1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _______ to _______
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 August 11, 2000 there were 16,142,273 shares of the registrant's common stock
outstanding.
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 2000
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
-----------
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 2000 (Unaudited) and
March 31, 2000.......................................................... 3
Unaudited Interim Consolidated Statements of Operations for the
Three Months Ended June 30, 2000 and 1999 .............................. 4
Unaudited Interim Consolidated Statements of Cash Flows for the
Three Months Ended June 30, 2000 and 1999............................... 5
Notes to Unaudited Interim Consolidated Financial Statements.............. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................. 20
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ........................................... 21
SIGNATURES ............................................................................ 22
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
JUNE 30, MARCH 31,
ASSETS 2000 2000
----------- ---------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 26,118 $ 28,186
Accounts receivable, net of allowance for doubtful accounts of
$6,236 and $6,031 at June 30, 2000 and March 31, 2000,
respectively ............................................. 160,003 167,705
Inventories, net ............................................. 123,690 96,371
Prepaid expenses and other current assets .................... 13,156 7,812
Income taxes receivable ...................................... 2,668 3,714
Deferred tax asset, net ...................................... 6 249
--------- ---------
Total current assets ........................... 325,641 304,037
--------- ---------
PROPERTY AND EQUIPMENT, at cost:
Furniture, fixtures and equipment ............................ 55,446 52,491
Leasehold improvements ....................................... 5,690 5,692
--------- ---------
61,136 58,183
Less - Accumulated depreciation and amortization ............. (29,512) (27,523)
--------- ---------
Net property and equipment ..................... 31,624 30,660
OTHER ASSETS ..................................................... 501 528
EMPLOYEE RECEIVABLE .............................................. 528 518
EXCESS OF COST OVER NET ASSETS ACQUIRED, net ..................... 39,539 37,003
--------- ---------
Total assets ................................... $ 397,833 $ 372,746
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ............................ $ 45,502 $ 42,392
Trade accounts payable ....................................... 113,331 92,978
Accrued expenses ............................................. 13,250 14,746
--------- ---------
Total current liabilities ...................... 172,083 150,116
--------- ---------
LONG-TERM DEBT, less current portion ............................. 2,356 2,431
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST ................................................ 9,466 9,513
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000,000 shares authorized
at June 30, 2000 and March 31, 2000; none issued
and outstanding .......................................... -- --
Common stock, $0.01 par value; 30,000,000 shares
authorized at June 30, 2000 and March 31, 2000;
17,643,711 and 17,600,164 shares issued and
outstanding at June 30, 2000 and March 31, 2000,
respectively ............................................. 176 176
Additional paid-in capital ................................... 137,240 136,736
Retained earnings ............................................ 79,320 76,340
Accumulated other comprehensive income ....................... (2,808) (2,566)
--------- ---------
Total shareholders' equity ..................... 213,928 210,686
--------- ---------
Total liabilities and shareholders' equity ..... $ 397,833 $ 372,746
========= =========
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
JUNE 30,
---------------------
2000 1999
-------- --------
Net revenues ..................................... $284,926 $233,237
Cost of revenues ................................. 253,140 205,971
-------- --------
Gross profit ............................. 31,786 27,266
Selling, general and administrative expenses ..... 25,701 19,288
Acquisition related costs ........................ -- 370
-------- --------
Income from operations ................... 6,085 7,608
Interest expense, net ............................ 691 750
-------- --------
Income before income taxes ............... 5,394 6,858
Provision for income taxes ....................... 2,461 2,675
-------- --------
Income before minority interest .......... 2,933 4,183
Minority interest ................................ 47 --
-------- --------
Net income ............................... $ 2,980 $ 4,183
======== ========
Net income per common share:
Basic .................................... $ 0.17 $ 0.24
======== ========
Diluted .................................. $ 0.17 $ 0.24
======== ========
Weighted average common and common share
equivalents outstanding:
Basic .................................... 17,639 17,166
Diluted .................................. 17,720 17,760
The accompanying notes are an integral part of these unaudited interim
consolidated statements.
