relationships between the
companies, including the transaction management services that PFSweb provides
for Daisytek, the transitional services that Daisytek provides to PFSweb and a
tax indemnification and allocation agreement which governs the allocation of tax
liabilities and sets forth provisions with respect to other tax matters.

All of the agreements between PFSweb and Daisytek were made in the context
of a parent-subsidiary relationship and were negotiated in the overall context
of the spin-off. Although we generally believe 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 agreements are not
higher or lower than the prices that may be charged by, or to, unaffiliated
third parties for similar services.

Master Separation Agreement

The Master Separation Agreement sets forth the agreements between PFSweb
and Daisytek with respect to the principal corporate transactions required to
effect the transfers of assets and assumptions of liabilities necessary to
separate the PFSweb business unit from Daisytek and certain other agreements
governing this relationship thereafter.

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Transfer of Assets and Liabilities. Following completion of the Offering,
Daisytek transferred to PFSweb all of the fixed assets in Daisytek's Memphis
distribution facility as well as certain assets associated with providing
information technology services and the stock of several subsidiaries of
Daisytek representing the business operations of PFSweb, and PFSweb transferred
to Daisytek approximately $5.0 million in cash and assumed approximately $0.3
million of capital lease obligations, as well as the operating lease obligations
related to these assets. PFSweb also repaid to Daisytek, from the net proceeds
of the Offering, the aggregate sum of approximately $27 million, representing
the outstanding balance of PFSweb's intercompany payable to Daisytek.

Indemnification. PFSweb agreed to indemnify Daisytek against any losses,
claims, damages or liabilities arising from the liabilities transferred to
PFSweb and the conduct of the PFSweb business after the completion of the
Offering. Daisytek agreed to retain, and indemnify PFSweb against, any losses,
claims, damages or liabilities arising from the conduct of the PFSweb business
prior to the completion of the Offering.

Initial Public Offering and Distribution Agreement

General. PFSweb and Daisytek entered into an Initial Public Offering and
Distribution Agreement which governs their respective rights and duties with
respect to the Offering and the spin-off, and sets forth certain covenants to
which they will be bound for various periods following the Offering and the
spin-off.

Preservation of the Tax-free Status of the Spin-off. Daisytek has received
a private letter ruling from the Internal Revenue Service to the effect that the
spin-off will qualify as a tax-free distribution under Section 355 of the
Internal Revenue Code to Daisytek and its stockholders. In connection with
obtaining such ruling, certain representations and warranties were made
regarding Daisytek, PFSweb and their respective businesses. PFSweb has also
agreed to certain covenants that are intended to preserve the tax-free status of
the spin-off. These covenants include:

Certain Acquisition Transactions. Until two years after the completion of
the spin-off, PFSweb has agreed not to enter into or permit any transaction or
series of transactions that would result in a person or persons acquiring or
having the right to acquire shares of its capital stock that would comprise 50%
or more of either the value of all outstanding shares of its capital stock or
the total combined voting power of its outstanding voting stock.

Continuation of Active Trade or Business. Until two years after the
completion of the spin-off, PFSweb has agreed to continue to conduct its active
trade or business (within the meaning of Section 355 of the Code) as it was
conducted immediately prior to the completion of the spin-off. During such time,
PFSweb has agreed not to:

- liquidate, dispose of or otherwise discontinue the conduct of any
substantial portion of its active trade or business; or

- dispose of any business or assets that would cause it to be operated in a
manner inconsistent in any material respect with the business purposes
for the spin-off as described in the representations made in connection
with Daisytek's request for the IRS Ruling.

Continuity of Business. Until two years after the completion of the
spin-off, PFSweb has agreed that it will not voluntarily dissolve or liquidate;
and, except in the ordinary course of business, neither it nor any of its direct
or indirect subsidiaries will sell, transfer, or otherwise dispose of or agree
to dispose of assets (including any shares of capital stock of its subsidiaries)
that, in the aggregate, constitute more than 60% of its assets.

Intracompany Debt. Until two years after the completion of the spin-off,
PFSweb will not be able to have any indebtedness to Daisytek, other than
payables arising in the ordinary course of business.

These covenants will not prohibit PFSweb from implementing or complying
with any transaction permitted by an IRS ruling or a tax opinion.

Other Covenants Regarding Tax Treatment of the Transactions. Daisytek
intends the transfer of assets and liabilities from Daisytek to PFSweb as
provided by the master separation agreement (the "Contribution")

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to qualify as a reorganization under Section 368(a)(1)(D) of the Code (a "D
Reorganization"). Until two years after the completion of the spin-off, PFSweb
has agreed not to take, or permit any of our subsidiaries to take, any actions
or enter into any transaction or series of transactions that would be reasonably
likely to jeopardize the tax-free status of the spin-off or the qualification of
the Contribution as a D Reorganization, including any action or transaction that
would be reasonably likely to be inconsistent with any representation made in
connection with Daisytek's request for the IRS Ruling. PFSweb has also agreed to
take any reasonable actions necessary for the Contribution and the spin-off to
qualify as a D Reorganization.

Cooperation on Tax Matters. PFSweb and Daisytek have agreed to various
procedures with respect to the tax-related covenants described above, and PFSweb
is required to notify Daisytek if it desires to take any action prohibited by
these covenants. Upon such notification, if Daisytek determines that such action
might jeopardize the tax-free status of the spin-off or the qualification of the
Contribution as a D Reorganization, Daisytek will either use all commercially
reasonable efforts to obtain a private letter ruling from the IRS or a tax
opinion that would permit PFSweb to take the desired action or provide all
reasonable cooperation to PFSweb in connection with PFSweb obtaining such an IRS
ruling or tax opinion. In either case, Daisytek has agreed to bear the
reasonable costs and expenses of obtaining the IRS ruling or tax opinion, unless
it is determined that PFSweb's proposed action will jeopardize the tax-free
status of the spin-off or the qualification of the Contribution as a D
Reorganization, in which event PFSweb will be responsible for such costs and
expenses.

Indemnification for Tax Liabilities. PFSweb has generally agreed to
indemnify Daisytek and its affiliates against any and all tax-related losses
incurred by Daisytek in connection with any proposed tax assessment or tax
controversy with respect to the spin-off or the Contribution to the extent
caused by any breach by it of any of its representations, warranties or
covenants. If PFSweb causes the spin-off to not qualify as a tax-free
distribution, Daisytek would incur federal income tax (which currently would be
imposed at a 35% rate), and possibly state income taxes on the gain inherent in
the shares distributed, which would be based upon the market value of the shares
of PFSweb at the time of the spin-off. This indemnification does not apply to
actions that Daisytek permits PFSweb to take as a result of a determination
under the tax-related covenants as described above. Similarly, Daisytek has
agreed to indemnify PFSweb and its affiliates against any and all tax-related
losses incurred by it in connection with any proposed tax assessment or tax
controversy with respect to the spin-off or the Contribution to the extent
caused by any breach by Daisytek of any of its representations, warranties or
covenants.

Other Indemnification. PFSweb has generally agreed to indemnify Daisytek
and its affiliates against all liabilities arising out of any material untrue
statements and omissions in PFSweb's prospectus and the registration statement
of which it is a part and in any and all registration statements, information
statements and/or other documents filed with the SEC in connection with the
spin-off or otherwise. However, PFSweb's indemnification of Daisytek does not
apply to information relating to Daisytek. Daisytek has agreed to indemnify
PFSweb for this information.

Expenses. In general, PFSweb agreed to pay substantially all costs and
expenses relating to the Offering, including the underwriting discounts and
commissions, and Daisytek has agreed to pay substantially all costs and expenses
relating to the spin-off.

Tax Matters

Daisytek and PFSweb have entered into a tax indemnification and allocation
agreement to govern the allocation of tax liabilities and to set forth
agreements with respect to certain other tax matters.

Generally, under the Code, PFSweb will cease to be a member of the Daisytek
consolidated group upon the completion of the spin-off or if Daisytek owns less
than 80% of PFSweb's outstanding capital stock.

Daisytek generally will pay all taxes attributable to PFSweb and its
subsidiaries for tax periods or portions thereof ending on or before the
effective date of the Offering, except to the extent of any accruals thereof on
the books and records of PFSweb or its subsidiaries for such taxes under
generally accepted accounting principles. Thereafter, for tax periods or
portions thereof during which PFSweb is a member of the Daisytek

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consolidated, combined or unitary group, PFSweb will be apportioned its share of
the group's income tax liability based on its taxable income determined
separately from Daisytek's taxable income, and PFSweb will pay its calculated
taxes to Daisytek, which will then file a consolidated, combined or unitary
return with the appropriate tax authorities. There may be certain U.S. state or
local jurisdictions in which PFSweb will file separate income tax returns, not
combined or consolidated with Daisytek, for such tax periods. In that
circumstance, PFSweb would file a tax return with the appropriate tax
authorities, and pay all taxes directly to the tax authority. PFSweb will be
compensated for tax benefits generated by it before tax deconsolidation and used
by the Daisytek consolidated group. PFSweb will prepare and file all tax
returns, and pay all income taxes due with respect to all tax returns required
to be filed by it for all tax periods after it ceases to be a member of the
Daisytek consolidated, combined or unitary group.

Daisytek is responsible for most U.S. tax adjustments related to PFSweb for
all periods or portions thereof ending on or before the effective date of the
Offering. In addition, PFSweb and Daisytek have agreed to cooperate in any tax
audits, litigation or appeals that involve, directly or indirectly, periods
prior to the time that PFSweb ceases to be a member of the Daisytek consolidated
group. PFSweb and Daisytek have agreed to indemnify each other for tax
liabilities resulting from the failure to cooperate in such audits, litigation
or appeals, and for any tax liability resulting from the failure to maintain
adequate records.

Notwithstanding the tax allocation agreement, for all periods in which
Daisytek owns or owned 80% or more of PFSweb's capital stock, PFSweb will be
included in Daisytek's consolidated group for federal income tax purposes. If
Daisytek or other members of the consolidated group fail to make any federal
income tax payments, PFSweb will be liable for the shortfall since each member
of a consolidated group is liable for the group's entire tax obligation.

Under the tax indemnification and allocation agreement, Daisytek has agreed
to indemnify PFSweb against any taxes resulting from the failure of the spin-off
to qualify for tax-free treatment, except that PFSweb will be liable for, and
will indemnify Daisytek against, any taxes resulting from the failure of the
spin-off to qualify for tax-free treatment if it is the result of PFSweb
engaging in a "Prohibited Action" or the occurrence of a "Disqualifying Event."
Neither PFSweb nor Daisytek have the option to rescind the spin-off if tax
liability results.

A "Prohibited Action" is defined as:

- if PFSweb takes any action which is inconsistent with the tax treatment
of the spin-off as contemplated in the IRS Ruling; or

- if, prior to the spin-off, PFSweb issues shares of stock or took any
other action that would result in it not being controlled by Daisytek
within the meaning of Section 368(c) of the Code.

A "Disqualifying Event" includes any event involving the direct or indirect
acquisition of the shares of PFSweb's capital stock after the spin-off which has
the effect of disqualifying the spin-off from tax-free treatment, whether or not
the event is the result of our direct action or within PFSweb's control.

Transaction Management Services Agreement

PFSweb and Daisytek have entered into a transaction management services
agreement which sets forth the transaction management services that PFSweb
provides for Daisytek. Under this agreement, PFSweb provides a wide range of
transaction management services, including information management, order
fulfillment and distribution, product warehousing, inbound call center services,
product return administration and other services.

The agreement has an initial term of five years from the completion of the
Offering, although either party has the right to terminate the agreement at any
time, without cause. If Daisytek terminates the agreement without cause,
Daisytek must provide at least 180 days' prior notice and pay PFSweb a
termination fee. The termination fee is based upon the net value of the assets
transferred to PFSweb by Daisytek which are primarily used in servicing the
Daisytek business. The termination fee declines over the five year term of the
agreement. If PFSweb terminates the agreement without cause, PFSweb must provide
at least 365 days' prior

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notice and Daisytek does not have to pay any termination fee. In addition, if
there is a change in control of Daisytek, PFSweb may terminate the agreement
upon 90 days' prior notice and Daisytek does not have to pay the termination
fee. During the term of the agreement, Daisytek pays PFSweb service fees based
upon a percent of Daisytek shipped revenue. PFSweb and Daisytek have agreed that
these fees are based upon certain assumptions regarding the nature, cost and
scope of the services PFSweb will be providing under the agreement. If these
assumptions should prove to be materially incorrect, PFSweb and Daisytek have
agreed to negotiate in good faith an adjustment to the fees payable to PFSweb
under the agreement.

During the term of the agreement, PFSweb has agreed not to engage, on its
own behalf, in the business of selling or distributing, on a wholesale basis,
any Daisytek products. This will not restrict it, however, from providing
transaction management services to third parties who may be engaged in the
business of selling or distributing, on a wholesale basis, the same or competing
products.

As part of the restructuring of PFSweb's arrangements with IBM, PFSweb has
also entered into transaction management agreements with Daisytek to provide
transaction management services, on a worldwide basis, in connection with
Daisytek's distribution of various IBM products. Under these agreements, PFSweb
receives service fees based upon a variable percent of Daisytek's gross profit
arising from its IBM product sales. These agreements are coterminous with
PFSweb's IBM agreements which, generally, have terms of one to two years,
although IBM may terminate these agreements at any time.

Transition Services Agreement

Upon completion of the Offering, Daisytek and PFSweb entered into a
transition services agreement. Under this agreement, Daisytek provides PFSweb
with various services relating to employee payroll and benefits, use of
facilities, and other administrative services. Daisytek will provide PFSweb with
these services until the completion of the spin-off (the "Transition Period"),
except that, with respect to any particular service, PFSweb may, upon notice to
Daisytek, either terminate the Transition Period as of an earlier date or extend
the Transition Period for up to one year from the completion of the Offering.

The agreement requires PFSweb to use all commercially reasonable efforts to
obtain these transition services from a source other than Daisytek prior to the
conclusion of the Transition Period. If, however, PFSweb cannot obtain any
transition service from a source other than Daisytek and the transition service
is necessary for PFSweb to continue to operate its business, then, PFSweb may
require Daisytek to continue to provide the transition service for an additional
period not to exceed six months.

Generally, PFSweb will pay Daisytek for these transition services an amount
equal to the cost historically allocated by Daisytek to PFSweb's business,
adjusted to reflect any changes in the nature, cost or level of the services so
provided. If PFSweb requires Daisytek to provide it with any transition service
after the expiration of the Transition Period, PFSweb will pay Daisytek the fair
market value of these services.

