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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _______ to _______
Commission File Number 0-25400
DAISYTEK INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 75-2421746
- ------------------------------ --------------------------
(State of Incorporation) (I.R.S. Employer I.D. No.)
500 NORTH CENTRAL EXPRESSWAY, PLANO, TEXAS 75074
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 881-4700
-----------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
At February 7, 2000 there were 17,326,321 shares of registrant's common stock
outstanding.
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
DECEMBER 31, 1999
INDEX
PART I. FINANCIAL INFORMATION Page Number
-----------
Item 1. Financial Statements:
Consolidated Balance Sheets as of December 31, 1999 (Unaudited)
and March 31, 1999..................................................... 3
Unaudited Interim Consolidated Statements of Operations for the
Three and Nine Months Ended December 31, 1999 and 1998 ................ 5
Unaudited Interim Consolidated Statements of Cash Flows for the
Nine Months Ended December 31, 1999 and 1998........................... 6
Notes to Unaudited Interim Condensed Consolidated Financial
Statements............................................................. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................................ 12
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............................. 22
Item 6. Exhibits and Reports on Form 8-K ............................................... 22
SIGNATURES ............................................................................ 23
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
December 31, March 31,
1999 1999
------------ ------------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents ........................................ $ 33,693 $ 1,551
Accounts receivable, net of allowance for doubtful accounts of
$6,017 and $2,857 at December 31, 1999 and
March 31, 1999, respectively ................................. 162,825 139,864
Inventories, net ................................................. 104,443 107,918
Prepaid expenses and other current assets ........................ 4,315 4,982
Income taxes receivable .......................................... 3,217 --
Deferred tax asset ............................................... 614 137
------------ ------------
Total current assets ............................... 309,107 254,452
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Furniture, fixtures and equipment ................................ 47,388 37,807
Leasehold improvements ........................................... 5,513 2,399
------------ ------------
52,901 40,206
Less - Accumulated depreciation and amortization ................. (25,511) (20,296)
------------ ------------
Net property and equipment ......................... 27,390 19,910
OTHER ASSETS ......................................................... 8,624 12,070
EMPLOYEE RECEIVABLE .................................................. 506 485
EXCESS OF COST OVER NET ASSETS ACQUIRED, net ......................... 37,502 28,962
------------ ------------
Total assets ....................................... $ 383,129 $ 315,879
============ ============
The accompanying notes are an integral part of these
consolidated balance sheets.
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, March 31,
1999 1999
------------ ------------
(unaudited)
CURRENT LIABILITIES:
Current portion of long-term debt ................................ $ 69 $ 146
Trade accounts payable ........................................... 98,966 103,179
Accrued expenses ................................................. 18,094 12,363
------------ ------------
Total current liabilities .......................... 117,129 115,688
------------ ------------
LONG-TERM DEBT, less current portion ................................. 52,101 43,021
------------ ------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST .................................................... 9,591 --
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000,000 shares authorized
at December 31, 1999 and March 31, 1999; none issued
and outstanding .............................................. -- --
Common stock, $0.01 par value; 30,000,000 shares
authorized at December 31, 1999 and March 31, 1999;
17,293,542 and 17,162,382 shares issued and
outstanding at December 31, 1999 and March 31, 1999,
respectively ................................................. 173 172
Additional paid-in capital ....................................... 132,365 87,394
Retained earnings ................................................ 74,037 71,801
Deferred compensation ............................................ (160) --
Accumulated other comprehensive income ........................... (2,107) (2,197)
------------ ------------
Total shareholders' equity ......................... 204,308 157,170
------------ ------------
Total liabilities and shareholders' equity ......... $ 383,129 $ 315,879
============ ============
The accompanying notes are an integral part of these
consolidated balance sheets.
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Net revenues .......................................... $ 283,087 $ 225,507 $ 763,013 $ 668,247
Cost of revenues ...................................... 259,699 198,721 686,432 588,211
---------- ---------- ---------- ----------
Gross profit .................................. 23,388 26,786 76,581 80,036
Selling, general and administrative expenses .......... 25,293 17,803 68,679 51,750
Acquisition related costs ............................. -- 197 619 732
Reversal of loss on disposition of business ........... -- -- (1,000) --
---------- ---------- ---------- ----------
Income (loss) from operations ................. (1,905) 8,786 8,283 27,554
Interest expense ...................................... 1,452 617 3,222 2,258
---------- ---------- ---------- ----------
Income (loss) before income taxes ............. (3,357) 8,169 5,061 25,296
Provision for income taxes ............................ 30 3,188 3,313 9,596
---------- ---------- ---------- ----------
Income (loss) before minority interest and
cumulative effect of accounting change ...... (3,387) 4,981 1,748 15,700
Minority interest ..................................... 488 -- 488 --
Cumulative effect of accounting change, net of tax .... -- -- -- (405)
---------- ---------- ---------- ----------
Net income (loss) ............................. $ (2,899) $ 4,981 $ 2,236 $ 15,295
========== ========== ========== ==========
Net income (loss) per common share:
Basic:
Income (loss) before cumulative effect of
accounting change ............................ $ (0.17) $ 0.29 $ 0.13 $ 0.92
Cumulative effect of accounting change,
net of tax ................................... -- -- -- (0.02)
---------- ---------- ---------- ----------
Net income (loss) .............................. $ (0.17) $ 0.29 $ 0.13 $ 0.90
========== ========== ========== ==========
Diluted:
Income (loss) before cumulative effect of
accounting change ............................ $ (0.17) $ 0.28 $ 0.13 $ 0.88
Cumulative effect of accounting change,
net of tax ................................... -- -- -- (0.02)
---------- ---------- ---------- ----------
Net income (loss) .............................. $ (0.17) $ 0.28 $ 0.13 $ 0.86
========== ========== ========== ==========
Weighted average common and common share equivalents
outstanding:
Basic .......................................... 17,200 17,140 17,179 17,083
Diluted ........................................ 17,200 17,572 17,837 17,734
The accompanying notes are an integral part of these interim
consolidated statements.