Substitute Stock Options

In connection with the completion of the spin-off, all outstanding Daisytek
stock options will be replaced with substitute stock options as described below:

Options held by Daisytek employees who transfer to PFSweb will be replaced
(at the option holder's election to be made prior to the spin-off) with either
options to acquire shares of PFSweb common stock or options to acquire shares of
both Daisytek common stock and PFSweb common stock (which may be exercised
separately) (the "Unstapled Options"). Options held by Daisytek employees who
remain with Daisytek will be replaced (at the option holder's election to be
made prior to the spin-off) with either options to acquire shares of Daisytek
common stock or Unstapled Options.

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substitute option immediately prior to the spin-off, and (2) the ratio of the
exercise price of the options to the market value of the underlying stock
immediately before and after the spin-off is preserved.

Substantially all of the other terms and conditions of each substitute
stock option, including the time or times when, and the manner in which, each
option will be exercisable, the duration of the exercise period, the permitted
method of exercise, settlement and payment, the rules that will apply in the
event of the termination of employment of the employee, the events, if any, that
may give rise to an employee's right to accelerate the vesting or the time or
exercise thereof and the vesting provisions, will be the same as those of the
replaced Daisytek stock option, except that option holders who are employed by
one company will be permitted to exercise, and will be subject to all of the
terms and provisions of, options to acquire shares in the other company as if
such holder was an employee of such other company.

Although it is not possible to specify how many shares of PFSweb common
stock will be subject to substitute stock options in replacement of Daisytek
stock options, it is possible PFSweb stockholders may experience some dilutive
impact from the previously described conversion.

No adjustment or replacement will be made to outstanding PFSweb stock
options as a result of the spin-off.

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RISK FACTORS

Our business, financial condition and operating results could be adversely
affected by any of the following factors, in which event the trading price of
our common stock could decline, and you could lose part or all of your
investment. The risks and uncertainties described below are not the only ones
that we face. Additional risks and uncertainties not presently known to us, or
that we currently think are immaterial, may also impair our business operations.

RISKS RELATED TO OUR BUSINESS

Our historical financial information may not be representative of our results
as a separate company.

The historical financial information included in this Form 10-K may not
reflect what our results of operations, financial position and cash flows would
have been had we been a separate, stand-alone entity during the periods
presented or what our results of operations, financial position and cash flows
will be in the future. This is because:

- we made certain adjustments and allocations since Daisytek did not
account for us as, and we were not operated as, a single stand-alone
business for the periods presented; and

- the information does not reflect many significant changes that will occur
in our funding and operations as a result of our new agreements with IBM
and our separation from Daisytek.

We cannot assure you that the adjustments and allocations we made in
preparing our historical consolidated financial statements appropriately reflect
our operations during such periods as if we had, in fact, operated as a
stand-alone entity or what the actual effect of our separation from Daisytek
will be. Accordingly, we cannot assure you that our historical results of
operations are indicative of our future operating or financial performance.

Our revenue is dependent upon our clients' business and product sales; all of
our client agreements are terminable by the client at will.

Our revenue is primarily transaction based and will fluctuate with the
volume of transactions or level of sales of the products by our clients for
which we provide transaction management services. If we dedicate significant
resources to clients whose business does not generate substantial transactions
or whose products do not generate substantial customer sales, our business may
be materially adversely affected. In addition, all of our agreements with our
clients are terminable by the client at will. Therefore, we cannot assure you
that any of our clients will continue to use our services for any period of
time.

We anticipate incurring significant expenses in the foreseeable future, which
may reduce our profitability.

In order to reach our business growth objectives, we expect to incur
significant operating and marketing expenses, as well as capital expenditures,
during the next several years. In order to offset these expenses, we will need
to generate significant additional revenue. If our revenue grows more slowly
than we anticipate or if our operating and marketing expenses exceed our
expectations, we may not generate sufficient revenue to be profitable or be able
to sustain or increase profitability on a quarterly or an annual basis in the
future.

Our systems may not accommodate significant growth in our number of clients.

Our success depends on our ability to handle a large number of transactions
for many different clients in various product categories. We expect that the
volume of transactions will increase significantly as we expand our operations.
If this occurs, additional stress will be placed upon the network hardware and
software that manages our operations. We cannot assure you of our ability to
efficiently manage a large number of transactions. If we are not able to
maintain an appropriate level of operating performance, we may develop a
negative reputation and our business would be materially adversely affected.

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Because we must always have sufficient capacity, we may enter into
disadvantageous contracts.

We expect that the number of transactions and products that we handle will
continue to grow in the future. In order to ensure that we are able to handle
such additional transactions and products, we may be required to locate and
obtain additional facilities, including warehouse space, and acquire additional
systems and equipment. If we overestimate the facilities and systems capacity
that we require, we may be obligated to pay for more capacity than we actually
use, resulting in our incurring costs without corresponding revenue. Conversely,
if we underestimate our capacity needs, we may be unable to provide the
necessary services for our clients or may be required to obtain additional
capacity through more expensive means. The occurrence of either of these
situations could significantly reduce our operating margins and adversely affect
our business.

We face competition from many sources that could adversely affect our
business.

Our sales and implementation cycles are highly variable and may cause our
operating results to vary widely.

The sales cycle for our services is variable, typically ranging between a
few weeks to several months from initial contact with the potential client to
the signing of a contract. Occasionally sales require substantially more time.
Delays in executing client contracts may affect our revenue and cause our
operating results to vary widely. We believe that a potential client's decision
to purchase our services is discretionary, involves a significant commitment of
its resources and is influenced by intense internal and external pricing and
operating comparisons. To successfully sell our services, we generally must
educate our potential clients regarding the use and benefit of our services,
which can require significant time and resources. Consequently, the period
between initial contact and the purchase of our services is often long and
subject to delays associated with the lengthy approval and competitive
evaluation processes that typically accompany significant operational decisions.
Additionally, the time required to implement our systems and integrate a new
client can range from several weeks to many months. Delays in integrating new
clients may affect our revenue and cause our operating results to vary widely.

We are dependent on our key personnel, and we need to hire and retain skilled
personnel to sustain our business.

Our performance is highly dependent on the continued services of our
executive officers and other key personnel, the loss of any of whom could
materially adversely affect our business. We currently do not have employment
agreements with any of our executive officers or many of our key personnel. In
addition, we need to attract and retain other highly-skilled technical and
managerial personnel for whom there is intense competition. We cannot assure you
that we will be able to attract and retain the personnel necessary for the
continuing growth of our business. Our inability to attract and retain qualified
technical and managerial personnel would materially adversely affect our ability
to maintain and grow our business.

We are subject to risks associated with our international operations.

A significant component of our business strategy is to continue to expand
internationally. For example, we recently opened a new 150,000 square foot
distribution center in Liege, Belgium. We cannot assure you that we will be
successful in expanding into additional international markets. In addition to
the uncertainty

20
<PAGE> 21

regarding our ability to generate revenue from foreign operations and expand our
international presence, there are risks inherent in doing business
internationally, including:

- changing regulatory requirements;

- legal uncertainty regarding foreign laws, tariffs and other trade
barriers;

- political instability;

- potentially adverse tax consequences;

- foreign currency fluctuations; and

- cultural differences.

Any one or more of these factors may materially adversely affect our
business in a number of ways, such as increased costs, operational difficulties
and reductions in revenue.

We are uncertain about our need for and the availability of additional funds
beyond the funds raised in the Offering.

Our future capital needs are difficult to predict. We may require
additional capital in order to take advantage of unanticipated opportunities,
including strategic alliances and acquisitions, or to respond to changing
business conditions and unanticipated competitive pressures. Additionally, funds
from operations may be less than anticipated. Should these circumstances arise,
we may need to raise additional funds either by borrowing money or issuing
additional equity. We cannot assure you that we will be able to raise such funds
on favorable terms or at all. In addition, although historically we have relied
upon Daisytek as our source of funds, since the completion of the Offering,
Daisytek has been prohibited under its line of credit from providing us with
funding, and we will be restricted from borrowing from Daisytek following the
spin-off. We currently do not have any credit facility in place under which we
can borrow funds when needed. If we are unable to obtain additional funds, we
may be unable to take advantage of new opportunities or take other actions that
otherwise might be important to our business.

We may engage in future strategic alliances or acquisitions that could dilute
our existing stockholders, cause us to incur significant expenses or harm our
business.

We may review strategic alliance or acquisition opportunities that would
complement our current business or enhance our technological capabilities.
Integrating any newly acquired businesses, technologies or services, may be
expensive and time-consuming. To finance any acquisitions, it may be necessary
for us to raise additional funds through public or private financings.
Additional funds may not be available on terms that are favorable to us and, in
the case of equity financings, may result in dilution to our stockholders. In
addition, we have limited ability to issue capital stock prior to or after the
spin-off. We may not be able to operate any acquired businesses profitably or
otherwise implement our growth strategy successfully. If we are unable to
integrate any newly acquired entities or technologies effectively, our operating
results could suffer. Future acquisitions by us could also result in large and
immediate write-offs, incurrence of debt and contingent liabilities, or
amortization of expenses related to goodwill and other intangibles, any of which
could harm our operating results.

Our business could be adversely affected by a systems or equipment failure,
whether our own or of our clients.

Our operations are dependent upon our ability to protect our distribution
facilities, customer service centers, computer and telecommunications equipment
and software systems against damage and failures. Damage or failures could
result from fire, power loss, equipment malfunctions, system failures, natural
disasters and other causes. Although we believe we have sufficient property and
business interruption insurance, if our business is interrupted either from
accidents or the intentional acts of others, our business could be materially
adversely affected. In addition, in the event of widespread damage or failures
at our facilities, our short-term disaster recovery and contingency plans and
insurance coverage may not be sufficient.
21
<PAGE> 22

Our clients' businesses may also be harmed from any system or equipment
failures we experience. In that event, our relationship with these clients may
be adversely affected, we may lose these clients, our ability to attract new
clients may be adversely affected and we could be exposed to liability.

Interruptions could also result from the intentional acts of others, like
"hackers." If our systems are penetrated by computer hackers, or if computer
viruses infect our systems, our computers could fail or proprietary information
could be misappropriated.

If our clients suffer similar interruptions in their operations, for any of
the reasons discussed above or for others, our business could also be adversely
affected. Many of our clients' computer systems interface with our own. If they
suffer interruptions in their systems, the link to our systems could be severed
and sales of their products could be slowed or stopped.

A breach of our e-commerce security measures could reduce demand for our
services.

A requirement of the continued growth of e-commerce is the secure
transmission of confidential information over public networks. A party who is
able to circumvent our security measures could misappropriate proprietary
information or interrupt our operations. Any compromise or elimination of our
security could reduce demand for our services.

We may be required to expend significant capital and other resources to
protect against security breaches or to address any problem they may cause.
Because our activities involve the storage and transmission of proprietary
information, such as credit card numbers, security breaches could damage our
reputation and expose us to litigation and possible liability. Our security
measures may not prevent security breaches, and failure to prevent security
breaches may disrupt our operations.

RISKS RELATED TO DAISYTEK

Our business may be materially adversely affected if Daisytek does not
complete the spin-off of our company.

Although Daisytek has informed us that it currently intends to complete the
spin-off, if the spin-off is not completed, we will continue to be controlled by
Daisytek. If that happens, the price of our shares in the public market could be
adversely affected because of the reduced liquidity and the uncertainty as to
if, when and how the shares held by Daisytek would be sold or distributed to the
public. This would, in turn, adversely affect the potential benefits offered by
employee equity incentive compensation programs, such as employee stock options.
In addition, we believe that our control by Daisytek may limit our ability to
market our services to some manufacturers.

We depend on Daisytek for various services and for a significant portion of
our revenue.

We will be providing transaction management services for Daisytek under a
five-year agreement. Daisytek is currently our largest client, and we expect
that Daisytek will remain a significant client for the foreseeable future.
Consequently, a substantial portion of our business will be dependent upon the
success of Daisytek's sales and marketing of its products. Daisytek has the
right to terminate the agreement, subject to the payment of a termination fee.

In addition, we have historically been dependent on Daisytek for various
services, including facilities, human resources, management information systems,
as well as for working capital. We have entered into a transition services
agreement with Daisytek under which Daisytek will continue to provide certain of
these services to us until the spin-off is completed, but not later than one
year following the closing of the Offering. When the term of this agreement
expires, we will need either to extend the term of this agreement, engage other
entities to perform these services or perform these services ourselves. We
cannot assure you that Daisytek will continue to provide these services after
the initial term of the agreement, or that the cost of these services will not
be significantly higher if we purchase services from other parties or devote
resources to handle these functions internally.

22
<PAGE> 23

All of our agreements with Daisytek were made in the context of a
parent-subsidiary relationship and were negotiated in the overall context of our
spin-off from Daisytek. We cannot assure you that the prices charged to us, or
by us, under these agreements are not higher or lower than the prices that may
be charged by, or to, unaffiliated third parties for similar services.

Through its ownership of our stock, Daisytek will be able to exert substantial
influence over our management and corporate affairs.

Daisytek owns approximately 80.1% of our outstanding shares of common
stock. Daisytek has announced its intention to complete the spin-off and
distribute these shares to its stockholders on July 6, 2000. However, as long as
Daisytek owns a majority of our outstanding common stock, Daisytek will continue
to be able to elect our entire board of directors and to remove any director,
with or without cause, and generally to determine the outcome of all corporate
actions requiring stockholder approval. As a result, Daisytek will be in a
position to continue to control all matters affecting our company, including:

- the composition of our board of directors and, through it, any decisions
with respect to the direction and policies of our company, including the
appointment and removal of officers;

- any decisions with respect to mergers or other business combinations
involving our company;

- the acquisition or disposition of assets by our company;

- future issuances of common stock or other securities of our company;

- the incurrence of debt by our company;

- amendments, waivers and modifications to our transaction management
services agreement with Daisytek and other agreements relating to our
spin-off from Daisytek;

- the payment of dividends on our common stock; and

- decisions with respect to treatment of items in those of our tax returns
which are consolidated or combined with Daisytek tax returns.

We may have potential business conflicts of interest with Daisytek.

Daisytek will continue to be one of our largest customers for a significant
period of time and, unless and until Daisytek completes the spin-off of our
common stock, it will continue to be our controlling stockholder. As a result,
conflicts of interest may arise between us and Daisytek in a number of areas,
including:

- the nature, quality and pricing of services we provide to Daisytek;

- the nature, quality and pricing of transitional services Daisytek has
agreed to provide to us;

- labor, tax, employee benefit and other matters relating to the spin-off
of our company from Daisytek;

- the incurrence of debt by our company and business combinations by our
company;

- sales or distributions by Daisytek of all or any portion of its ownership
interest in our company; and

- Daisytek's ability to control the management and affairs of our company.

We cannot assure you that we will be able to resolve any potential
conflicts or that, if resolved, we would not be able to receive more favorable
resolution if we were dealing with an unaffiliated party. Our transaction
management services agreement with Daisytek and the other agreements we will
enter into with Daisytek may be amended from time to time upon agreement between
the parties. As long as we are controlled by Daisytek, we cannot assure you that
Daisytek would not require us to agree to an amendment to the transaction
management services agreement or any other agreement that may be more or less
favorable to us than the current terms of the agreement. In addition, our
ability to incur indebtedness, make acquisitions and dispositions and issue
stock is restricted under the terms of an agreement that we entered into with
Daisytek.