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Nine Months Ended
December 31,
------------------------------
1999 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................ $ 2,236 $ 15,295
Adjustments to reconcile net income to net cash provided by
(used in) operating activities --
Depreciation and amortization ...................................... 6,575 5,132
Provision for doubtful accounts .................................... 6,706 1,885
Minority interest .................................................. (488) --
Non cash compensation expense ...................................... 32 --
Deferred income tax benefit ........................................ (477) (198)
Changes in operating assets and liabilities --
Accounts receivable ............................................ (15,860) 469
Inventories, net ............................................... 16,602 (22,708)
Trade accounts payable and accrued expenses .................... (6,528) (805)
Income taxes ................................................... (3,754) (1,401)
Prepaid expenses and other current assets ...................... 1,788 (373)
------------ ------------
Net cash provided by (used in) operating activities ....... 6,832 (2,704)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................................... (12,072) (6,053)
Acquisitions of businesses, net of cash acquired ...................... (20,448) (6,552)
Advances to employees, net ............................................ (144) (119)
(Increase) decrease in other assets ................................... 3,446 (9,393)
------------ ------------
Net cash used in investing activities ..................... (29,218) (22,117)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit, net ........................... 8,825 27,324
Payments on capital leases and notes payable .......................... (8,511) (5,074)
Net proceeds of PFSweb initial public offering ........................ 53,014 --
Net proceeds from exercise of stock options ........................... 1,378 1,675
Distributions to former shareholders of The Tape Company .............. -- (973)
------------ ------------
Net cash provided by financing activities ................. 54,706 22,952
------------ ------------
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS..................... (178) 281
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................... 32,142 (1,588)
CASH AND CASH EQUIVALENTS, beginning of period ............................ 1,551 2,087
------------ ------------
CASH AND CASH EQUIVALENTS, end of period .................................. $ 33,693 $ 499
============ ============
The accompanying notes are an integral part of these interim
consolidated statements.
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS AND BASIS OF PRESENTATION:
Daisytek International Corporation ("Daisytek"), a Delaware corporation,
and subsidiaries (the "Company") is a leading wholesale distributor of non-paper
computer and office automation supplies and accessories ("computer supplies")
and professional-grade video and audio media products ("professional tape
products"). Through PFSweb, Inc. and its subsidiaries ("PFSweb"), the Company is
also a leading provider of transaction management services to both traditional
and e-commerce companies. The Company, through its subsidiaries in the U.S.,
Canada, Australia, Mexico, Singapore and Europe, sells products and services
primarily in North America, as well as in Latin America, Australia, Singapore,
the Pacific Rim, Europe and Africa.
In December 1999, PFSweb completed an initial public offering ("IPO") of
3,565,000 shares of its common stock. At December 31, 1999, the Company owned
approximately 80.1% of the outstanding shares of common stock of PFSweb.
Minority interest represents minority shareholders' proportionate share of the
equity of PFSweb.(See Note 2)
In the opinion of management, the Unaudited Interim Condensed Consolidated
Financial Statements of the Company include all adjustments, consisting of only
normal recurring adjustments, necessary for a fair presentation of the Company's
financial position as of December 31, 1999, its results of operations and its
results of cash flows for the nine months ended December 31, 1999 and 1998.
Results of the Company's operations for interim periods may not be indicative of
results for the full fiscal year. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations promulgated by the Securities and Exchange Commission (the
"SEC").
The Unaudited Interim Condensed Consolidated Financial Statements should be
read in conjunction with the audited Consolidated Financial Statements and
accompanying notes of the Company included in the Company's Form 10-K (File
Number 0-25400) as filed with the SEC on June 29, 1999 (the "Company's Form
10-K"). Accounting policies used in the preparation of the Unaudited Interim
Condensed Consolidated Financial Statements are consistent in all material
respects with the accounting policies described in the Notes to Consolidated
Financial Statements in the Company's Form 10-K.
Certain prior period data has been reclassified to conform to the current
period presentation. These reclassifications had no effect on previously
reported net income, shareholders' equity or cash flows.
2. PUBLIC OFFERING OF PFSWEB COMMON STOCK
In December 1999, PFSweb successfully completed the IPO and sold 3,565,000
shares of common stock at $17 per share. Net proceeds from the IPO aggregated
approximately $53 million and were used to repay PFSweb's intercompany payable
to Daisytek of approximately $28 million, of which approximately $22 million was
paid as of December 31, 1999, 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 million. The remaining net
proceeds are intended to be used for currently anticipated PFSweb annual capital
expenditures of $7 - $10 million, a portion of which may be financed through
capital or operating leases, the remaining PFSweb payable balance to Daisytek,
for PFSweb working capital needs, and for possible acquisitions by PFSweb. As a
result of the IPO, the Company credited additional paid-in capital for
approximately $43 million for its share of the net IPO proceeds. Daisytek,
which currently owns approximately 80.1% of the outstanding shares of PFSweb's
common stock, 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 would be distributed to Daisytek common shareholders on a pro-rata basis.
Daisytek has filed a ruling request with the Internal Revenue Service ("IRS")
with regard to the tax-free treatment of the distribution of its remaining
ownership of PFSweb to the Daisytek shareholders. Daisytek has announced that it
currently expects a response from the IRS within four to six months and plans to
spin-off its remaining ownership of PFSweb in calendar year 2000. The spin-off
is subject to certain conditions, and the Company cannot provide assurance as to
whether or when it will occur. As a result of the planned spin-off, Daisytek
stock options outstanding at the date of the spin-off may be converted to new
options in either Daisytek or PFSweb stock at a conversion rate that will not be
determined until the spin-off date.
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS):
Nine Months Ended
December 31,
-----------------------------
1999 1998
------------ ------------
Cash paid during the period for:
Interest .................................... $ 3,035 $ 2,040
Income taxes ................................ $ 6,835 $ 11,305
4. COMPREHENSIVE INCOME (LOSS) (IN THOUSANDS):
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------------ -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Net income (loss) ................................ $ (2,899) $ 4,981 $ 2,236 $ 15,295
Comprehensive income adjustments:
Foreign currency translation
adjustment ............................... 92 52 90 (383)
------------ ------------ ------------ ------------
Comprehensive income (loss) ...................... $ (2,807) $ 5,033 $ 2,326 $ 14,912
============ ============ ============ ============
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE:
Basic earnings per share ("EPS") is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
during the quarter. Diluted EPS reflects the potential dilution that could occur
if dilutive securities were exercised into common stock. Stock options are
considered dilutive securities. During the three months ended December 31, 1999,
outstanding options to purchase 4,266,988 common shares were anti-dilutive and
have been excluded from the weighted average share computation.
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------------ -----------------------------
NUMERATOR: 1999 1998 1999 1998
------------ ------------ ------------ ------------
Income (loss) before cumulative effect of
accounting change ..................................... $ (2,899) $ 4,981 $ 2,236 $ 15,700
Cumulative effect of accounting change .................. -- -- -- (405)
------------ ------------ ------------ ------------
Net income (loss) ....................................... $ (2,899) $ 4,981 $ 2,236 $ 15,295
============ ============ ============ ============
DENOMINATOR:
Denominator for basic earnings per share -
Weighted average shares ............................... 17,200 17,140 17,179 17,083
Effect of dilutive securities:
Employee stock options ................................ -- 432 658 651
------------ ------------ ------------ ------------
Denominator for diluted earnings per share -
Adjusted weighted average shares and
assumed conversions .............................. 17,200 17,572 17,837 17,734
============ ============ ============ ============
Net income (loss) per common share:
Basic:
Income (loss) before cumulative effect of
accounting change ............................. $ (0.17) $ 0.29 $ 0.13 $ 0.92
Cumulative effect of accounting change .............. -- -- -- (0.02)
------------ ------------ ------------ ------------
Net income (loss) ................................... $ (0.17) $ 0.29 $ 0.13 $ 0.90
============ ============ ============ ============
Diluted:
Income (loss) before cumulative effect of
accounting change ............................. $ (0.17) $ 0.28 $ 0.13 $ 0.88
Cumulative effect of accounting change .............. -- -- -- (0.02)
------------ ------------ ------------ ------------
Net income (loss) ................................... $ (0.17) $ 0.28 $ 0.13 $ 0.86
============ ============ ============ ============
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. SEGMENT INFORMATION:
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related information." The Company operates in
three reportable business segments: (1) Computer Supplies, (2) Professional Tape
Products, and (3) PFSweb. The Company's reportable segments are strategic
business units that offer different products and services and they are managed
separately based on the fundamental differences in their operations. PFSweb
segment revenue includes revenue earned for certain services provided to the
Computer Supplies segment, which is eliminated as part of the intersegment
elimination. In addition, PFSweb and Computer Supplies net revenues are
presented as management evaluates the businesses under its modified IBM
distributor agreements. No single customer accounted for more than 10% of the
Company's net revenues for the nine month periods ended December 31, 1999 and
1998. The following tables set forth information as to the Company's reportable
segments (in thousands):
Professional
Computer Tape Intersegment
Supplies Products PFSweb Eliminations Total
------------ ------------ ------------ ------------ ------------
THREE MONTHS ENDED DECEMBER 31, 1999
Net revenues ............................. $ 253,363 $ 22,908 $ 10,868 $ (4,052) $ 283,087
Operating contribution ................... 4,456 1,011 (5,497) -- (30)
THREE MONTHS ENDED DECEMBER 31, 1998
Net revenues ............................. $ 198,510 $ 24,971 $ 3,094 $ (1,068) $ 225,507
Operating contribution ................... 7,956 798 229 -- 8,983
NINE MONTHS ENDED DECEMBER 31, 1999
Net revenues ............................. $ 679,271 $ 69,922 $ 20,342 $ (6,522) $ 763,013
Operating contribution ................... 19,160 4,340 (6,123) -- 17,377
NINE MONTHS ENDED DECEMBER 31, 1998
Net revenues ............................. $ 585,216 $ 78,244 $ 7,491 $ (2,704) $ 668,247
Operating contribution ................... 24,993 2,950 343 -- 28,286
ASSETS
December 31, 1999 ........................ $ 271,420 $ 44,603 $ 67,106 $ -- $ 383,129
March 31, 1999 ........................... 198,527 48,295 69,057 -- 315,879
The Company's Computer Supplies segment includes certain expenses and
assets that relate to the Professional Tape Products segment but are not
allocated by management to this segment. These expenses relate primarily to the
Company's (i) centralized management information, warehouse and telephone
systems, and (ii) executive, administrative and other corporate costs. These
assets primarily relate to the Company's centralized management information,
warehouse and telephone systems and leasehold improvements on shared facilities.
In addition, prior to the PFSweb IPO, certain corporate expenses and assets that
relate to the PFSweb segment had not been allocated to this segment.
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reconciliation of segment operating contribution to consolidated income
before taxes is as follows (in thousands):
Three Months Ended Dec. 31, Nine Months Ended Dec. 31,
------------------------------ ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Segment operating contribution (loss) ............ $ (30) $ 8,983 $ 17,377 $ 28,286
Acquisition related costs (a) .................... -- 197 619 732
Incremental charges (b) .......................... 1,875 -- 9,475 --
Reversal of loss on disposition of business ...... -- -- (1,000) --
Interest expense ................................. 1,452 617 3,222 2,258
------------ ------------ ------------ ------------
Consolidated income (loss) before income taxes ... $ (3,357) $ 8,169 $ 5,061 $ 25,296
============ ============ ============ ============
(a) These charges relate to the Professional Tape Products segment.
(b) Incremental charges have not been allocated to the reportable segments.
These charges relate to certain repositioning and separation activities
associated with the planned spin-off of PFSweb, certain other charges as a
result of these activities, to increase allowances for bad debts, legal and
professional fees related to an unsolicited acquisition offer and other
charges effected during such periods.
7. BUSINESS COMBINATION:
On October 1, 1999, the Company acquired certain assets and liabilities of
Arlington Industries, Inc., a privately held, specialty wholesaler of copier and
fax consumables for approximately $19.5 million in cash, resulting in goodwill
of approximately $ 8.0 million to be amortized over a period of 20 years.
8. STOCKHOLDER RIGHTS PLAN:
On October 15, 1999, 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 October 25, 1999. Each right entitles
the registered shareowners to purchase from the Company one one-thousandth of a
share of preferred stock at an exercise price of $70.00, 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 outstanding shares of common stock. The rights
expire on October 25, 2009, unless redeemed or exchanged by the Company earlier.
9. DEBT:
In October 1999, the Company amended one of its unsecured revolving line of
credit agreements (the "Facility"), effective in November 1999, to increase the
maximum borrowing availability from $85 million to $105 million. This amendment
also provided for the release of PFSweb subsidiaries as guarantors of the
Facility upon (i) the effective date of the IPO of the shares of the common
stock of PFSweb, Inc. and (ii) the payment from PFSweb, Inc. to Daisytek in
settlement of the outstanding payable to Daisytek. In satisfaction of these
conditions, PFSweb subsidiaries have been released from their guarantee.
Additionally, this amendment also prohibits Daisytek from advancing funds to
PFSweb following the completion of the IPO, except in the normal course of
business. The Facility has also been amended to increase the interest rate,
effective March 1, 2000, to Eurodollar rate plus 1.0% to 1.75% from Eurodollar
rate plus .625% to 1.125%. The expiration date of the Facility has also been
extended to January 1, 2001. The Company is currently in discussion with its
lenders to enter into a new, long-term line of credit agreement.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Unaudited
Interim Consolidated Financial Statements and related notes appearing elsewhere
in this Form 10-Q.