23
<PAGE> 24

Our directors may have conflicts of interest because they are also directors
of Daisytek.

All of the members of our board of directors are also directors of Daisytek
and our chairman also serves in such capacity for Daisytek. In addition, many of
our executive officers, directors and employees hold shares of Daisytek common
stock and options to acquire shares of Daisytek common stock. These individuals
may have conflicts of interest with respect to certain decisions involving
business opportunities and similar matters that may arise in the ordinary course
of our business or the business of Daisytek. Conflicts, if any, could be
resolved in a manner adverse to us and our stockholders, which could materially
adversely affect our business, results of operations and financial condition.

We have potential liability to Daisytek for tax indemnification obligations.

Daisytek has announced that it plans to complete the spin-off of our
company on July 6, 2000. We will indemnify Daisytek for any tax liability it
suffers arising out of our actions, or certain actions to which we are a party
that may exist, before or after the spin-off that would cause the spin-off to
lose its qualification as a tax-free distribution for federal income tax
purposes. These actions include any event involving the acquisition of the
shares of our capital stock after the spin-off which has the effect of
disqualifying the spin-off from tax-free treatment, whether or not the event is
the result of our direct action or within our control. If we cause the spin-off
to not qualify as a tax-free distribution, Daisytek would incur federal income
tax (which currently would be imposed at a 35% rate), and possibly state income
taxes on the gain inherent in the shares distributed, which would be based upon
the market value of the PFSweb shares at the time of the spin-off. In the event
that we are required to indemnify Daisytek in respect of this liability, it
would have a material adverse effect on our cash flow and business operations.

We have potential liability for Daisytek's tax obligations.

For all periods in which Daisytek owns or owned 80% or more of our capital
stock, we are included in Daisytek's consolidated group for federal income tax
purposes. If Daisytek or other members of the consolidated group fail to make
any federal income tax payments, we would be liable for the shortfall since each
member of a consolidated group is liable for the group's entire tax obligation.

We have limited ability to issue common stock prior to or after the spin-off.

In order for the spin-off to be tax-free to Daisytek and Daisytek's
stockholders, we agreed not to issue additional shares of capital stock before
the spin-off if it would prevent Daisytek from distributing at least 80% of our
capital stock in the spin-off. Similarly, we agreed upon certain limitations
during the two-year period after the spin-off, such as issuing an additional
amount of our capital stock in a single transaction or series of transactions
related to the spin-off which, when combined with the common stock issued in the
offering, could cause a 50% or greater change in the vote or value of our
outstanding capital stock. These restrictions may impede our ability to complete
transactions using our capital stock or to attract qualified persons to become
officers or directors.

RISKS RELATED TO OUR INDUSTRY

If the trend toward outsourcing does not continue, our business will be
adversely affected.

Our business could be materially adversely affected if the trend toward
outsourcing declines or reverses, or if corporations bring previously outsourced
functions back in-house. Particularly during general economic downturns,
businesses may bring in-house previously outsourced functions in order to avoid
or delay layoffs.

Our market is subject to rapid technological change and to compete we must
continually enhance our systems to comply with evolving standards.

To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our services and the underlying
network infrastructure. If we are unable to adapt to changing market conditions,
client requirements or emerging industry standards, our business could be
adversely

24
<PAGE> 25

affected. The Internet and e-commerce are characterized by rapid technological
change, changes in user requirements and preferences, frequent new product and
service introductions embodying new technologies and the emergence of new
industry standards and practices that could render our technology and systems
obsolete. Our success will depend, in part, on our ability to both internally
develop and license leading technologies to enhance our existing services and
develop new services. We must continue to address the increasingly sophisticated
and varied needs of our clients and respond to technological advances and
emerging industry standards and practices on a cost-effective and timely basis.
The development of proprietary technology involves significant technical and
business risks. We may fail to develop new technologies effectively or to adapt
our proprietary technology and systems to client requirements or emerging
industry standards.

RISKS RELATED TO OUR STOCK

The distribution of a substantial number of shares of our common stock in
conjunction with the spin-off may affect our stock price.

Daisytek owns 14,305,000 shares of our common stock. Daisytek has announced
its intention to complete the spin-off and distribute these shares to its
stockholders on July 6, 2000. These shares will be eligible for immediate resale
in the public market, other than any shares held by our affiliates. We cannot
predict whether substantial amounts of our common stock will be sold in the open
market in anticipation of, or following, any distribution of our shares by
Daisytek to its stockholders. Daisytek has the sole discretion to determine the
timing, structure and all terms of its distribution of our common stock, all of
which may also affect the level of market transactions in our common stock.

In addition, upon completion of the spin-off, outstanding Daisytek options
held by our employees and officers and Daisytek employees and officers may be
converted into options to purchase our common stock. It is possible our
stockholders may experience some dilutive impact as a result of the conversion
of Daisytek options at the time of the spin-off. In addition, these factors
could make it more difficult for us to raise funds through future offerings of
our common stock.

Our certificate of incorporation, our bylaws, our shareholder rights plans and
Delaware law make it difficult for a third party to acquire us, despite the
possible benefit to our stockholders.

Provisions of our certificate of incorporation, our bylaws, our shareholder
rights plans and Delaware law could make it more difficult for a third party to
acquire us, even if doing so would be beneficial to our stockholders. For
example, our certificate of incorporation provides for a classified board of
directors, meaning that only approximately one-third of our directors will be
subject to re-election at each annual stockholder meeting. Our certificate of
incorporation also permits our Board of Directors to issue one or more series of
preferred stock which may have rights and preferences superior to those of the
common stock. The ability to issue preferred stock could have the effect of
delaying or preventing a third party from acquiring us. We have also adopted a
shareholder rights plan. These provisions could discourage takeover attempts and
could materially adversely affect the price of our stock.

ITEM 2. PROPERTIES

Our PFSweb business is headquartered in a central office facility located
in Plano, TX, a Dallas suburb. We currently share the use of this facility with
Daisytek, who will be moving to a new corporate headquarters after the spin-off
is completed.

In the U.S., we operate an over one million square foot central
distribution complex in Memphis, Tennessee. This complex is located
approximately four miles from the Memphis International Airport, where both
Federal Express and United Parcel Service operate large hub facilities.

We recently opened a new 150,000 square foot distribution center in Liege,
Belgium, which has many of the same advanced distribution systems and equipment
as in our Memphis complex.

In order to provide operations in international locations, our transitional
agreement with Daisytek will provide for our use of its regional customer
service, warehouse and distribution facilities in Canada.

25
<PAGE> 26

We operate customer service centers in Memphis, Tennessee; Plano, Texas;
Toronto, Canada; and Liege, Belgium. Our call center technology permits the
automatic routing of calls to available customer service representatives in
several of our call centers.

All of our facilities are leased and the material lease agreements contain
one or more renewal options.

ITEM 3. LEGAL PROCEEDINGS

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 our financial condition or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

26
<PAGE> 27

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our Common Stock is listed and trades on the Nasdaq Stock Market under the
symbol "PFSW." The following table sets forth for the period indicated the high
and low sale price for the Common Stock as reported by the Nasdaq National
Market:

<TABLE>
<CAPTION>
PRICE
-------------
HIGH LOW
---- ---
<S> <C> <C>
Fiscal Year 2000
Third Quarter............................................. $52 11/16 $31 1/2
Fourth Quarter............................................ $40 3/8 $12
</TABLE>

As of June 19, 2000, there were approximately 4,000 shareholders of which
17 were record holders of the Common Stock.

We have never declared or paid cash dividends on our Common Stock and do
not anticipate the payment of cash dividends on our Common Stock in the
foreseeable future. We currently intend to retain all earnings to finance the
further development of our business. The payment of any future cash dividends
will be at the discretion of our Board of Directors and will depend upon, among
other things, future earnings, operations, capital requirements, the general
financial condition of the Company and general business conditions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

HISTORICAL PRESENTATION

The selected consolidated historical statement of operations data for each
of the fiscal years ended March 31, 1998, 1999 and 2000, and the selected
consolidated balance sheet data as of March 31, 1999 and 2000 have been derived
from our audited consolidated financial statements, and should be read in
conjunction with those statements and notes, which are included in this Form
10-K. The selected consolidated statement of operations data for the fiscal year
ended March 31, 1997 and the selected consolidated balance sheet data as of
March 31, 1997 and 1998 have been derived from our audited consolidated
financial statements, and should be read in conjunction with those statements,
which are not included in this Form 10-K. The selected consolidated historical
statement of operations data for the fiscal year ended March 31, 1996 and the
selected consolidated historical balance sheet data as of March 31, 1996, have
been derived from our unaudited consolidated financial statements, and include,
in our opinion, all normal, recurring adjustments necessary for a fair
presentation of the financial position at such dates and the results of
operations for such respective periods. The financial information herein may not
necessarily reflect our results of operations, financial position and cash flows
in the future or what our results of operations, financial position and cash
flows would have been had we been a separate, stand-alone entity during the
periods presented. The selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and notes
thereto which are included elsewhere in this Form 10-K.

27
<PAGE> 28

HISTORICAL SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
----------------------------------------------------
1996 1997 1998 1999 2000
----------- ------- ------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Product revenue......................... $ -- $16,543 $45,804 $ 93,702 $55,778
Service fee revenue..................... 111 1,034 3,539 7,547 30,829
------- ------- ------- -------- -------
Total revenues.................. 111 17,577 49,343 101,249 86,607
------- ------- ------- -------- -------
Costs of revenues:
Cost of product revenue................. -- 15,768 43,392 88,335 52,639
Cost of service fee revenue............. 67 596 2,208 5,323 23,475
------- ------- ------- -------- -------
Total costs of revenues......... 67 16,364 45,600 93,658 76,114
------- ------- ------- -------- -------
Gross profit.............................. 44 1,213 3,743 7,591 10,493
Percent of revenues....................... 39.6% 6.9% 7.6% 7.5% 12.1%
Selling, general and administrative
expenses................................ -- 1,074 3,705 6,711 17,764
------- ------- ------- -------- -------
Income (loss) from operations............. 44 139 38 880 (7,271)
Percent of revenues....................... 39.6% 0.8% 0.1% 0.9% (8.4)%
Interest expense, net..................... 53 77 143 374 459
------- ------- ------- -------- -------
Income (loss) before income taxes......... (9) 62 (105) 506 (7,730)
Provision (benefit) for income taxes...... (2) 38 (30) 214 (1,791)
------- ------- ------- -------- -------
Net income (loss)......................... $ (7) $ 24 $ (75) $ 292 $(5,939)
======= ======= ======= ======== =======
PER SHARE DATA:
Net income (loss) per share:
Basic and diluted(a).................... $ (0.00) $ 0.00 $ (0.01) $ 0.02 $ (0.38)
======= ======= ======= ======== =======
Weighted average number of shares
outstanding:
Basic and diluted(a).................... 14,305 14,305 14,305 14,305 15,479
</TABLE>

---------------

(a) On an historical basis, reported basic and diluted net income per share was
determined based on net income divided by the 14,305,000 shares outstanding
prior to the Offering, which was consummated in fiscal 2000. For purposes
of the net income per share calculation, the shares outstanding prior to
the Offering are treated as outstanding for all historical periods
presented. There were no potentially dilutive securities outstanding prior
to the Offering. For fiscal 2000, outstanding options to purchase common
shares of PFSweb were anti-dilutive and have been excluded from the
weighted average share computation.

<TABLE>
<CAPTION>
AS OF MARCH 31,
---------------------------------------------------
1996 1997 1998 1999 2000
----------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA (IN THOUSANDS):
Working capital............................ $579 $ 5,757 $ 1,344 $14,636 $27,974
Total assets............................... 591 15,614 20,911 69,057 64,840
Long-term obligations...................... 629 5,851 1,827 29,029 2,407
Shareholders' equity (deficit)............. (49) (8) (155) 581 47,650
</TABLE>

28
<PAGE> 29

ITEM 7. 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 consolidated
financial statements and related notes thereto appearing elsewhere in this Form
10-K.

FORWARD-LOOKING INFORMATION

We have made forward-looking statements in this Report on Form 10-K. 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-K and our Prospectus dated
December 2, 1999, could cause our results to differ materially from those
expressed in our forward-looking statements. These factors include:

- our reliance on the fees generated by the transaction volume or product
sales of our clients;

- the impact of strategic alliances;

- trends in the market for our services;

- trends in e-commerce;

- whether we can continue and manage growth;

- changes in the trend toward outsourcing;

- increased competition;

- effects of changes in profit margins;

- the unknown effects of possible system failures and rapid changes in
technology;

- trends in government regulation; and

- our relationship with and separation from Daisytek.

We have based these statements on our current expectations about future
events. Although we believe that the expectations reflected in our
forward-looking statements are reasonable, we cannot guarantee you that these
expectations actually will be achieved. This report on Form 10-K also contains
other forward-looking statements, including those related to our anticipated
spin-off from Daisytek. Consummation of the spin-off is uncertain and
realization of the anticipated results could take longer than expected and
implementation difficulties and market factors could alter anticipated results.
In evaluating these statements, you should consider various factors, including
the risks set forth in the section entitled "Risk Factors" beginning on page 19.
These factors may cause our actual results to differ materially from any
forward-looking statements.

OVERVIEW

We are an international provider of transaction management services to both
traditional and e-commerce companies. We derive our revenues from a broad range
of services, including order management, Web-enabled customer care services,
billing services, information management, international fulfillment and
distribution services and professional consulting services. Our distribution
services are conducted at our warehouses and include picking, packing and
shipping our clients' customer orders. We offer our services as an integrated
solution, which enables our clients to outsource their complete transaction
management needs to a single source and to focus on their core competencies. We
currently provide transaction management services to over 30 clients that
operate in a range of vertical markets, including apparel, computer products,
printers, sporting goods, cosmetics and consumer electronics, among others.

29
<PAGE> 30

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 call center services and a per-item basis for fulfillment services.
Additional fees are billed for other services. We price our services based on a
variety of factors, including the depth and complexity of the services provided,
the amount of capital expenditures or systems customization required, the length
of contract and other factors. Many of our contracts with our clients involve
third-party vendors who provide additional services such as package delivery.
The costs we are charged by these third-party vendors for these services are
passed on to our clients (and, in many cases, our clients' customers) and are
not reflected in our revenue or expense. Historically, our services have also
included purchasing and reselling client product inventory. In these
arrangements, our product revenue was recognized at the time product was
shipped. During the quarter ended September 30, 1999, our primary client
agreement under which we previously purchased and sold inventory was
restructured to provide transaction management services only on a service fee
basis.

Our expenses are comprised of:

- on an historical basis, cost of product revenue, which consists of the
purchase price of product sold and net freight costs;

- cost of service fee revenue, which consists primarily of compensation and
related expenses for our Web-enabled customer care 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

- selling, general and administrative expenses, which consist primarily of
compensation and related expenses for sales and marketing staff,
executive, management and administrative personnel and other overhead
costs, including certain occupancy and information technology costs and
depreciation and amortization expenses. In addition, on an historical
basis, certain direct contract costs related to our IBM master
distributor agreements have been reflected as selling and administrative
expenses.

ADJUSTED FINANCIAL PRESENTATION

We believe our historical financial statements may not provide a meaningful
comparison to our future financial statements. This is because the financial
presentation of our operations in the future will be different from what they
have been historically, as described below.

In 1996, we entered into an agreement with the printer supplies division of
IBM. Under this agreement, we provided IBM with various transaction management
services, such as call center services and order fulfillment and distribution.
We also served as an IBM master distributor of printer supply products. Under
this master distributor arrangement, we purchased the printer supply products
from IBM and resold them to IBM customers. Following our initial agreement with
the printer supplies division, we entered into several similar agreements with
other divisions of IBM, both in the U.S. and Europe, and expanded our then
existing agreements to include more product lines.

During the quarter ended September 30, 1999, we, Daisytek and IBM entered
into new agreements to conform to our current business model. Under these new
agreements, Daisytek acts as the master distributor of the IBM products and we
will continue to provide various transaction management services. As part of
this restructuring, we transferred to Daisytek the IBM product inventory, which
we held as the master distributor, together with our customer accounts
receivable and our accounts payable owing to IBM in respect of the product
inventory. The purpose of the restructuring was to separate the master
distributor and transaction management responsibilities between ourselves and
Daisytek so that each could focus on its core competencies.

As a result of the restructuring of the IBM agreements, our historical
financial statements may not provide a meaningful comparison to our future
financial statements. This is because, as a master distributor under our prior
agreements, we recorded revenue as product revenue as we sold the product to IBM
customers. Similarly, our gross profit was based upon the difference between our
revenue from product sales
30
<PAGE> 31

and the cost of purchasing the product from IBM. In the future, however, our
revenue under the new IBM agreements will be service fee revenue that will be
payable by Daisytek and will be based upon a variable percentage of Daisytek's
gross profit arising from its IBM product sales.

As a result of this restructuring of our IBM agreements, our total revenues
arising under our new IBM agreements will be reduced, as compared to the total
revenues arising under the prior IBM agreements. However, our gross profit
margin as a percent of service fee revenue under the new IBM agreements is
anticipated to be significantly higher as compared to our gross profit margin as
a percent of product revenue under the prior IBM agreements.

In addition, upon completion of the Offering in December 1999, we entered
into a new transaction management services agreement with Daisytek. Under this
agreement, we receive service fee revenue based upon a percentage of Daisytek's
shipped product revenue. Consequently, our historical financial statements
reflect the service fee revenue we received from Daisytek under this new
agreement for only four months in fiscal 2000.

Additionally, upon completion of the Offering, Daisytek transferred to us
fixed assets and other assets which will be used in our business. We paid to
Daisytek a portion of the net proceeds of the Offering and assumed capital and
operating lease obligations related to these assets.

Our historical financial statements for fiscal 2000, also include
incremental costs on new contract implementations as well as certain incremental
charges.

In order to show how we will present our financial statements in the future
because of our new arrangements with IBM and Daisytek, we have set forth below
an unaudited adjusted presentation of our total historical revenue and cost of
revenue. This presentation shows, retroactively, what our service fee revenue
and cost of service fee revenue would have been if (i) our modified agreements
with IBM had been in effect during the periods presented, (ii) our new agreement
with Daisytek had been in effect for all of fiscal 1999 and 2000, (iii) our
acquisition of the assets and liabilities that Daisytek transferred to us upon
completion of the Offering had occurred as of the beginning of the periods
presented, and (iv) for adjustments to the costing methodology applied to
start-up activity on new client implementations and other modifications to
certain contracts.

<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR
ENDED ENDED
MARCH 31, MARCH 31,
1999 2000
----------- -----------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Service fee revenue......................................... $31,510 $46,003
Cost of service fee revenue................................. 18,525 29,815
Service fee gross profit.................................... 12,985 16,188
Service fee gross profit margin............................. 41.2% 35.2%
</TABLE>

Based on this presentation, our largest clients for fiscal 1999 would have
been Daisytek (65.1%), IBM (13.5%) and Emtec (10.3%), and our largest clients
for fiscal 2000 would have been Daisytek (43.7%) and IBM (15.9%). In calculating
these percentages, we have considered IBM as our client under our new IBM
agreements even though the service fees arising under these agreements are paid
by Daisytek.

We based the adjusted operating data on available information and certain
estimates and assumptions. We believe that such assumptions provide a reasonable
basis for presenting our results, adjusting for the transactions described
above. This adjusted financial information does not reflect what our operating
income or net income would have been during the periods presented or what our
results of operations may be in the future.

31
<PAGE> 32

RESULTS OF OPERATIONS

The following table sets forth certain historical financial information
from our audited consolidated statements of operations expressed as a percent of
revenues.

<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
----------------------------
1998 1999 2000
------ ------ ------
<S> <C> <C> <C>
Product revenue........................................... 92.8% 92.5% 64.4%
Service fee revenue....................................... 7.2 7.5 35.6
----- ----- -----
Total revenues.................................. 100.0 100.0 100.0
----- ----- -----
Cost of product revenue (as % of product revenue)......... 94.7 94.3 94.4
Cost of service fee revenue (as % of service fee
revenue)................................................ 62.4 70.5 76.1
----- ----- -----
Total costs of revenues......................... 92.4 92.5 87.9
----- ----- -----
Gross profit.............................................. 7.6 7.5 12.1
Selling, general and administrative expenses.............. 7.5 6.6 20.5
----- ----- -----
Income (loss) from operations............................. 0.1 0.9 (8.4)
Interest expense, net..................................... 0.3 0.4 0.5
----- ----- -----
Income (loss) before income taxes......................... (0.2) 0.5 (8.9)
Provision (benefit) for income taxes...................... 0.0 0.2 (2.0)
----- ----- -----
Net income (loss)......................................... (0.2)% 0.3% (6.9)%
===== ===== =====
</TABLE>

FISCAL YEAR ENDED MARCH 31, 2000 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1999

Product Revenue. Product revenue was $55.8 million for fiscal 2000 as
compared to $93.7 million for fiscal 1999. As stated above, during the quarter
ended September 30, 1999, we, Daisytek and IBM entered into new agreements
applicable to all of our IBM relationships. As a result of these agreements, the
activities performed under these contracts since that date were accounted for as
service fee revenue as opposed to product revenue. Prior to the impact of these
new agreements, product revenue had increased as compared to prior periods due
to the addition of our European IBM distribution agreement as well as growth
from the existing North America IBM master distributor agreements. In future
periods, we do not expect to have any product revenue.

Service Fee Revenue. Service fee revenue was $30.8 million for fiscal 2000
as compared to $7.5 million during fiscal 1999, an increase of $23.3 million or
308.5%. The increase in service fee revenues over prior periods was due to the
further expansion of existing contracts, the restructuring of all the IBM
contracts, and new service contract relationships, including our new transaction
management services agreement with Daisytek which commenced on the completion of
the Offering in December 1999. Service fee revenue from existing contracts
increased $1.3 million and new service contract relationships added $22.0
million for fiscal 2000. For fiscal 2000, new service fee revenue totaling $11.6
million is for fees earned from Daisytek under our new transaction management
services agreement, effective as of the Offering, and our new IBM contracts
that, prior to the September 1999 quarter, would have been reported as product
revenue.

Cost of Product Revenue. Cost of product revenue was $52.6 million for
fiscal 2000, as compared to $88.3 million during fiscal 1999, a decrease of
$35.7 million, or 40.4%. Cost of product revenue as a percent of product revenue
was 94.4% during fiscal 2000, and 94.3% during fiscal 1999. The resulting gross
profit margin was 5.6% and 5.7% for fiscal 2000 and 1999, respectively. As a
result of the new IBM arrangements, we do not expect to incur any cost of
product revenue in future periods.

Cost of Service Fee Revenue. Cost of service fee revenue was $23.5 million
for fiscal 2000, as compared to $5.3 million during fiscal 1999, an increase of
$18.2 million or 343.4%. The resulting service fee gross profit

32
<PAGE> 33

margin was 23.9% during fiscal 2000, and 29.5% during fiscal 1999. During fiscal
2000, cost of service fee revenue increased related to a large number of new
client implementations.

Gross Profit. Gross profit was $10.5 million, or 12.1% of revenues, for
fiscal 2000, as compared to $7.6 million, or 7.5% of revenues, for fiscal 1999.
The increase in total gross profit resulted primarily from the further expansion
of existing contracts and new service contract relationships, including our new
transaction management services agreement with Daisytek, which commenced on the
completion of the Offering in December 1999. The increase in gross profit as a
percentage of revenues resulted from the restructuring of all of the IBM
contracts into service fee contracts, which typically have a higher gross profit
margin as a percent of revenue as compared to the gross profit margin as a
percent of revenue earned under the IBM master distribution agreements. In the
Adjusted Financial Presentation data above, we have provided, retroactively,
what our service fee gross profit margin would have been considering the impact
of our modified agreement with IBM, our new agreement with Daisytek, our
acquisition of the assets and liabilities which Daisytek transferred to us upon
completion of the Offering and adjustments to the costing methodology applied to
start-up activity on new client implementations and other modifications to
certain contracts. The gross profit margin for fiscal 2000, would have been
35.2% after giving effect to these adjustments. Our service fee gross profit
margin in the future is targeted to be between 35-40%.

Selling, General and Administrative Expenses. SG&A expenses were $17.8
million for fiscal 2000, or 20.5% of revenues, as compared to $6.7 million, or
6.6% of revenues, for fiscal 1999. As a result of incremental costs, the
restructuring of the IBM agreements and the related reduction in product
revenue, SG&A expenses as a percentage of total revenue were higher in fiscal
2000 than in fiscal 1999. SG&A expenses increased as a result of costs incurred
to support the higher sales volumes under both new and existing contracts and
incremental investments in resources and technology to support our continued
growth. SG&A expenses also increased as a result of certain incremental charges
effected during fiscal 2000. In the future, while we anticipate that we will
continue to incur incremental costs as we make further SG&A investments in our
sales, marketing, and technology areas to support our growth strategies and as a
result of operating as a stand-alone public company, we are targeting our SG&A,
as a percent of sales, to decrease as we increase our service fee revenue.

Interest Expense, Net. Interest expense was $0.5 million for fiscal 2000 as
compared to $0.4 million for fiscal 1999. Interest expense increased as a result
of an increase in the average payable to Daisytek to support working capital
requirements applicable primarily to our master distributor agreements and for
capital expenditures, offset by interest income earned subsequent to the
Offering. The weighted average interest rate was 6.7% during fiscal 2000 and
1999. As indicated below, in December 1999, we used a portion of the funds from
the Offering to repay our intercompany payable balance to Daisytek and purchase
certain assets from Daisytek. The remaining available cash will be used for
future capital expenditures, general working capital needs and possible
acquisitions. To the extent that we have excess cash available, we expect to
generate interest income in future periods.

Income Taxes. Our income tax benefit as a percentage of pre-tax loss was
23.2% for fiscal 2000 as compared to an income tax provision as a percentage of
pre-tax income of 42.3% for fiscal 1999. We will continue to be included in
Daisytek's consolidated tax return for all periods in which Daisytek owns 80% or
more of our capital stock, or through the date of the spin-off from Daisytek. As
part of the tax sharing agreement entered into with Daisytek, we will be
reimbursed for any income tax benefit derived from our inclusion in the
consolidated return. However, any loss generated by us in Europe is not included
in the Daisytek consolidated return and may not be utilized at a consolidated
level. Accordingly, in fiscal 2000, we recorded a benefit for the pre-tax loss
generated in the U.S., however, because of our limited operating history in
Europe, it is uncertain whether it is "more likely than not" that we will be
able to utilize our European losses in future periods and therefore we did not
record an income tax benefit for those pre-tax losses. To the extent we have
future losses in Europe, it will continue to negatively impact our income tax
provision. Additionally, since we will cease to be included in Daisytek's
consolidated return upon completion of the spin-off and we have not established
a sufficient history of earnings, on a stand-alone basis, a valuation allowance
has been provided for the net deferred income tax asset as of March 31, 2000.
For fiscal 1999, the income tax

33
<PAGE> 34

percentage is impacted by the differences between our U.S. and foreign
subsidiaries, which are taxed at different rates.

FISCAL YEAR ENDED MARCH 31, 1999 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1998

Product Revenue. Product revenue was $93.7 million for fiscal 1999 compared
to $45.8 million for fiscal 1998, an increase of $47.9 million or 104.6%.
Product revenue increased as a result of an increase of $10.5 million under new
European IBM distributor agreements and an increase of $37.4 million or 81.7% in
sales under our North American IBM master distributor agreements.

Service Fee Revenue. Service fee revenue was $7.5 million during fiscal
1999 as compared to $3.5 million during fiscal 1998, an increase of $4.0 million
or 113.3%. The increase in service fee revenue was attributable to an increase
in existing contracts of $1.3 million or 37.1% and the addition of $2.7 million
related to new service contract relationships.

Cost of Product Revenue. Cost of product revenue was $88.3 million during
fiscal 1999 as compared to $43.4 million during fiscal 1998, an increase of
$44.9 million or 103.6%. Cost of product revenue as a percent of product revenue
was 94.3% for fiscal 1999 and 94.7% for fiscal 1998. The resulting product gross
profit margin was 5.7% for fiscal 1999 and 5.3% for fiscal 1998. The increase in
product gross profit margin was due to our European IBM business, which had a
higher gross profit margin than our domestic IBM business due to differences in
customer and product mix.

Cost of Service Fee Revenue. Cost of service fee revenue was $5.3 million
for fiscal 1999 compared to $2.2 million during fiscal 1998, an increase of $3.1
million or 141.1%. The increase in cost of service fee revenue during fiscal
1999 was due to growth in client orders processed during the period. The
resulting service fee gross profit margin was 29.5% during fiscal 1999 and 37.6%
during fiscal 1998. The decrease in service fee gross profit margin was due to
the addition of certain large contracts at lower gross profit margins and
incremental costs related to implementing several new contracts during fiscal
1999.

Gross Profit. Our gross profit was $7.6 million or 7.5% of revenues for
fiscal 1999 as compared to $3.7 million or 7.6% of revenues for fiscal 1998. In
the Future Financial Presentation data above, we have provided, retroactively,
what our service fee gross profit margin would have been considering the impact
of the new IBM and Daisytek agreements and our acquisition of the assets and
liabilities which Daisytek will transfer to us upon completion of this offering.
The gross profit margin for the year ended March 31, 1999 would have been 41.2%.