FORWARD-LOOKING INFORMATION
The matters discussed in this report on Form 10-Q, other than historical
information, and, in particular, information regarding future revenue, earnings
and business plans and goals, consist of forward-looking information under the
Private Securities Litigation Reform Act of 1995, and are subject to and involve
risks and uncertainties which could cause actual results to differ materially
from the forward-looking information. These risks and uncertainties include, but
are not limited to, the "Risk Factors" set forth in the Company's prospectus
dated March 26, 1998, and the Company's Report on Form 10-K filed on June 29,
1999, and the PFSweb prospectus dated December 2, 1999, as well as general
economic conditions, industry and e-commerce trends, the loss of key suppliers
or customers, the loss of strategic product shipping relationships, customer
demand, product availability, changes in the trend toward outsourcing, increased
competition, risks inherent in acquiring, integrating and operating new
businesses, concentrations of credit risk, distribution efficiencies, capacity
constraints, the unknown effects of possible system failures and rapid changes
in technology, exchange rate fluctuations, and the regulatory and trade
environment (both domestic and foreign). This report on Form 10-Q also contains
other forward-looking statements, including those related to the planned
spin-off of PFSweb. 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. Actual results
could differ materially from those projected in the forward-looking statements.
BUSINESS STRATEGY
During December 1999, the Company completed the first phase in its plan to
spin-off PFSweb through the completion of an initial public offering of PFSweb
stock. In connection with the second phase of this process, the Company has
filed a ruling request with the Internal Revenue Service with regard to the
tax-free treatment of the distribution of Daisytek's remaining 80% ownership of
PFSweb to the Daisytek shareholders. The Company is targeting for this
distribution to occur sometime during calendar year 2000. As a result, the
following business strategy discussion relates only to the Daisytek business,
excluding PFSweb.
Daisytek is a leading low cost distributor. The Company bases its continued
growth on the following strategies:
1) Focus on the growing computer supplies and professional tape
industries in the U.S. and international markets.
2) Seek acquisitions to supplement growth in the Company's computer
supplies business and professional tape business or to add selected
product lines.
The Company's Computer Supplies segment specializes in computer supplies
that have longer life cycles and lower risk of technological obsolescence than
hardware and software products. The Company believes that the demand for these
products remains strong due to the advancement and reduction in price points of
printer and computer technologies, which in turn grows the installed base of
equipment that consumes the products the Company distributes. Continuing
automation of the workplace and the growth in color printing technologies that
use consumable supplies at higher rates also fuel the demand for the computer
supplies product offering. The Company offers these products to its U.S.
customers using value-added services such as next-business-day delivery, the
latest order cutoff times in the industry, order confirmation, product
drop-shipping, and customized product catalogs. The Company plans to expand
sales to existing customers, including those in the contract stationer and
value-added reseller channels. The Company is also focusing on new distribution
channels such as mass merchants, grocery and convenience stores, direct mail
marketers and .com business sites.
The Company continues to research new markets to expand its international
computer supplies business. Many international markets are emerging markets that
have exponentially higher growth opportunities for consumable computer supplies
compared with the United States. Presently, the Company
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operates sales and distribution centers in Canada, Mexico, Australia and
Singapore and exports products into Latin America and certain other regions of
the world. The Company believes that its computer supplies experience and broad
product range place the Company in a competitive position in emerging
international markets.
The Company began its Professional Tape Products segment in 1998, and has
grown this division primarily through acquisitions. This segment operates as a
distributor of media products to the film, entertainment and multimedia
industries. The distribution sector of this industry in the U.S. is highly
fragmented and regionally focused. The Company's acquisition strategy has been
to acquire businesses that the Company believes can benefit from Daisytek's core
competencies in telemarketing and distribution management to create efficiencies
and provide value-added services to the customer base. The Company believes it
is nearing the end of its acquisition activity in this industry. Acquired
businesses have been integrated to create economies of scale. The Company
believes this integration effort will allow it to maintain the strong gross
margins earned in this segment, while at the same time reducing SG&A costs as a
percentage of net revenues, and, thus, increasing profit margins.
The Company plans to enhance growth by seeking acquisition opportunities to
supplement growth in the Company's computer consumables business and
professional tape business or to add selected product lines that can capitalize
on Daisytek's expertise in distribution and call-center management and offer the
Company an opportunity to expand its product line and increase profit margins.
On October 1, 1999, the Company acquired certain assets and liabilities of
Arlington Industries, Inc. ("Arlington"), a U.S. based specialty wholesaler
primarily focused on copier and fax consumable supplies.
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PRO FORMA PRESENTATION
The following is a pro forma historical financial presentation of the
Daisytek business units, excluding PFSweb, for the current fiscal year to date
and the last fiscal year. The presentation below considers certain
reorganization activities as a result of the planned separation of Daisytek and
PFSweb, including the estimated impact of the transaction management services
agreement between Daisytek and PFSweb for all periods presented. The second
quarter ended September 30, 1999, excludes what management believes are
incremental costs of $6.4 million related to a) this planned separation, b)
increases in allowance for bad debts, and c) other charges effected during this
period. The third quarter ended December 31, 1999, excludes what management
believes are incremental costs of $1.9 million for a) the planned separation, b)
legal and professional fees related to an unsolicited acquisition offer, and c)
other charges effected during this period. The presentation below also excludes
acquisition integration costs, loss on disposition of business and cumulative
effect of accounting change.
Daisytek based the following pro forma data on available information and
certain estimates and assumptions. Daisytek believes that such assumptions
provide a reasonable basis for presenting the results of Daisytek, excluding
PFSweb, on a stand alone basis. This pro forma financial information does not
reflect what our results of operations may be in the future.
Fiscal 2000
-------------------------------------------------------
June 30, Sept. 30, Dec. 31, 9 Mos.
1999 1999 1999 Total
---------- ---------- ---------- ----------
Net revenues ........................... $ 230,046 $ 242,876 $ 276,271 $ 749,193
Cost of revenues ....................... 205,464 216,238 251,255 672,957
---------- ---------- ---------- ----------
Gross profit ....................... 24,582 26,638 25,016 76,236
Selling, general and administrative 17,971 18,339 20,539 56,849
expenses................................ ---------- ---------- ---------- ----------
Income from operations ............. 6,611 8,299 4,477 19,387
Interest expense ....................... 652 871 1,316 2,839
---------- ---------- ---------- ----------
Income before income taxes ......... 5,959 7,428 3,161 16,548
Provision for income taxes ............. 2,324 2,901 1,228 6,453
---------- ---------- ---------- ----------
Net income ............................. $ 3,635 $ 4,527 $ 1,933 $ 10,095
========== ========== ========== ==========
Net income per common share:
Basic .............................. $ 0.21 $ 0.26 $ 0.11 $ 0.59
Diluted ............................ $ 0.20 $ 0.26 $ 0.11 $ 0.57
Fiscal 1999
----------------------------------------------------------------------
June 30, Sept. 30, Dec. 31, March 31, FY
1998 1998 1998 1999 Total
---------- ---------- ---------- ---------- ----------
Net revenues ........................... $ 221,585 $ 218,394 $ 223,481 $ 237,622 $ 901,082
Cost of revenues ....................... 196,293 193,256 198,811 212,103 800,463
---------- ---------- ---------- ---------- ----------
Gross profit ....................... 25,292 25,138 24,670 25,519 100,619
Selling, general and administrative 17,754 17,598 17,648 18,322 71,322
expenses................................ ---------- ---------- ---------- ---------- ----------
Income from operations ............. 7,538 7,540 7,022 7,197 29,297
Interest expense ....................... 933 829 845 467 3,074
---------- ---------- ---------- ---------- ----------
Income before income taxes ......... 6,605 6,711 6,177 6,730 26,223
Provision for income taxes ............. 2,318 2,618 2,409 2,625 9,970
---------- ---------- ---------- ---------- ----------
Net income ............................. $ 4,287 $ 4,093 $ 3,768 $ 4,105 $ 16,253
========== ========== ========== ========== ==========
Net income per common share:
Basic .............................. $ 0.25 $ 0.24 $ 0.22 $ 0.24 $ 0.95
Diluted ............................ $ 0.24 $ 0.23 $ 0.21 $ 0.23 $ 0.91
RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED DECEMBER 31, 1999 AND 1998
(PROFORMA).
Net Revenues. Net revenues for the three months ended December 31, 1999
were $276.3 million as compared to $223.5 million for the three months ended
December 31, 1998, an increase of $52.8 million, or 23.6%. Net revenues for the
nine months ended December 31, 1999 were $749.2 million as compared to $663.5
million for the nine months ended December 31, 1998, an increase of $85.7
million, or 12.9%. Computer Supplies net revenues increased 27.9% in the quarter
ended December 31, 1999, compared to the same period in fiscal year 1999. The
Computer Supplies business segment includes the Company's U.S. computer supplies
operation, international computer supplies operation and IBM product sales. The
net revenue increase in the Computer Supplies business compared to the same
quarter in the prior year is
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primarily attributable to the Arlington acquisition, growth in the international
computer supplies business, and growth in IBM product sales. U.S. Computer
supplies net sales increased 3.2%, excluding Arlington's net revenues of
approximately $25 million, in the quarter ended December 31, 1999, compared to
the same period in the prior year. Net revenues in the international computer
supplies operations increased 17.0% in the quarter ended December 31, 1999,
compared to the same prior year period. The Company experienced strong growth in
both its Mexico and Australia subsidiaries. The Company experienced declines in
its Latin American business due to tightened credit policies and general
economic conditions. The Company's Singapore operations continued to be
challenged, which resulted in a revenue decline compared to the same period in
fiscal 1999. The Company continually evaluates the business plans and viability
of its foreign operations. Net revenues related to the Company's IBM product
sales increased due to higher sales volumes under North American distributor
agreements and the new European distributor agreements. Professional Tape
Products net revenues decreased 8.3% in the third quarter of fiscal year 2000
compared to the same period in fiscal year 1999 due primarily to price
degradation in certain product lines and the disposition of the Steadi-Systems
professional hardware business, both partially offset by the acquisition of
several professional tape businesses in the current year.
Gross Profit. The Company's gross profit as a percent of net revenues was
9.1% for the three months ended December 31, 1999 as compared to 11.0% for the
three months ended December 31, 1998. The Company's gross profit percentage was
10.2% for the nine months ended December 31, 1999 as compared to 11.3% for the
nine months ended December 31, 1998. The decrease in the Company's gross profit
as a percentage of net revenues was primarily due to the Company's previously
announced focus on the key balance sheet areas of inventory and accounts
receivable. In order to make improvements in this area, the Company avoided
certain vendor incentive programs, during the three months ended December 31,
1999, that for comparative purposes have been previously reflected in the
Company's results. During fiscal year 1999, the Company was also able to take
advantage of certain enhanced product sourcing opportunities which did not
continue in fiscal year 2000 and, thus negatively impacted the fiscal year 2000
gross profit percentage on a comparative basis. Additionally, the gross profit
percentage declined in the international computer supplies business due
primarily to growth in the international retail business, which typically
carries lower margins. Also contributing to the overall decline in gross profit
percentage was the large revenue growth in IBM product sales, which are also
typically at lower margins. The Company believes that its gross profit
percentage may improve from levels reflected during its third quarter, however,
certain of these trends are expected to continue and could potentially have a
negative impact on gross margins as compared to the prior year. In addition, the
Company expects that competitive pressures in the computer supplies operations
may negatively impact gross margins during the remainder of fiscal year 2000.
SG&A Expenses. SG&A expenses for the three months ended December 31, 1999
were $20.5 million, or 7.4% of net revenues, as compared to $17.6 million, or
7.9% of net revenues, for the three months ended December 31, 1998. SG&A
expenses for the nine months ended December 31, 1999 were $56.8 million, or 7.6%
of net revenues, as compared to $53.0 million, or 8.0% of net revenues, for the
nine months ended December 31, 1998. The increase in SG&A expense for this
quarter compared to the prior year is primarily attributable to the acquisition
of Arlington on October 1, 1999, combined with an increase in variable costs
related to higher revenue levels. The decrease in SG&A expenses as a percentage
of net revenues for both the three and nine month periods ended December 31,
1999, is primarily due to an increase in IBM product sales with lower SG&A
expense ratios. This improved percentage is partially offset by a reduction in
net sales to large office superstores, which also have lower SG&A expense
ratios.
Interest Expense. Interest expense for the three months ended December 31,
1999 was $1.3 million as compared to $0.8 million for the three months ended
December 31, 1998. Interest expense for the nine months ended December 31, 1999
was $2.8 million as compared to $2.6 million for the nine months ended December
31, 1998. Interest expense was higher for the nine months ended December 31,
1999, primarily due to higher debt balances caused by business acquisition and
higher working capital levels throughout the year, which was partially offset by
lower interest rates. The weighted average interest rate was 6.3% and 6.7%
during the nine months ended December 31, 1999 and 1998, respectively.
Income Taxes. The Company's effective tax rate was 38.8% and 39.0% for the
three months ended December 31, 1999 and 1998, respectively. The effective tax
rate for the nine months ended December 31, 1999 and 1998 was 39.0% and 37.7%,
respectively. The comparative increase in the first nine months of fiscal year
2000 was primarily due to the impact of the pooling of interests with The Tape
Company in the first quarter of fiscal year 1999.