Selling, General and Administrative Expenses. SG&A expenses for fiscal 1999
were $6.7 million or 6.6% of revenues as compared to $3.7 million or 7.5% of
revenues for fiscal 1998. The increase in SG&A expenses for fiscal 1999 was a
result of costs incurred to support the growth in client orders processed under
both new and existing contracts. Incremental investments in resources and
technology to support our continued growth also contributed to increased SG&A
expenses.

Interest Expense, Net. Interest expense was $0.4 million during fiscal 1999
and $0.1 million during fiscal 1998. Interest expense increased as a result of
an increase in the average payable to Daisytek to support working capital
requirements applicable primarily to our master distributor agreements. The
weighted average interest rate was 6.7% during fiscal 1999 and 6.9% during
fiscal 1998.

Income Taxes. Our income tax expense as a percentage of pretax income was
42.3% for fiscal 1999 as compared to an income tax benefit as a percentage of
pretax loss of 28.6% for fiscal 1998. This difference resulted from a change in
the ratio of pretax income or loss between our U.S. and foreign subsidiaries
which are taxed at different rates, combined with certain nondeductible expenses
in fiscal 1998.

USE OF OFFERING PROCEEDS

In December 1999, PFSweb sold an aggregate of 3,565,000 shares of common
stock, $0.001 par value, in an initial public offering led by Hambrecht & Quist,
Dain Rauscher Wessels and Jefferies & Company, Inc., managing underwriters. The
Registration Statement on Form S-1 for the Offering was declared effective on

34
<PAGE> 35

December 2, 1999 (Commission File No. 333-87657). All of the securities
registered for the Offering were sold by the Company at an initial public
offering price of $17.00 per share.

The following sets forth certain information regarding the Offering as of
March 31, 2000 (in thousands):

<TABLE>
<S> <C> <C>
Gross offering proceeds..................................... $60,605
Offering expenses:
Underwriting discount..................................... 4,242
Expenses paid to or for underwriters...................... --
Other expenses............................................ 3,349
-----
Total offering expenses..................................... 7,591
-------
Net offering proceeds....................................... $53,014
=======
</TABLE>

All of such payments of Offering expenses were made to others, except that
James F. Reilly, a director of the Company, also serves as a Managing Director
of Hambrecht & Quist.

The following sets forth certain information regarding the use by the
Company of the net offering proceeds as of March 31, 2000 (in thousands).

<TABLE>
<S> <C>
Repayment of payable to Daisytek............................ $26,800
Acquisition of property and equipment and other assets from
Daisytek.................................................. 5,000
Working capital and temporary investments................... 21,214
-------
$53,014
=======
</TABLE>

The Company's temporary investments consist of commercial bank money market
accounts pending use of such funds for the Company's operations.

All of such payments of the Offering proceeds were made to others, except
for the payments to Daisytek, which is the holder of approximately 80% of the
Company's outstanding common stock.

LIQUIDITY AND CAPITAL RESOURCES

As a subsidiary of Daisytek, we have historically funded our business
through intercompany borrowings from Daisytek. The net proceeds of the Offering
were used to repay our intercompany borrowings from Daisytek. We currently
believe that the remaining net proceeds from the Offering and funds generated
from operations will satisfy our working capital and capital expenditure
requirements for the next twelve months. Daisytek has been prohibited from
advancing funds to us following the Offering, except in the normal course of
business. Accordingly, in order to provide additional financing flexibility in
the future, we plan to seek our own credit facility.

We had previously guaranteed an unsecured revolving line of credit with
commercial banks of Daisytek (the "Facility"). On October 29, 1999, Daisytek
amended the Facility. This amendment also provided for the release of us as
guarantor on the Facility upon (i) the effective date of the Offering of the
shares of common stock of PFSweb and (ii) the payment from PFSweb to Daisytek in
settlement of the outstanding payable to Daisytek. In satisfaction of these
conditions, we have been released from its guarantee.

Working capital increased to $28.0 million at March 31, 2000 from $14.6
million at March 31, 1999. The amount as of March 31, 2000 was primarily the
result of the Offering, which on a net basis, contributed approximately $20
million to working capital. A significant portion of our working capital needs
has historically been related to our master distributor agreements with IBM,
which required us to purchase and resell the product inventory to IBM customers.
Under our new agreements with IBM, Daisytek now acts as the master distributor
(and is responsible for the purchase and resale of the product inventory and
retains the customer revenue), and we continue to perform most of the other
transaction management services we had provided previously. As part of these new
IBM agreements, we now receive service fees from Daisytek for the transaction
management services that we provide. In connection with the restructuring of our
IBM

35
<PAGE> 36

agreements, during the quarter ended September 30, 1999, we transferred to
Daisytek the IBM-related product inventory, customer accounts receivable and
accounts payable that we held under our prior agreements. In consideration of
this transfer, Daisytek paid to us the net book value of these assets and
liabilities (approximately $20 million). As a result of the modification to the
IBM agreements and the proceeds raised from the Offering, our historical working
capital requirements prior to March 31, 2000, may not be indicative of our
future needs.

Net cash provided by financing activities was $24.0 million for fiscal
2000. In December 1999, we successfully completed our Offering and sold
3,565,000 shares of common stock, including the underwriters over-allotment, at
$17 per share. Net proceeds from the offering aggregated approximately $53.0
million. Proceeds were used to repay an intercompany payable to Daisytek of
approximately $27 million and to acquire from Daisytek all fixed assets in its
Memphis distribution facility, as well as certain assets providing information
technology services for approximately $5.0 million, and we received the stock of
several subsidiaries of Daisytek representing the business operations of PFSweb.
The remaining net proceeds are intended to be used for working capital, capital
expenditures, a portion of which may be financed through capital or operating
leases, and possible acquisitions. Net cash provided by financing activities was
$27.7 million for fiscal 1999. During fiscal 1999, cash provided by Daisytek was
used to fund the incremental financing of one of our client's inventory, our
capital expenditures and working capital requirements. Net cash used in
financing activities was $4.0 million in fiscal 1998, representing a repayment
to Daisytek.

Cash flows provided by operating activities totaled $10.6 million for
fiscal 2000 and primarily reflected a reduction in accounts payable and accrued
expenses of $25.0 million, accounts receivable of $8.3 million and inventory of
$29.9 million. These reductions primarily related to the transfer of the IBM
related working capital assets from us to Daisytek in conjunction with the new
IBM agreements. Net cash used in operating activities was $12.3 million for
fiscal 1999. Net cash provided by operating activities was $4.5 million for
fiscal 1998. Working capital requirements increased in fiscal 1999 compared to
fiscal 1998 primarily due to product revenue growth under our North American IBM
master distributor agreements. We also entered into new master distributor
agreements in December 1998 to provide services for IBM in Europe. Our North
American revenue growth, as well as the new European contracts, resulted in
significant increases in IBM contract related accounts receivable, inventory and
accounts payable.

Cash used in investing activities was $10.2 million for fiscal 2000. During
fiscal 2000, our capital expenditures totaled $21.2 million and included the
asset purchase from Daisytek at the completion of the Offering, our new Belgium
distribution facility, and the expansion of U.S. sales and distribution
facilities. Partially offsetting these capital expenditures was a reduction of
third-party financed inventory. Cash used in investing activities for fiscal
1999 totaled $14.9 million and was primarily a result of a long-term contractual
agreement with one of our clients pursuant to which, as part of the services
that we provide, we finance certain of the client's inventory. During fiscal
2000, this client provided notification that they intend to repay the
outstanding balance within the next twelve months. Capital expenditures were
$2.7 million for fiscal 1999 and $0.3 million for fiscal 1998. Capital
expenditures have historically consisted primarily of additions to upgrade our
management information systems, including our Internet-based customer tools,
other methods of e-commerce and general expansion of our facilities, both
domestic and foreign. We expect to incur significant capital expenditures in
order to support new contracts and anticipated future growth opportunities. We
anticipate that our total investment in upgrades and additions to facilities and
information technology services for calendar year 2000 will be approximately $7
to $10 million. Some of these expenditures may be financed through operating or
capital leases.

We believe that international markets represent further opportunities for
growth. We may consider entering into forward exchange contracts in order to
hedge our net investment in our Canadian or European operations or in other
international countries in which we establish a presence, although no assurance
can be given that we will be able to do so on acceptable terms.

In the future, we may attempt to acquire other businesses to expand our
services or capabilities in connection with our efforts to grow our business. We
currently have no binding agreements to acquire any such businesses. Should we
be successful in acquiring other businesses, we may require additional
financing.

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<PAGE> 37

Acquisitions involve certain risks and uncertainties. Therefore, we can give no
assurance with respect to whether we will be successful in identifying
businesses to acquire, whether we will be able to obtain financing to complete
an acquisition, or whether we will be successful in operating the acquired
business.

YEAR 2000 ISSUE

Daisytek and its subsidiaries (including PFSweb) completed its
identification, assessment and remediation of the year 2000 compliance issue
("Y2K") in December 1999. The total expenses incurred by Daisytek and its
subsidiaries (including PFSweb) related to Y2K was approximately $0.8 million,
which included both external costs, such as outside consultants, software and
hardware applications, as well as internal costs, primarily payroll related,
which are not reported separately. To date, the Company has not experienced any
material Y2K failures and to the best of its knowledge neither have any of its
significant clients or service providers. However, there can be no assurance
that in the future issues related to Y2K will not have a material adverse effect
on our financial condition or that of our significant clients or service
providers.

INVENTORY MANAGEMENT

Prior to September 30, 1999, our agreements with IBM were structured as
master distributor agreements. The transaction management services we provided
for IBM under these agreements included purchasing and reselling IBM product
inventory to IBM customers. During the quarter ended September 30, 1999, we
restructured our agreements with IBM so that we will no longer be purchasing or
reselling the IBM product inventory. In addition, we transferred to Daisytek the
IBM-related customer accounts receivables, inventory and accounts payable. We do
not expect to own product inventory in future periods.

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 as our business grows with consumer product
clients, our business activity will be more significant in the quarter ended
December 31.

We believe that results of operations for a quarterly period may not be
indicative of the results for any other quarter or for the full year.

INFLATION

Management believes that inflation has not had a material effect on our
operations.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires that an entity
recognize all derivative financial instruments as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. If certain conditions are met, a derivative may be used to hedge certain
types of transactions, including foreign currency exposures of a net investment
in a foreign operation. SFAS No. 133 is effective for fiscal years beginning
after June 15, 2000, with initial application as of the beginning of an entity's
fiscal quarter. SFAS No. 133. The Company is currently evaluating the provisions
of SFAS No. 133 and its effect on the accounting treatment of its financial
instruments.

During 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition." SAB No. 101 requires that
revenue generally is realized or realizable and earned when all of the following
criteria are met: (i) persuasive evidence of an arrangement exists, (ii)
delivery has occurred or services have been rendered, (iii) the seller's price
to the buyer is fixed or determinable, and (iv) collectibility is reasonably
assured. SAB No. 101 is effective for fiscal years beginning after December 15,
1999. The Company is currently evaluating the provisions of SAB No. 101 and its
effect, if any, on the Company's financial statements.

37
<PAGE> 38

ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The carrying value of the Company's financial instruments, which include
cash and cash equivalents and a capital lease obligation, approximate their fair
values based on current market price and rates.

We are subject to market risk associated with changes in foreign currency
exchange rates. In order to manage these risks, beginning in the year ended
March 31, 1999, certain of our risks were considered in Daisytek's corporate
risk management program, which included entering into certain forward currency
exchange contracts. We did not enter into any such contracts on our own.

Currently, our foreign currency exchange rate risk is primarily limited to
Canadian dollars and the Euro. In the future, we believe our foreign currency
exchange risk will also include other currencies applicable to certain of our
international operations. In order to mitigate foreign currency rate risk, we
will consider entering into forward currency exchange contracts to hedge our net
investment and long-term intercompany payable balances.

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<PAGE> 39

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... 40
Consolidated Balance Sheets as of March 31, 1999 and 2000... 41
Consolidated Statements of Operations for the Fiscal Years
Ended March 31, 1998, 1999 and 2000....................... 42
Consolidated Statements of Shareholders' Equity for the
Fiscal Years Ended March 31, 1998, 1999 and 2000.......... 43
Consolidated Statements of Cash Flows for the Fiscal Years
Ended March 31, 1998, 1999 and 2000....................... 44
Notes to Consolidated Financial Statements.................. 45
</TABLE>

39
<PAGE> 40

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of PFSweb, Inc.:

We have audited the accompanying consolidated balance sheets of PFSweb,
Inc. (a Delaware corporation) and subsidiaries (see Note 1) as of March 31, 1999
and 2000, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended March 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PFSweb, Inc. and
subsidiaries as of March 31, 1999 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
2000, in conformity with accounting principles generally accepted in the United
States.

ARTHUR ANDERSEN LLP

Dallas, Texas,
May 4, 2000 (except with respect to the
matters discussed in Note 11, as to which the
date is June 8, 2000)

40
<PAGE> 41

PFSWEB, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
MARCH 31,
-----------------
1999 2000
------- -------
<S> <C> <C>
ASSETS

CURRENT ASSETS:
Cash...................................................... $ 587 $24,896
Accounts receivable, net of allowance for doubtful
accounts of $635 and $690 at March 31, 1999 and 2000,
respectively........................................... 22,190 8,892
Other receivables......................................... -- 7,917
Inventories, net.......................................... 29,856 --
Prepaid expenses and other current assets................. 997 1,052
Deferred tax asset, net................................... 453 --
------- -------
Total current assets.............................. 54,083 42,757
------- -------
PROPERTY AND EQUIPMENT, net................................. 2,711 21,555
OTHER ASSETS................................................ 12,263 528
------- -------
Total assets...................................... $69,057 $64,840
======= =======

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Current portion of capital lease obligations.............. $ -- $ 274
Trade accounts payable.................................... 38,329 6,277
Payable to Daisytek....................................... -- 4,707
Accrued expenses.......................................... 1,118 3,525
------- -------
Total current liabilities......................... 39,447 14,783
------- -------
PAYABLE TO DAISYTEK......................................... 29,029 --
------- -------
CAPITAL LEASE OBLIGATIONS, less current portion............. -- 2,407
------- -------
COMMITMENTS AND CONTINGENCIES (Notes 6 and 8)
SHAREHOLDERS' EQUITY (Note 1):
Preferred stock, $1.00 par value; 1,000,000 shares
authorized; none issued and outstanding at March 31,
2000................................................... -- --
Common stock, $0.001 par value; 40,000,000 shares
authorized; 17,870,000 shares issued and outstanding at
March 31, 2000......................................... -- 18
Additional paid-in capital................................ -- 50,673
Retained deficit.......................................... -- (2,836)
Daisytek's net equity investment.......................... 712 --
Accumulated other comprehensive loss...................... (131) (205)
------- -------
Total shareholders' equity........................ 581 47,650
------- -------
Total liabilities and shareholders' equity........ $69,057 $64,840
======= =======
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

41
<PAGE> 42

PFSweb, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
----------------------------
1998 1999 2000
------- -------- -------
<S> <C> <C> <C>
REVENUES (Note 6):
Product revenue........................................... $45,804 $ 93,702 $55,778
Service fee revenue....................................... 3,539 7,547 30,829
------- -------- -------
Total revenues.................................... 49,343 101,249 86,607
------- -------- -------
COSTS OF REVENUES:
Cost of product revenue................................... 43,392 88,335 52,639
Cost of service fee revenue............................... 2,208 5,323 23,475
------- -------- -------
Total costs of revenues........................... 45,600 93,658 76,114
------- -------- -------
Gross profit...................................... 3,743 7,591 10,493
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 3,705 6,711 17,764
------- -------- -------
Income (loss) from operations.......................... 38 880 (7,271)
INTEREST EXPENSE, net....................................... 143 374 459
------- -------- -------
Income (loss) before income taxes...................... (105) 506 (7,730)
PROVISION (BENEFIT) FOR INCOME TAXES........................ (30) 214 (1,791)
------- -------- -------
NET INCOME (LOSS)........................................... $ (75) $ 292 $(5,939)
======= ======== =======
NET INCOME (LOSS) PER SHARE:
Basic and diluted......................................... $ (0.01) $ 0.02 $ (0.38)
======= ======== =======
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic and diluted......................................... 14,305 14,305 15,479
======= ======== =======
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

42
<PAGE> 43

PFSweb, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
DAISYTEK'S OTHER
COMMON STOCK ADDITIONAL NET COMPREHENSIVE TOTAL
-------------------- PAID-IN RETAINED EQUITY INCOME SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT INVESTMENT (LOSS) EQUITY
---------- ------- ---------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1997............. -- $ -- $ -- $ -- $ (25) $ 17 $ (8)
Net loss............................ -- -- -- -- (75) -- (75)
Other comprehensive loss -- foreign
currency translation adjustment... -- -- -- -- -- (72) (72)
---------- ------- ------- ------- ------- ------- -------
Comprehensive loss..................
Balance, March 31, 1998............. -- -- -- -- (100) (55) (155)
Net income.......................... -- -- -- -- 292 -- 292
Contributed capital................. -- -- -- -- 520 -- 520
Other comprehensive loss -- foreign
currency translation adjustment... -- -- -- -- -- (76) (76)
---------- ------- ------- ------- ------- ------- -------
Comprehensive income................
Balance, March 31, 1999............. -- -- -- -- 712 (131) 581
Net loss prior to initial public
offering.......................... -- -- -- -- (3,103) -- (3,103)
Contribution of Daisytek's net
equity investment................. -- -- (2,391) -- 2,391 -- --
Net loss subsequent to initial
public offering................... -- -- -- (2,836) -- -- (2,836)
Issuance of common stock to
Daisytek.......................... 14,305,000 14 6 -- -- -- 20
Initial public offering, net of
issuance costs.................... 3,565,000 4 53,010 -- -- -- 53,014
Stock based compensation expense.... -- -- 48 -- -- -- 48
Other comprehensive loss -- foreign
currency translation adjustment... -- -- -- -- -- (74) (74)
---------- ------- ------- ------- ------- ------- -------
Comprehensive loss..................
Balance, March 31, 2000............. 17,870,000 $ 18 $50,673 $(2,836) $ -- $ (205) $47,650
========== ======= ======= ======= ======= ======= =======

COMPREHENSIVE
INCOME
(LOSS)
-------------
<S> <C>
Balance, March 31, 1997.............
Net loss............................ $ (75)
Other comprehensive loss -- foreign
currency translation adjustment... (72)
-------
Comprehensive loss.................. $ (147)
=======
Balance, March 31, 1998.............
Net income.......................... $ 292
Contributed capital.................
Other comprehensive loss -- foreign
currency translation adjustment... (76)
-------
Comprehensive income................ $ 216
=======
Balance, March 31, 1999.............
Net loss prior to initial public
offering.......................... $(3,103)
Contribution of Daisytek's net
equity investment.................
Net loss subsequent to initial
public offering................... (2,836)
Issuance of common stock to
Daisytek..........................
Initial public offering, net of
issuance costs....................
Stock based compensation expense....
Other comprehensive loss -- foreign
currency translation adjustment... (74)
-------
Comprehensive loss.................. $(6,013)
=======
Balance, March 31, 2000.............
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

43
<PAGE> 44

PFSWEB, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
-----------------------------
1998 1999 2000
------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ (75) $ 292 $ (5,939)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 63 275 2,373
Provision for doubtful accounts........................ 299 344 458
Deferred income tax (benefit) provision................ (222) (192) 453
Non-cash compensation expense.......................... -- -- 48
Changes in operating assets and liabilities:
Accounts and other receivables....................... (3,640) (13,615) 8,324
Inventories, net..................................... (1,413) (18,630) 29,856
Prepaid expenses and other current assets............ -- (1,001) (55)
Accounts payable and accrued expenses................ 9,487 20,231 (24,954)
------- -------- --------
Net cash provided by (used in) operating activities.... 4,499 (12,296) 10,564
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (294) (2,658) (18,521)
(Increase) decrease in other assets....................... -- (12,264) 8,358
------- -------- --------
Net cash used in investing activities.................. (294) (14,922) (10,163)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution...................................... -- 520 --
Issuance of common stock to Daisytek...................... -- -- 20
Net proceeds from initial public offering of common
stock.................................................. -- -- 53,014
Repayment on capital lease obligations.................... -- -- (15)
Increase (decrease) in payable to Daisytek................ (4,034) 27,202 (29,029)
------- -------- --------
Net cash provided by (used in) financing activities.... (4,034) 27,722 23,990
------- -------- --------
EFFECT OF EXCHANGE RATES ON CASH............................ (62) (30) (82)
------- -------- --------
NET INCREASE IN CASH........................................ 109 474 24,309
CASH, beginning of period................................... 4 113 587
------- -------- --------
CASH, end of period......................................... $ 113 $ 587 $ 24,896
======= ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Fixed assets acquired under capital leases................ $ -- $ -- $ 2,696
======= ======== ========
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

44
<PAGE> 45

PFSWEB, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. OVERVIEW AND BASIS OF PRESENTATION:

In June 1999, Daisytek International Corporation ("Daisytek") created a
separate wholly-owned subsidiary named PFSweb, Inc. (the "Company" or "PFSweb"),
a Delaware corporation, to become a holding company for certain of Daisytek's
wholly-owned subsidiaries ("PFS") in contemplation of an initial public offering
(the "Offering") of PFSweb. Daisytek contributed $20,000 for 14,305,000 shares
of common stock of PFSweb. In December 1999, PFSweb sold 3,565,000 shares of
common stock, including the underwriters' over-allotment, at a price of $17 per
share. Net proceeds from the Offering aggregated approximately $53.0 million and
were used to repay its payable to Daisytek and to acquire from Daisytek all
fixed assets in its Memphis distribution facility, as well as certain assets
providing information technology services for approximately $5.0 million (see
Notes 3 and 6). The remaining net proceeds are intended to be used for capital
expenditures, a portion of which may be financed through capital, or operating
leases, for general working capital, and possible acquisitions. Simultaneous
with the completion of the Offering, Daisytek contributed to PFSweb all the
assets, liabilities and equity comprising PFS. Prior to the Offering, the
financial position, results of operations and cashflows of PFS were referred to
as the combined financial statements of PFSweb. Subsequent to the Offering and
for all periods presented herein, the financial position, results of operations
and cash flows of the Company are referred to as the consolidated financial
statements of PFSweb, Inc. and subsidiaries.

PFSweb is an international provider of transaction management services to
both traditional and e-commerce companies in the United States, Canada and
Europe. The company offers such services as order management, Web-enabled
customer care services, billing and collection services, information management,
international fulfillment and distribution services and professional consulting
services.

Daisytek, which currently owns 14,305,000 shares of PFSweb's common stock,
representing approximately 80.1% of the total outstanding shares, has announced
that it plans to divest its interest in PFSweb. The divestiture involves
Daisytek distributing to holders of its common stock all of its interest in
PFSweb through a spin-off transaction in which the shares of PFSweb will be
distributed to Daisytek common stockholders on a pro-rata basis (see Note 11).

The accompanying consolidated financial statements are presented on a
carve-out basis and reflect the consolidated historical results of operations,
financial position and cash flows of the Company. For all periods presented,
certain expenses reflected in the consolidated financial statements include an
allocation of certain Daisytek corporate expenses and infrastructure costs.
Management believes that the methods used to allocate expenses are reasonable,
although the cost of services could be higher if obtained from other sources. In
addition, certain service fee revenue and cost of service fee revenue have been
reflected by PFSweb for services subcontracted to PFSweb by Daisytek. The
service fee revenue, cost of service fee revenue and allocated expenses have
been reflected on bases that Daisytek and PFSweb consider to be a reasonable
reflection of the services provided and revenue earned by PFSweb and the
utilization of services provided by Daisytek and the benefit received by PFSweb.
The financial information included herein may not reflect the consolidated
financial position, operating results, shareholders' equity and cash flows of
PFSweb in the future or what it would have been had PFSweb been a separate,
stand-alone entity during the periods presented (see Note 6).

2. SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation

The consolidated financial statements include the accounts and the
historical results of operations and cash flows of PFSweb during each respective
period. All significant PFSweb intercompany accounts and transactions have been
eliminated.

45
<PAGE> 46
PFSWEB, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Use of Estimates

The preparation of consolidated financial statements in conformity with
generally accepted accounting principles 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. The allocation of certain expenses (see Notes 1 and 6) in
these financial statements required management estimates and assumptions. Actual
results could differ from those estimates.

Revenue Recognition

The Company recognized product revenue upon shipment of product to
customers and provided for estimated returns and allowances. The Company's
service fee revenues are recognized at the time the service is provided to its
client. Certain contracts involve third-party vendors who provide services such
as package delivery. The costs incurred by the Company related to such
third-party services are passed on to clients and are not reflected in revenue
or expense.

Costs of Revenues

The Company recognized cost of product revenue upon shipment of product to
customers. The Company's cost of service fee revenue is recognized as incurred
and represents costs incurred to provide services under fee-based contracts,
including salaries, shipping supplies, and facility costs.

Concentration of Business and Credit Risk

All of the Company's product revenue for fiscal 1998, 1999 and 2000, was
generated by sales of product purchased under master distributor agreements with
one supplier. Product and service fee revenue from Daisytek accounted for
approximately 22%, 13% and 22% of the Company's total revenues for fiscal 1998,
1999 and 2000, respectively. No other client accounted for 10% or more of the
Company's revenue during such periods. As of March 31, 1999, one customer
accounted for approximately 23% of accounts receivable. As of March 31, 2000,
four customers accounted for over 75% of trade accounts receivable on an
aggregate basis.

Reclassifications

Certain prior year data has been reclassified to conform to the current
period presentation. These reclassifications had no effect on previously
reported net income, shareholders' equity or net cash flows.

Cash and Cash Equivalents

Cash equivalents are defined as short-term highly liquid investments with
original maturities of three months or less.

Accounts Receivable

Accounts receivable include outstanding trade accounts receivables as well
as certain unbilled amounts owed to PFSweb by clients in accordance with
contracts. The amount of unbilled receivables at March 31, 1999 and 2000 was
approximately $2.7 million and $0.2 million, respectively.

Other Receivables

During fiscal 1999, the Company entered into a long-term contractual
agreement whereby the Company finances certain inventory owned by a client of
the Company. The Company warehouses this client inventory and distributes it
upon the sale to third parties by the client, who controls the disposition of
this inventory. As

46
<PAGE> 47
PFSWEB, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of March 31, 1999, other assets included approximately $12.1 million related to
this receivable. During fiscal 2000, this client provided notification to the
Company of its intention to repay the outstanding balance within the next twelve
months. As of March 31, 2000, other receivables included approximately $3.4
million related to this receivable. In addition to service fees, the Company
charges the client an asset management fee, a portion of which results in
interest income.

Other receivables, as of March 31, 2000, also includes approximately $4.5
million of receivables from European governments for refunds of Value Added
Taxes ("VAT") paid under our new service agreements applicable to our IBM
relationships.

Inventories

Inventories (merchandise held for resale, all of which are finished goods)
are stated at the lower of weighted average cost or market. During the quarter
ended September 30, 1999, the Company transferred to Daisytek all of its
inventory (see Note 6) and as of March 31, 2000, the Company does not own any
inventory.

Property and Equipment

The components of property and equipment as of March 31, 1999 and 2000 are
as follows (in thousands):

<TABLE>
<CAPTION>
FISCAL YEARS ENDED
MARCH 31,
------------------
1999 2000
------- --------
<S> <C> <C>
Furniture and fixtures...................................... $ 907 $11,933
Computer equipment.......................................... 803 3,725
Leasehold improvements...................................... 32 3,472
Capitalized software costs.................................. 1,100 4,772
Other....................................................... 199 356
------ -------
3,041 24,258
Less-accumulated depreciation and amortization............ (330) (2,703)
------ -------
Property and equipment, net....................... $2,711 $21,555
====== =======
</TABLE>

Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the respective assets
which range from three to ten years.

The Company periodically evaluates whether events or circumstances have
occurred that indicate that long-lived assets may not be recoverable or that the
remaining useful life may warrant revision. When such events or circumstances
are present, the Company assesses the recoverability of long-lived assets by
determining whether the carrying value will be recovered through the expected
undiscounted future cash flows. In the event the sum of the expected
undiscounted future cash flows resulting from the use of the asset is less than
the carrying value of the asset, an impairment loss equal to the excess of the
asset's carrying value over its fair value is recorded. To date no such
impairment has been recognized.

Foreign Currency Translation and Transactions

For the Company's Canadian operations, the local currency is the functional
currency. All assets and liabilities are translated at exchange rates in effect
at the end of the period, and income and expense items are translated at the
average exchange rates for the period. Translation adjustments are reported as a
separate component of shareholder's equity.

For the Company's European operations, the U.S. dollar is the functional
currency. Monetary assets and liabilities are translated at the rates of
exchange on the balance sheet date and certain assets (notably

47
<PAGE> 48
PFSWEB, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

inventory, and property and equipment) are translated at historical rates.
Income and expense items are translated at average rates of exchange for the
period except for those items of expense, which relate to assets, which are
translated at historical rates. The gains and losses from foreign currency
transactions and translation related to these subsidiaries are included in net
income and have not been material.