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RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED DECEMBER 31, 1999 AND 1998.
The following discussion relates to Daisytek, including its majority-owned
subsidiary, PFSweb. These are historical results and may not be representative
of the Company's results after the planned spin-off of PFSweb.
Net Revenues. Net revenues for the three months ended December 31, 1999
were $283.1 million as compared to $225.5 million for the three months ended
December 31, 1998, an increase of $57.6 million, or 25.5%. Net revenues for the
nine months ended December 31, 1999 were $763.0 million as compared to $668.2
million for the nine months ended December 31, 1998, an increase of $94.8
million, or 14.2%. Computer Supplies net revenues increased 27.9% in the quarter
ended December 31, 1999, compared to the same period in fiscal year 1999. The
Computer Supplies business segment includes the Company's U.S. computer supplies
operation, international computer supplies operation and IBM product sales. The
net revenue increase in the Computer Supplies business compared to the same
quarter in the prior year is primarily attributable to the Arlington
acquisition, growth in the international computer supplies business, and growth
in IBM product sales. U.S. Computer supplies net sales increased 3.2%, excluding
Arlington's net revenues of approximately $25 million, in the quarter ended
December 31, 1999, compared to the same period in the prior year. Net revenues
in the international computer supplies operations increased 17.0% in the quarter
ended December 31, 1999, compared to the same prior year period. The Company
experienced strong growth in both its Mexico and Australia subsidiaries. The
Company experienced declines in its Latin America business due to tightened
credit policies and general economic conditions. The Company's Singapore
operations continued to be challenged, which resulted in a revenue decline
compared to the same period in fiscal 1999. The Company continually evaluates
the business plans and viability of its foreign operations. Net revenues related
to the Company's IBM product sales increased due to higher sales volumes under
North American distributor agreements and the new European distributor
agreements. Professional Tape Products net revenues decreased 8.3% in the third
quarter of fiscal year 2000 compared to the same period in fiscal year 1999 due
primarily to price degradation in certain product lines and the disposition of
the Steadi-Systems professional hardware business, both partially offset by the
acquisition of several professional tape businesses in the current year. PFSweb
also experienced an increase in its service fee-based activity as a result of
new contracts and expansion of existing contracts.
Gross Profit. The Company's gross profit as a percent of net revenues was
8.3% for the three months ended December 31, 1999 as compared to 11.9% for the
three months ended December 31, 1998. The Company's gross profit for the quarter
was negatively impacted by certain incremental charges of $1.0 million. Gross
profit as a percent of net revenues was 10.0% for the nine months ended December
31, 1999 as compared to 12.0% for the nine months ended December 31, 1998.
Excluding certain incremental charges of $4.2 million, gross profit as a percent
of net revenues was 10.6% for the nine months ended December 31, 1999. The
decrease in the Company's gross profit as a percentage of net sales was
primarily due to the Company's previously announced focus on the key balance
sheet areas of inventory and accounts receivable. In order to make improvements
in this area, the Company avoided certain vendor incentive programs, during the
three months ended December 31, 1999, that for comparative purposes have been
previously reflected in the Company's results. During fiscal year 1999, the
Company was also able to take advantage of certain enhanced product sourcing
opportunities which did not continue in fiscal year 2000 and, thus, negatively
impacted the fiscal year 2000 gross profit percentage on a comparative basis.
Additionally, the gross profit percentage declined in the International Computer
Supplies business due primarily to growth in international retail business,
which typically carries lower margins. Also contributing to the overall decline
in gross profit percentage was the revenue growth in IBM product sales, which
are also typically at lower margins. On a consolidated basis, the Company's
gross profit percentage was negatively impacted by costs associated with
PFSweb's large number of new client implementations. The Company believes that
its gross profit percentage may improve from levels reflected during its third
quarter, however, certain of these trends are expected to continue and could
potentially have a negative impact on gross margins as compared to the prior
year. In addition, the Company expects that competitive pressures in the
computer supplies operations may negatively impact gross margins during the
remainder of fiscal year 2000.
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SG&A Expenses. SG&A expenses for the three months ended December 31, 1999
were $25.3 million, or 8.9% of net revenues, as compared to $17.8 million, or
7.9% of net revenues, for the three months ended December 31, 1998. SG&A
expenses for the nine months ended December 31, 1999 were $68.7 million, or 9.0%
of net revenues, as compared to $51.8 million, or 7.7% of net revenues, for the
nine months ended December 31, 1998, excluding acquisition related costs in each
period and the reversal of loss on disposition of business. The increase in SG&A
expenses and the related increase in SG&A as a percentage of net revenues, for
the first three quarters of fiscal year 2000, is primarily attributable to (i)
the acquisition of Arlington on October 1, 1999, (ii) the investments in
resources and technology to implement new contracts and further develop
infrastructure for PFSweb and, (iii) a reduction in net sales to large office
superstores, which typically have lower SG&A expense ratios. This impact on the
SGA percentage was partially offset by an increase in IBM product sales with
lower SG&A expense ratios. SG&A expenses for the three and nine month periods
ended December 31, 1999, included incremental charges primarily related to
certain repositioning and separation activities associated with the PFSweb
spin-off, certain other charges as a result of these activities, to increase
allowances for bad debts related primarily to issues in the Company's Latin
American accounts receivable and for legal and professional fees related to an
unsolicited acquisition offer. Over the next few quarters, the Company expects
to record additional incremental charges of $1.5 million to $2.0 million for the
remainder of these activities, and for acquisition integration expenses related
to the purchase of Arlington in October 1999.
Acquisition Related Costs. During the nine months ended December 31, 1999,
the Company recorded costs of approximately $0.6 million applicable to
transition, integration and merger activities within its Professional Tape
Division. During this same period in fiscal year 1999, Daisytek incurred various
acquisition costs of $0.7 million related to accounting, legal and other costs
applicable to the acquisition of The Tape Company.
Loss on Disposition of Business. In fiscal 1999, the Company recorded a
charge of $2.8 million related to the disposition of its professional tape
hardware business. In the second quarter of fiscal year 2000, the Company
reversed $1.0 million of this charge related to facility lease termination
costs, since management now believes it will be able to avoid some of these
costs.