Income Taxes

In accordance with Statement of Financial Accounting Standards ("SFAS") No.
109 "Accounting for Income Taxes", deferred taxes reflect the impact of
temporary differences between the amount of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws and regulations.
These differences relate primarily to provisions for doubtful accounts, book
versus tax depreciation differences, and certain accrued expenses deducted for
book purposes but not yet deductible for tax purposes. In accordance with SFAS
No. 109, a valuation allowance must be provided when it is more likely than not
that the deferred income tax asset will not be realized (see Note 7).

Fair Value of Financial Instruments

The Company estimates fair value based on market information and
appropriate valuation methodologies. Fair value is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation. The fair values of all financial
instruments approximate their carrying amounts in the accompanying consolidated
balance sheets.

Comprehensive Income (Loss)

Comprehensive income (loss) is defined as the change in equity (net assets)
of a business enterprise during a period from transactions and other events and
circumstances from non-owner sources. It consists of net income (loss) and other
gains and losses affecting shareholders' equity that, under generally accepted
accounting principles, are excluded from net income, such as unrealized gains
and losses on investments available for sale, foreign currency translation gains
and losses and minimum pension liability. Currency translation and other
derivative foreign currency exchange contracts are the only items of other
comprehensive income impacting the Company.

Net Income (Loss) Per Common Share

The Company computed net income (loss) per share in accordance with SFAS
No. 128 "Earnings Per Share." Basic and diluted net income (loss) per share
attributable to PFSweb was determined based on net income (loss) divided by the
14,305,000 shares of PFSweb, Inc. (see Note 1) outstanding prior to the
Offering, which was consummated in fiscal 2000. For purposes of the net income
(loss) per share calculation, the shares outstanding prior to the Offering are
treated as outstanding for all periods presented. There were no potentially
dilutive securities outstanding during the periods presented prior to the
Offering. For fiscal 2000, outstanding options to purchase common shares of
PFSweb were anti-dilutive and have been excluded from the weighted average share
computation.

Adoption of New Accounting Standards

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company is currently evaluating the provisions of SFAS No. 133 and its effect on
the accounting treatment of its financial instruments.

Cash Paid During Year

The Company made payments for interest of approximately $0, $16,000 and
$3,514,000 and income taxes of approximately $139,000, $269,000 and $6,000
during fiscal 1998, 1999 and 2000, respectively (see Notes 3 and 7). Unpaid
taxes payable and intercompany accrued interest are included in the payable to
Daisytek as of March 31, 1999. The Company's income tax receivable and
intercompany accrued interest are included in the payable to Daisytek as of
March 31, 2000.

3. PAYABLE TO DAISYTEK:

Funds advanced by Daisytek to fund the Company's working capital
requirements and certain investment activities have been reflected as an
intercompany payable as of March 31, 1999. Interest expense charged by Daisytek
was based on its weighted average interest rates of 6.9%, 6.7% and 6.7% and
approximated $497,000, $1,039,000 and $1,688,000 for fiscal 1998, 1999 and 2000,
respectively.

During fiscal 2000, PFSweb used a portion of the proceeds from the Offering
to repay its payable to Daisytek. Following the completion of the Offering,
Daisytek is prohibited from advancing funds to PFSweb, except in the normal
course of business, and PFSweb will be restricted from borrowing from Daisytek
following the spin-off. As of March 31, 2000, the payable to Daisytek reflects
payables incurred in the normal course of business and includes approximately
$4.5 million related to VAT, for which the Company has corresponding receivables
from European governments (see Note 2).

4. CAPITAL LEASE OBLIGATIONS:

During fiscal 2000, the Company entered into certain non-cancelable capital
lease agreements involving warehouse and computer equipment. The Company's
property held under capital leases, included in furniture, fixtures and
equipment in the accompanying consolidated balance sheets, amounted to
approximately $2.7 million, net of accumulated amortization at March 31, 2000.

The following is a schedule of future minimum lease payments under the
capital leases together with the present value of the net minimum lease payments
as of March 31, 2000 (in thousands):

<TABLE>
<S> <C>
Fiscal year ended March 31,
2001...................................................... $ 442
2002...................................................... 506
2003...................................................... 506
2004...................................................... 493
2005...................................................... 425
Thereafter................................................ 1,310
-------
Total minimum lease payments.............................. $ 3,682
Less: Amount representing interest........................ (1,001)
-------
Present value of net minimum lease payments............... 2,681
Less: Current installments................................ (274)
-------
Long-term capital lease obligations....................... $ 2,407
=======
</TABLE>

49
<PAGE> 50
PFSWEB, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. STOCK OPTIONS:

PFSweb has authorized 6,000,000 shares of common stock for issuance under
two 1999 stock option plans and 35,000 shares under a stock option agreement
(the "PFSweb Plans"). The PFSweb Plans, which are currently administered by the
Compensation Committee of the Board of Directors of PFSweb provide for the
granting of incentive awards in the form of stock options to directors,
executive management, key employees, and outside consultants of PFSweb. The
right to purchase shares under the stock option agreements typically vest over a
three-year period. Stock options must be exercised within 10 years from the date
of grant. Stock options are generally issued at fair market value. In July 1999,
PFSweb issued options to purchase 35,000 common shares at $10.45 to a
non-employee of the Company.

The following table summarizes stock option activity under the PFSweb
Plans:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES PRICE PER SHARE EXERCISE PRICE
--------- --------------- ----------------
<S> <C> <C> <C>
Outstanding, March 31, 1999............... -- $ -- $ --
Granted................................. 1,425,000 $10.45 - $17.00 $10.69
Exercised............................... -- $ -- $ --
Canceled................................ (63,500) $10.45 - $13.00 $10.77
---------
Outstanding, March 31, 2000............. 1,361,500 $10.45 - $17.00 $10.69
=========
</TABLE>

All of these options are subject to a three-year vesting schedule under
which no options vest for three years, subject to acceleration, in part, upon
completion of the spin-off of PFSweb from Daisytek. After the spin-off, options
vest one-third on the anniversary of the date of grant and one-twelfth each
quarter thereafter (see Note 11). The weighted average fair value of options
granted during fiscal 2000 was $5.50. The weighted average remaining contractual
life of outstanding options is 9.3 years. Additionally, certain of the Company's
employees have been granted Daisytek stock options. These options, which may
convert to PFSweb stock options at the spin-off date, are described below.

Prior to the Offering and spin-off transaction described in Note 1, certain
of the Company's employees were granted Daisytek stock options under Daisytek's
stock option compensation plans (the "Daisytek Plans"). The purpose of the Plans
is to benefit and advance the interests of Daisytek by rewarding officers and
certain key employees for their contributions to the financial success of
Daisytek and thereby motivating them to continue to make such contributions in
the future. The Daisytek Plans provide for fixed grants of both incentive stock
options and nonqualified stock options. The stock options generally vest over a
three to five-year period from the date of grant and expire 10 years after the
date of grant.

50
<PAGE> 51
PFSWEB, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes stock option activity under the Daisytek
Plans as it relates to PFSweb employees:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES PRICE PER SHARE EXERCISE PRICE
--------- --------------- ----------------
<S> <C> <C> <C>
Outstanding, March 31, 1997.................. 802,684 $0.64 - $16.25 $ 8.72
Granted.................................... 570,370 $12.50 - $19.63 $12.87
Exercised.................................. (252,436) $0.64 - $ 9.75 $ 2.47
Canceled................................... (296,442) $9.75 - $16.25 $15.80
---------
Outstanding, March 31, 1998.................. 824,176 $0.64 - $19.63 $10.96
Granted.................................... 1,807,886 $12.88 - $22.88 $15.13
Exercised.................................. (108,832) $0.64 - $12.50 $ 3.41
Canceled................................... (146,739) $9.75 - $22.88 $16.05
---------
Outstanding, March 31, 1999.................. 2,376,491 $2.65 - $22.88 $14.16
Granted.................................... 29,500 $10.94 - $13.56 $11.06
Exercised.................................. (48,649) $2.65 - $12.50 $11.00
Canceled................................... (33,550) $10.94 - $22.88 $12.84
---------
Outstanding, March 31, 2000.................. 2,323,792 $9.75 - $22.88 $14.21
=========
</TABLE>

The weighted average fair values of options granted during fiscal 1998,
1999 and 2000, were $7.05, $7.68 and $5.26, respectively. As of March 31, 1998,
1999 and 2000, 183,956, 243,747, and 680,100, respectively, of options
outstanding were exercisable. The weighted average exercise price of exercisable
options outstanding at March 31, 1998, 1999 and 2000 were $5.74, $10.44 and
$12.73, respectively. The remaining options will become exercisable over the
next four years based on vesting percentages.

The following table summarizes information concerning currently outstanding
and exercisable Daisytek stock options issued under the Daisytek Plans to PFSweb
employees at March 31, 2000:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ----------------------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF OUTSTANDING AS OF REMAINING AVERAGE EXERCISABLE AS OF AVERAGE
EXERCISE PRICES MARCH 31, 2000 CONTRACTUAL LIFE EXERCISE PRICE MARCH 31, 2000 EXERCISE PRICE
--------------- ----------------- ---------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
$ 9.75 - $14.06 1,921,595 8.1 $12.53 619,345 $11.81
$15.50 - $22.88 402,197 8.2 $22.21 60,755 $22.17
</TABLE>

The Company has adopted the disclosure-only provisions of SFAS 123,
"Accounting for Stock-Based Compensation." In accordance with the provisions of
SFAS 123, the Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for the PFSweb Plans and the Daisytek Plans and accordingly, does not
recognize compensation expense for its stock option plans because the Company
and Daisytek typically do not issue options at exercise prices below the market
value at the date of grant. Had compensation expense for the PFSweb Plans and
the Daisytek Plans applicable to the Company's employees been determined based
upon the fair value at the grant date for awards consistent with the methodology
prescribed by SFAS 123, the Company's consolidated pretax income would have
decreased by approximately $787,000, $2,531,000 and $5,352,000 in fiscal 1998,
1999 and 2000, respectively, and would have resulted in a net loss per share of
($0.06), ($0.16) and ($0.73) in fiscal 1998, 1999, and 2000, respectively. These
pro forma effects may not be representative of expense in future periods since
the estimated fair value of stock options on the date of grant is amortized to
expense over the vesting period. Additional options may be granted in future
years. Options issued under the Daisytek Plans prior to April 1, 1995, were
excluded from the computation.

51
<PAGE> 52
PFSWEB, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used for
grants of Daisytek options to PFSweb employees under the Daisytek Plans in
fiscal 1998: no dividends, expected volatility ranging between 40.97% and
41.40%; risk-free interest rate ranging between 5.6% and 6.8%; and expected life
of 6 years. The following assumptions were used for grants of Daisytek options
to PFSweb employees under the Daisytek Plans during fiscal 1999: no dividends,
expected volatility ranging between 41.42% and 47.92%; risk-free interest rate
ranging between 4.6% and 5.5%; and expected life of 6 years. The following
assumptions were used for grants of Daisytek options to PFSweb employees under
the Daisytek Plans during fiscal 2000: no dividends; expected volatility between
49.37% and 50.02%; risk-free interest rate ranging between 5.7% and 6.0%; and
expected life of 6 years. The following assumptions were used for PFSweb options
granted under the PFSweb Plans during fiscal 2000: no dividends; expected
volatility between 45.00% and 84.23%; risk-free interest rate between 5.5% and
6.2%; and expected life of 6 years.

In connection with the completion of the spin-off (see Note 11), all
outstanding Daisytek stock options will be replaced with substitute stock
options as described below:

In general, the adjustments to the outstanding Daisytek options will be
established pursuant to a formula designed to ensure that: (1) the aggregate
"intrinsic value" (i.e. the difference between the exercise price of the option
and the market price of the common stock underlying the option) of the
substitute options will not exceed the aggregate intrinsic value of the
outstanding Daisytek stock options which are replaced by such substitute option
immediately prior to the spin-off, and (2) the ratio of the exercise price of
the options to the market value of the underlying stock immediately before and
after the spin-off is preserved.

No adjustment or replacement will be made to outstanding PFSweb stock
options as a result of the spin-off.

6. TRANSACTIONS WITH DAISYTEK AND OTHER RELATED PARTIES:

The Company's product revenue from sales to Daisytek was $10.7 million,
$12.4 million and $7.2 million in fiscal 1998, 1999 and 2000, respectively.

The Company's costs and expenses include allocations from Daisytek for
certain general administrative services including information technology,
financial, treasury, legal, insurance and other corporate functions as

52
<PAGE> 53
PFSWEB, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

well as certain costs of operations including facility charges. These
allocations have been estimated on bases that Daisytek and the Company consider
to be a reasonable reflection of the utilization of services provided or the
benefit received by the Company. The methods used for allocation of expenses
from Daisytek were either (i) percentage of: revenue, shipped orders, or number
of employees, or (ii) management's best estimate. However, these allocations of
costs and expenses do not necessarily indicate the costs and expenses that would
have been or will be incurred by the Company on a stand-alone basis. Management
estimates that incremental selling, general and administrative expenses
associated with PFSweb operating as a stand-alone publicly traded company,
including executive management, overhead and public company costs, insurance and
risk management costs, and other costs would have been approximately $2.0
million for fiscal 1998, 1999, and 2000.

During the quarter ended September 30, 1999, and in connection with the
restructuring of certain IBM master distribution agreements, the Company
transferred to Daisytek certain related product inventory, accounts receivable
and accounts payable that it held under its prior agreements. In consideration
of this transfer, the Company received the net book value of these assets and
liabilities of approximately $20 million and reduced its payable to Daisytek by
a corresponding amount.

In conjunction with the successful completion of the Offering, PFSweb
entered into agreements with Daisytek, including a tax sharing agreement, a
transaction management services agreement, transition services agreement and a
master separation agreement which are expected to have a significant impact on
the financial position and results of operations of PFSweb. In addition, on a
going forward basis, Daisytek will continue to be an obligor for certain of the
Company's facility and equipment leases.

Included in the financial statements are service fee revenues and cost of
service fee revenues which have been reflected by PFSweb for certain services
subcontracted to PFSweb by Daisytek under Daisytek's contractual agreements.

Service fee revenues charged to Daisytek under (i) the new IBM contracts,
entered into during the quarter ended September 30, 1999, (ii) terms of the
transaction management services agreement with Daisytek and (iii) for certain
subcontracted services, were $12.1 million for fiscal 2000. Service fee revenues
applicable to the subcontracted service were $0.5 million and $0.8 million in
fiscal 1998 and 1999, respectively.

In May 1999, the Company entered into an agreement to provide services to a
certain company. An executive officer and a director of PFSweb both served on
the Board of Directors of this company. Service fee revenue earned from this
company was approximately $1.8 million for fiscal 2000.

PFS had previously guaranteed an unsecured revolving line of credit with
commercial banks of Daisytek (the "Facility"). On October 29, 1999, Daisytek
amended the Facility. This amendment also provided for the release of PFS as
guarantor on the Facility upon (i) the effective date of the Offering of the
shares of common stock of PFSweb and (ii) the payment from PFSweb to Daisytek in
settlement of the outstanding payable to Daisytek. In satisfaction of these
conditions, PFS has been released from its guarantee. Additionally, this
amendment also prohibits Daisytek from advancing funds to PFSweb following the
completion of the Offering, except in the normal course of business.