Interest Expense. Interest expense for the three months ended December 31,
1999 was $1.5 million as compared to $0.6 million for the three months ended
December 31, 1998. Interest expense for the nine months ended December 31, 1999
was $3.2 million as compared to $2.3 million for the nine months ended December
31, 1998. Interest expense was higher for the nine months ended December 31,
1999, primarily due to higher debt balances caused by business acquisitions and
higher working capital levels throughout the year. This impact was partially
offset by lower interest rates and by proceeds from the PFSweb IPO which was
completed in December 1999. The weighted average interest rate was 6.3% and 6.7%
during the nine months ended December 31, 1999 and 1998, respectively.
Income Taxes. The Company's effective tax rate was approximately zero for
the three months ended December 31, 1999 compared to 39.0% for the three months
ended December 31, 1998. The effective tax rate for the nine months ended
December 31, 1999 and 1998 was 65.5% and 37.9%, respectively. The income tax
provision is negatively impacted for the three and nine month periods ending
December 31, 1999, due to losses generated by PFSweb for which no income tax
benefit has been recorded. Due to the Company's limited operating history in
Europe, it is uncertain whether it is "more likely than not" that the Company
will be able to utilize its cumulative tax losses and therefore no tax benefit
has been recorded related to these losses. Additionally, although PFSweb will
continue to be included in the Company's consolidated U.S. tax return through
the spin-off, for the period between the IPO and the spin-off, any loss
generated by PFSweb, in excess of established limits, may not be utilized at a
consolidated level. Accordingly, no benefit has been recorded related to
PFSweb's U.S. operating loss subsequent to the IPO. To the extent PFSweb's U.S.
entities or European subsidiary have tax losses in future quarters, prior to the
spin-off, it will continue to negatively impact the Company's consolidated
income tax provision.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary source of cash has been from financing
activities. During the nine months ended December 31, 1999, net cash of $54.7
million was provided by financing activities, compared to net cash provided by
financing activities of $23.0 million for the nine months ended December 31,
1998.
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In December 1999, PFSweb successfully completed its IPO and sold 3,565,000
shares of common stock at $17 per share. Net proceeds from the IPO aggregated
approximately $53 million and were used to repay PFSweb's intercompany payable
to Daisytek, approximately $28 million, of which approximately $22 million was
paid as of December 31, 1999, 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. In connection
with this sale of assets, Daisytek and PFSweb have entered into a five year
agreement whereby PFSweb will provide transaction management services for
Daisytek's U.S. wholesale consumable supplies business. During the nine months
ended December 31, 1998, cash provided by financing activities was generated
primarily from proceeds from revolving lines of credit. In conjunction with the
Professional Tape Products segment's business combination, certain acquired debt
of The Tape Company was paid in full by the Company during the nine months ended
December 31, 1998. Included in cash flows from financing activities for the nine
months ended December 31, 1998 are distributions made to former shareholders of
The Tape Company relating to taxes incurred by these shareholders for earnings
of the business unit of The Tape Company, which was organized as a subchapter S
corporation. These distributions were made prior to the business combination
with the Company.
The Company's cash at December 31, 1999 is primarily related to the
remaining proceeds from the IPO, which are intended to be used for PFSweb's
anticipated capital expenditures, the remaining PFSweb payable balance to
Daisytek, future PFSweb working capital needs, and possible acquisitions by
PFSweb. Remaining IPO proceeds cannot be utilized to pay down the Company's
outstanding balance on its credit facility.
Net cash provided by operating activities for the nine months ended
December 31, 1999, was $6.8 million compared to net cash used in operating
activities of $2.7 million for the same period the prior year. Working capital
increased to $192.0 million at December 31, 1999 from $138.8 million at March
31, 1999. This increase of $53.2 million was primarily attributable to 1)
acquisition of the Arlington business, 2) remaining net PFSweb IPO proceeds; and
3) increase in accounts receivable related to growth in the existing business
units. These factors were partially offset by a decline in inventory levels
during this period. This reduction in inventory resulted from the Company's
focus on its critical balance sheet components. During the quarter ended
December 31, 1999, the Company experienced improvements in inventory turns in
all business units.
Funds used for investing activities during the nine months ended December
31, 1999 and 1998 primarily included costs to acquire businesses and capital
expenditures. During June 1999, the Company purchased assets of a regional
professional tape business for approximately $2.2 million, and in October 1999,
purchased certain assets and liabilities of a specialty wholesaler of copier and
fax consumables for approximately $19.5 million. Capital expenditures were
approximately $12.1 million and $6.1 million during the nine months ended
December 31, 1999 and 1998, respectively. These capital expenditures consisted
primarily of additions to upgrade the Company's management information systems
and expansion of its PFSweb distribution facilities, both domestic and foreign.
The Company anticipates that its total investment in upgrades and additions to
facilities for fiscal year 2000 will be approximately $14 million to $17
million. The Company's PFSweb subsidiary has a long-term contractual agreement
with one of its clients pursuant to which, as part of the services that PFSweb
provides, PFSweb finances certain of the client's inventory. This financing
agreement provided net cash flows of $3.4 million for the nine months ended
December 31, 1999, and used net cash flows of $9.4 million for the nine months
ended December 31, 1998. Subsequent to December 31, 1999 the client gave PFSweb
a preliminary indication that they might not have PFSweb finance this inventory
in the future.
At December 31, 1999, the Company's unsecured revolving lines of credit
provided for borrowings up to approximately $129 million. There were outstanding
balances on the lines of credit totaling $51.8 million at December 31, 1999,
leaving approximately $77 million available for additional borrowings.
In October 1999, the Company amended one of its unsecured revolving line of
credit agreements (the "Facility"), effective in November 1999, to increase the
maximum borrowing availability from $85 million to $105 million. This amendment
also provided for the release of PFSweb subsidiaries as guarantors of the
Facility upon (i) the effective date of the IPO of the shares of the common
stock of PFSweb, Inc. and (ii) the payment from PFSweb, Inc. to Daisytek in
settlement of the outstanding payable to Daisytek. In satisfaction of these
conditions, PFSweb subsidiaries have been released from their guarantee.
Additionally, this amendment also prohibits Daisytek from advancing funds to
PFSweb, except in the normal course of business. The Facility has also been
amended to increase the interest rate, effective March 1, 2000, to Eurodollar
rate plus 1.0% to 1.75% from Eurodollar rate plus .625% to 1.125%. The
expiration date of the Facility has also been extended to January 1, 2001. The
Company is currently in discussion with its lenders to enter into a new,
long-term line of credit agreement.
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The Company believes that international markets represent further
opportunities for growth. The Company attempts to protect itself from foreign
currency fluctuations by denominating substantially all of its non-Canadian and
non-Australian international sales in U.S. dollars. In addition, the Company has
entered into various forward Canadian and Australian currency exchange contracts
in order to hedge the Company's net investment in, and its intercompany payable
applicable to, its Canadian and Australian subsidiaries. The Company has the
following forward currency exchange contracts outstanding as of December 31,
1999:
CURRENCY TYPE US$ CONTRACT AMOUNT CONTRACT TYPE EXPIRATION
------------- ------------------- ------------- ----------
Canadian Dollars $8.3 million Sell Canadian Dollars May 2000
Australian Dollars $2.6 million Sell Australian Dollars February 2000
Australian Dollars $7.9 million Sell Australian Dollars April 2000
Australian Dollars $1.3 million Sell Australian Dollars April 2000
As of December 31, 1999, the Company had incurred unrealized losses of
approximately $0.2 million on the outstanding forward exchange contracts. The
Company may consider entering into other forward exchange contracts in order to
hedge the Company's net investment in its Canadian, Australian, Mexican, and
Singaporean subsidiaries, although no assurance can be given that the Company
will be able to do so on acceptable terms.
In the future, the Company may attempt to acquire other businesses to
expand its existing computer supplies and professional tape businesses in the
U.S. or internationally, expand its product line similar to the Company's entry
into the Professional Tape Products segment and expand its services or
capabilities in connection with its efforts to grow its PFSweb business. The
Company currently has no binding agreements to acquire any material businesses.
Should the Company be successful in acquiring other businesses, the Company may
require additional financing to consummate such a transaction. Acquisitions
involve certain risks and uncertainties, therefore, the Company can give no
assurance with respect to whether it will be successful in identifying such a
business to acquire, whether it will be able to obtain financing to complete
such an acquisition, or whether the Company will be successful in operating the
acquired business.
The Company believes it will be able to satisfy its working capital needs
for the next twelve months, as well as business growth and planned capital
expenditures, through funds available under the Company's various line of credit
facilities, trade credit, lease financing, internally generated funds and by
increasing the amount available under the Company's credit facilities. Further,
depending on market conditions and the terms thereof, the Company may also
consider obtaining additional funds through an additional line of credit, other
debt financing or the sale of capital stock; however, no assurance can be given
in such regard.
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QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The carrying value of the Company's financial instruments, which include
cash and cash equivalents and capital lease obligations, approximate their fair
values based on current market price and rates.
The Company is subject to market risk associated with changes in interest
rates and foreign currency exchange rates. Interest rate exposure is limited to
the Company's outstanding balances on its revolving lines of credit, which
amounted to $51.8 million at December 31, 1999. The interest rates on the
revolving lines of credit float with the market. A 50 basis point movement in
interest rates would result in an increase or decrease in interest expense of
approximately $259,000 annualized, based on the outstanding balances of the
revolving lines of credit at December 31, 1999.
The Company's foreign currency exchange rate risk is primarily limited to
Mexican Pesos, Canadian Dollars, Australian Dollars, Singapore Dollars and the
Euro. The Company's international sales and purchases are generally U.S. Dollar
based, except in Canada and Australia and, to a lesser extent, in Europe. In
order to mitigate foreign currency rate risk, the Company periodically enters
into foreign currency forward contracts to hedge the net investments and
long-term intercompany payable balances applicable to its Canadian and
Australian subsidiaries. The Company had four outstanding foreign currency
forward contracts at December 31, 1999. If the foreign exchanges rates of the
Canadian and Australian currencies fluctuate 10% from the December 31, 1999
rates, gains or losses in fair value on the four outstanding contracts would be
$2.4 million.
YEAR 2000 ISSUE
The Company completed its identification, assessment and remediation of the
year 2000 compliance issue ("Y2K") in December 1999. The total expenses incurred
by the Company related to Y2K was approximately $0.8 million, of which $0.3
million was incurred during the nine months ended December 31, 1999. These
expenses 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 customers 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 customers or service
providers.
INVENTORY MANAGEMENT
The Company manages its inventories held for sale in its wholesale
distribution business by maintaining sufficient quantities of product to achieve
high order fill rates while at the same time maximizing inventory turnover
rates. Inventory balances will fluctuate as the Company adds new product lines
and makes large purchases from suppliers to take advantage of attractive terms.
To reduce the risk of loss to the Company due to supplier price reductions and
slow moving inventory, the Company's purchasing agreements with many of its
suppliers, including most of its major suppliers, contain price protection and
stock return privileges under which the Company receives credits if the supplier
lowers prices on previously purchased inventory or the Company can return slow
moving inventory in exchange for other products.
SEASONALITY
Although the Company historically has experienced its greatest sequential
quarter revenue growth in its fourth fiscal quarter, management has not been
able to determine the specific or, if any, seasonal factors that may cause
quarterly variability in operating results. Management believes, however, that
factors that may influence quarterly variability include the overall growth in
the non-paper computer supplies industry and shifts in demand for the Company's
computer supplies products due to a variety of factors, including sales
increases resulting from the introduction of new products. The Company generally
experiences a relative slowness in sales during the summer months, which may
adversely affect the Company's first and second fiscal quarter results in
relation to sequential quarter performance.
The seasonality of the Company's PFSweb business is dependent upon the
seasonality of its clients' business and their sale of their products.
Accordingly, management must rely upon the projections of its
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PFSweb clients in assessing quarterly variability. We believe that as the PFSweb
business grows with consumer product clients, its business activity will be more
significant in the quarter ended December 31.
The Company believes 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 the
Company's operations.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB 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. The Company presently utilizes derivative financial
instruments only to hedge its net investments in certain of its foreign
operations. SFAS No. 133 requires gains or losses on these financial instruments
in other comprehensive income as a part of the cumulative translation
adjustment. The Company is currently evaluating the provisions of SFAS No. 133
and its effect on the accounting treatment of these financial instruments. 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. Early
adoption of the standard is allowed, however, the statement cannot be applied
retroactively to financial statements of prior periods.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
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.
10.1 PFSweb, Inc. Underwriting Agreement by and among
PFSweb, Inc., Daisytek International Corporation and
the Underwriters named therein.
27.1 Financial Data Schedule for the nine months ended
December 31, 1999
27.2 Financial Data Schedule for the nine months ended
December 31, 1998
b) Reports on Form 8-K:
None.
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23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 14, 2000
DAISYTEK INTERNATIONAL CORPORATION
By: /s/ Thomas J. Madden
----------------------------------
Thomas J. Madden
Chief Financial Officer,
Chief Accounting Officer,
Vice President - Finance
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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.
10.1 PFSweb, Inc. Underwriting Agreement by and among
PFSweb, Inc., Daisytek International Corporation and
the Underwriters named therein.
27.1 Financial Data Schedule for the nine months ended
December 31, 1999
27.2 Financial Data Schedule for the nine months ended
December 31, 1998