A non-employee director of PFSweb, is a Managing Director of Hambrecht and
Quist LLP, one of the lead managing underwriters on the Offering.

7. INCOME TAXES:

The Company's operations have been included in consolidated income tax
returns filed by Daisytek. If Daisytek or other members of the consolidated
group fail to make tax payments required by law, PFSweb would be liable for any
shortfall. The provision for income taxes reflected in the consolidated
statements of operations and the deferred tax assets reflected in the
consolidated balance sheets have been prepared as

53
<PAGE> 54
PFSWEB, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

computed on a separate return basis. The current income tax liability or
receivable for the periods presented have been included in the payable to
Daisytek.

A reconciliation of the difference between the expected income tax
provision at the U.S. federal statutory corporate tax rate of 34%, and the
Company's effective tax rate is as follows (in thousands):

<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
------------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Provision (benefit) computed at statutory rate.......... $ (36) $ 172 $(2,628)
Impact of foreign taxation at different rate............ 6 16 (24)
State income taxes, net of federal tax impact........... (4) 21 51
Expenses not deductible for tax purposes................ 5 11 84
Net operating loss carryback............................ -- -- (171)
Change in valuation reserve............................. -- -- 915
Other................................................... (1) (6) (18)
------- ------- -------
Provision (benefit) for income taxes.......... $ (30) $ 214 $(1,791)
======= ======= =======
</TABLE>

The consolidated income (loss) before income taxes, by domestic and foreign
entities, is as follows (in thousands):

<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
-----------------------------
1998 1999 2000
------- ------- ---------
<S> <C> <C> <C>
Domestic................................................... $(155) $ (45) $(5,331)
Foreign.................................................... 50 551 (2,399)
----- ----- -------
Total............................................ $(105) $ 506 $(7,730)
===== ===== =======
</TABLE>

The provision (benefit) for income taxes is summarized as follows (in
thousands):

<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
-----------------------------
1998 1999 2000
------- ------- ---------
<S> <C> <C> <C>
Current
Domestic................................................. $ 160 $ 268 $(2,150)
State.................................................... 9 33 77
Foreign.................................................. 23 105 (171)
----- ----- -------
Total current.................................... 192 406 (2,244)
Deferred
Domestic................................................. (208) (175) 453
State.................................................... (14) (17) --
----- ----- -------
Total deferred........................................ (222) (192) 453
----- ----- -------
Total............................................ $ (30) $ 214 $(1,791)
===== ===== =======
</TABLE>

54
<PAGE> 55
PFSWEB, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The components of the deferred tax asset (liability) are as follows (in
thousands):

<TABLE>
<CAPTION>
MARCH 31,
---------------
1999 2000
------ ------
<S> <C> <C>
Deferred tax asset:
Allowance for doubtful accounts........................... $ 216 $ 241
Inventory................................................. 70 --
Foreign net operating loss carryforwards.................. -- 670
Other..................................................... 205 120
------ ------
491 1,031
Less -- Valuation reserve................................. -- 915
------ ------
Total deferred tax asset.......................... 491 116
------ ------
Deferred tax liability:
Property and equipment.................................... (38) (116)
------ ------
Total deferred liability.......................... (38) (116)
------ ------
Deferred tax asset, net..................................... $ 453 $ --
====== ======
</TABLE>

In accordance with SFAS No. 109, a valuation allowance must be provided
where it is more likely than not that the deferred income tax asset will not be
realized. Upon completion of the spin-off (see Note 11), PFSweb will cease to be
included in Daisytek's consolidated tax return. Accordingly, a sufficient
history of earnings has not been established by PFSweb, on a stand-alone basis,
and a valuation allowance has been provided for the net deferred income tax
asset as of March 31, 2000. At March 31, 2000, foreign net operating loss
carryforwards relate to taxable losses of the Company's Europe subsidiary that
expire in 2015.

8. COMMITMENTS AND CONTINGENCIES:

The Company leases facilities, warehouse, office, transportation and other
equipment under operating leases expiring in various years through fiscal 2009.
In most cases, management expects that, in the normal course of business, leases
will be renewed or replaced by other leases. Minimum future annual rental
payments under non-cancelable operating leases having original terms in excess
of one year are as follows (in thousands):

<TABLE>
<S> <C>
2001...................................................... $ 7,431
2002...................................................... 7,297
2003...................................................... 6,170
2004...................................................... 5,986
2005...................................................... 1,863
Thereafter................................................ 3,799
-------
Total........................................... $32,546
=======
</TABLE>

Total rental expense under operating leases approximated $0.4 million, $0.8
million and $3.7 million for fiscal 1998, 1999 and 2000, respectively.

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.

55
<PAGE> 56
PFSWEB, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. SEGMENT AND GEOGRAPHIC INFORMATION:

The Company operates one reportable segment as an international provider of
transaction management services to both traditional and e-commerce companies.
Geographic areas in which the Company operates include the United States, Europe
and Canada.

The following is geographic information by area. Transfers between
geographic areas were immaterial.

<TABLE>
<CAPTION>
YEAR ENDED OR AT MARCH 31,
----------------------------
1998 1999 2000
------- -------- -------
<S> <C> <C> <C>
Revenues:
United States........................................ $45,729 $ 85,746 $64,455
Europe............................................... -- 10,456 18,357
Canada............................................... 3,614 5,047 3,795
------- -------- -------
$49,343 $101,249 $86,607
======= ======== =======
Long-lived assets:
United States........................................ $ 318 $ 14,449 $14,465
Europe............................................... -- 373 7,358
Canada............................................... 10 152 260
------- -------- -------
$ 328 $ 14,974 $22,083
======= ======== =======
</TABLE>

10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):

Unaudited quarterly results of operations for fiscal 1999 and 2000 were as
follows (amounts in thousands except per share data):

<TABLE>
<CAPTION>
FISCAL 1999
-----------------------------------------
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales...................................... $21,428 $22,660 $25,661 $31,500
Gross profit................................... 1,249 1,441 2,079 2,822
Net income (loss).............................. 25 (41) 164 144
Basic and diluted earnings (loss) per share.... 0.00 (0.00) 0.01 0.01
Shares used in computation of basic and diluted
income (loss) per share:..................... 14,305 14,305 14,305 14,305
</TABLE>

<TABLE>
<CAPTION>
FISCAL 2000
-----------------------------------------
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales...................................... $35,811 $26,971 $10,868 $12,957
Gross profit................................... 2,787 2,458 1,096 4,152
Net loss....................................... (198) (575) (4,777) (389)
Basic and diluted loss per share............... (0.01) (0.04) (0.31) (0.02)
Shares used in computation of basic and diluted
loss per share:.............................. 14,305 14,350 15,447 17,870
</TABLE>

The seasonality of the Company's business is dependent upon the seasonality
of its clients' business and their sale of products. Management believes that as
the Company's business grows with consumer product clients, the Company's
business activity will be more significant in the quarter ended December 31.

56
<PAGE> 57
PFSWEB, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. SUBSEQUENT EVENTS:

On June 8, 2000, the Daisytek Board of Directors approved the separation of
PFSweb from Daisytek by means of a tax-free dividend of Daisytek's remaining
ownership of PFSweb after receiving a favorable ruling from the IRS to the
effect that the distribution by Daisytek of its shares of PFSweb stock will be
tax-free to Daisytek and to Daisytek's shareholders for U.S. federal income tax
purposes. The distribution of Daisytek's 14,305,000 shares of PFSweb is payable
at the close of business on July 6, 2000, to Daisytek shareholders of record as
of June 19, 2000.

On June 8, 2000, the Board of Directors declared a dividend distribution of
one preferred stock purchase right (a "Right") for each share of the Company's
common stock outstanding on July 6, 2000. Each Right entitles the registered
shareholders to purchase from the Company one one-thousandth of a share of
preferred stock at an exercise price of $67, subject to adjustment. The Rights
are not currently exercisable, but would become exercisable if certain events
occurred relating to a person or group acquiring or attempting to acquire 15
percent or more of the Company's outstanding shares of common stock. The Rights
expire on July 6, 2010, unless redeemed or exchanged by the Company earlier.

57
<PAGE> 58

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Reference is made to the information to be set forth in the section
entitled "Election of Directors" in the definitive proxy statement involving the
election of directors in connection with the Annual Meeting of Stockholders of
the Company to be held in 2000 (the "Proxy Statement") which section is
incorporated herein by reference. The Proxy Statement (or an amendment to this
Form 10-K containing the relevant information) will be filed with the Securities
and Exchange Commission not later than 120 days after the last day of the
Company's fiscal year.

ITEM 11. EXECUTIVE COMPENSATION

Information required by Part III, Item 11, will be included in the section
entitled "Election of Directors" of the Company's Proxy Statement relating to
the Company's annual meeting of stockholders to be held in 2000, and is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information required by Part III, Item 12, will be included in the Sections
entitled "Election of Directors" and "Security Ownership of Certain Beneficial
Owners and Management" of the Company's Proxy Statement relating to the
Company's annual meeting of stockholders to be held in 2000, and is incorporated
herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information regarding certain of the Company's relationships and related
transactions will be included in the section entitled "Certain Relationships and
Related Transactions" of the Company's Proxy Statement relating to the Company's
annual meeting of stockholders to be held in 2000, and is incorporated herein by
reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report:

1. Financial Statements

Report of Independent Public Accountants

Consolidated Balance Sheets as of March 31, 1999 and 2000

Consolidated Statements of Operations for the Fiscal Years Ended March 31,
1998, 1999 and 2000

Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended
March 31, 1998, 1999 and 2000

Consolidated Statements of Cash Flows for the Fiscal Years Ended March 31,
1998, 1999 and 2000

Notes to Consolidated Financial Statements

2. Financial Statements Schedules

Report of Independent Public Accountants

58
<PAGE> 59

Schedule II -- Valuation and Qualifying Accounts

All other schedules are omitted because the required information is not
present in amounts sufficient to require submission of the schedule or because
the information required is included in the financial statements or notes
thereto.

3. Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
1.1** -- Underwriting Agreement by and among PFSweb, Inc.,
Daisytek International Corporation and the Underwriters
named therein.
2.1* -- Master Separation Agreement by and among Daisytek
International Corporation, Daisytek, Incorporated,
Priority Fulfillment Services, Inc. and PFSweb, Inc.
2.2* -- Initial Public Offering and Distribution Agreement by and
among Daisytek International Corporation, Daisytek,
Incorporated, and PFSweb, Inc.
2.3* -- Registration Rights Agreement by and among Daisytek
International Corporation, Daisytek, Incorporated and
PFSweb, Inc.
2.4* -- Tax Indemnification and Allocation Agreement between
Daisytek, International Corporation and PFSweb, Inc.
2.5* -- Transition Services Agreement between Daisytek
Incorporated and PFSweb, Inc.
2.6* -- Transaction Management Services Agreement between
Daisytek, Incorporated and Priority Fulfillment Services,
Inc.
3.1* -- Amended and Restated Certificate of Incorporation
3.2* -- Amended and Restated Bylaws
10.1* -- Non-Employee Director Stock Option and Retainer Plan
10.2* -- Employee Stock Option Plan
10.3* -- Employee Annual Incentive Plan
10.4* -- Industrial Lease Agreement between Shelby Drive
Corporation and Priority Fulfillment Services, Inc.
10.5* -- Lease Contract between Transports Weerts and Priority
Fulfillment Services Europe B.V.
21 *** -- Subsidiaries of the Registrant
23 *** -- Consent
27.1*** -- Financial Data Schedule
</TABLE>

---------------

* Incorporated by reference from PFSweb, Inc. Registration Statement on Form
S-1 (Commission File No. 333-87657).

** Incorporated by reference from Form 10-Q for the fiscal quarter ended
December 31, 1999.

*** Filed herewith.

(b) Reports on Form 8-K:

None.

59
<PAGE> 60

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

The Shareholders of PFSweb, Inc.:

We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of PFSweb, Inc. (a
Delaware corporation)and subsidiaries included in this report on Form 10-K and
have issued our report thereon dated May 4, 2000 (except with respect to the
matters discussed in Note 11, as to which the date is June 8, 2000). Our audits
were made for the purpose of forming an opinion on the basic consolidated
financial statements taken as a whole. Schedule II of this report on Form 10-K
is the responsibility of the Company's management and is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not part
of the basic consolidated financial statements. This schedule has been subjected
to the auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, fairly states in all material
respects, the financial data required to be set forth therein in relation to the
basic consolidated financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Dallas, Texas
May 4, 2000

60
<PAGE> 61

SCHEDULE II

PFSWEB, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED MARCH 31, 2000
(AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
ADDITIONS
-----------------------
BALANCE AT CHARGES TO CHARGES TO BALANCE AT
BEGINNING COST AND OTHER END OF
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended March 31, 1998:
Allowance for doubtful accounts........ $122 299 -- (103) $318
Fiscal Year Ended March 31, 1999:
Allowance for doubtful accounts........ $318 344 -- (27) $635
Fiscal Year Ended March 31, 2000:
Allowance for doubtful accounts........ $635 458 -- (403) $690
Income tax valuation allowance......... $ -- 915 -- -- $915
</TABLE>

61
<PAGE> 62

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

By: /s/ THOMAS J. MADDEN
----------------------------------
Thomas J. Madden,
Executive Vice President
and Chief Financial and Accounting
Officer

Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>

/s/ MARK C. LAYTON Chairman of the Board, President June 29, 2000
----------------------------------------------------- and Chief Executive Officer
Mark C. Layton (Principal Executive Officer)

/s/ THOMAS J. MADDEN Executive Vice President and June 29, 2000
----------------------------------------------------- Chief Financial and Accounting
Thomas J. Madden Officer (Principal Financial
and Accounting Officer)

/s/ CHRISTOPHER YATES Director June 29, 2000
-----------------------------------------------------
Christopher Yates

/s/ JAMES R. POWELL Director June 29, 2000
-----------------------------------------------------
James R. Powell

/s/ TIMOTHY M. MURRAY Director June 29, 2000
-----------------------------------------------------
Timothy M. Murray

/s/ JAMES F. REILLY Director June 29, 2000
-----------------------------------------------------
James F. Reilly

/s/ PETER P. J. VIKANIS Director June 29, 2000
-----------------------------------------------------
Peter P. J. Vikanis
</TABLE>

62
<PAGE> 63

INDEX TO EXHIBITS

---------------

* Incorporated by reference from PFSweb, Inc. Registration Statement on Form
S-1 (Commission File No. 333-87657).

** Incorporated by reference from Form 10-Q for the fiscal quarter ended
December 31, 1999.

*** Filed herewith.