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED
JUNE 30,
----------------------
2000 1999
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................ $ 2,980 $ 4,183
Adjustments to reconcile net income to net cash provided by
(used in) operating activities --
Depreciation and amortization ...................................... 2,768 1,804
Provision for doubtful accounts .................................... 850 879
Minority interest .................................................. (47) --
Non-cash compensation expense ...................................... 16 --
Deferred income tax benefit (provision) ............................ 243 (301)
Changes in operating assets and liabilities --
Accounts receivable ............................................ 10,714 (3,034)
Inventories, net ............................................... (20,875) (2,979)
Prepaid expenses and other current assets ...................... (6,487) 1,456
Trade accounts payable and accrued expenses .................... 13,903 (10,007)
Income tax receivable .......................................... 1,058 2,000
-------- --------
Net cash provided by (used in) operating activities ....... 5,123 (5,999)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................................... (3,210) (2,612)
Acquisitions of businesses, net of cash acquired ...................... (2,614) (2,320)
Advances to employees, net ............................................ (115) (32)
Decrease (increase) in note receivable and other assets ............... 1,655 (163)
-------- --------
Net cash used in investing activities ..................... (4,284) (5,127)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit, net ........................... 3,258 12,901
Payments on capital leases and notes payable .......................... (6,593) (59)
Net proceeds from exercise of stock options and issuance of
common stock ..................................................... 519 106
-------- --------
Net cash provided by (used in) financing activities ....... (2,816) 12,948
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS .................... (91) (291)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...................... (2,068) 1,531
CASH AND CASH EQUIVALENTS, beginning of period ............................ 28,186 1,551
-------- --------
CASH AND CASH EQUIVALENTS, end of period .................................. $ 26,118 $ 3,082
======== ========
The accompanying notes are an integral part of these unaudited interim
consolidated statements.
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- OVERVIEW AND BASIS OF PRESENTATION
Daisytek International Corporation and its subsidiaries ("the Company" or
"Daisytek") is a leading wholesale distributor of non-paper computer and office
automation supplies and accessories ("computer and office supplies") and
professional-grade video and audio media products ("professional tape products")
and also a leading provider of transaction management services to both
traditional and electronic commerce, or e-commerce, companies. The Company's
three reportable segments are strategic business units that offer different
products and services and are managed separately based on fundamental
differences in their operations.
Computer and Office Supplies
The computer and office supplies products include laser toner, inkjet
cartridges, copier and fax supplies, printer ribbons, diskettes, optical storage
products, computer tape cartridges, accessories such as cleaning kits and media
storage files, paper, envelopes and business forms, writing instruments, office
machines and all desktop supplies. These products are used in a broad range of
computers and office automation products including laser and inkjet printers,
photocopiers, fax machines and data storage products. The Company's computer and
office supplies customers include value-added resellers, computer supplies
dealers, office product dealers, contract stationers, buying groups, computer
and office product superstores, drug and convenience stores, .coms, direct
marketers and other retailers who resell the products to end-users. The computer
and office supplies segment distributes products primarily in the United States,
Canada, Australia, Mexico and South America.
Professional Tape Products
In January 1998, the Company expanded its product line by acquiring
Steadi-Systems, Ltd. ("Steadi-Systems"), an independent wholesale distributor of
professional tape products and related hardware to the filmed entertainment and
multimedia industries. The Company further expanded its operations in the
distribution of pro-tape products through the acquisition of The Tape Company in
June 1998 and the purchase of the professional tape division of Videotape
Products, Inc. ("VTP") in March 1999. Through Steadi-Systems, The Tape Company,
and VTP, the Company distributes a wide array of professional-grade audio and
video media products to customers including production companies,
post-production operations, broadcast stations, corporate in-house production
facilities, advertising agencies, and cable television providers.
PFSweb
PFSweb, Inc.'s ("PFSweb") business unit was formed in 1991 and expanded in
1996 under the name "Priority Fulfillment Services." PFSweb is an international
provider of transaction management services to both traditional and e-commerce
companies and sells products and services primarily in the United States, Canada
and Europe. PFSweb offers such services as professional consulting services,
e-market place order management, web-enabled customer contact centers, customer
lifecycle management, billing and collection services, information management
and international distribution services. PFSweb provides its services under
fee-based contracts where service fee revenue is based on either the sales value
of the products or service activity volume.
In December 1999, PFSweb completed an initial public offering ("IPO") of
3,565,000 shares of its common stock. At June 30, 2000, the Company owned
approximately 80.1 percent of the outstanding shares of common stock of PFSweb.
Minority interest represents minority shareholders proportionate share of the
equity in PFSweb. On July 6, 2000, the Company completed the spin-off of PFSweb
through a distribution to Daisytek shareholders of its remaining 80.1 percent
ownership in PFSweb. See also Note 8 of these Notes to Unaudited Interim
Consolidated Financial Statements.
In the opinion of management, the Unaudited Interim Consolidated Financial
Statements of the Company include all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of the Company's
financial position as of June 30, 2000, its results of operations and its
results of cash flows for the three months ended June 30, 2000 and 1999. 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").
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Unaudited Interim 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, 2000 (the "Company's Form 10-K"). Accounting
policies used in the preparation of the Unaudited Interim 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.
NOTE 2 - COMPREHENSIVE INCOME
Comprehensive income 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 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.
The following table sets forth comprehensive income ( in thousands ):
THREE MONTHS ENDED
JUNE 30,
--------------------
2000 1999
------- -------
Net income ...................... $ 2,980 $ 4,183
Comprehensive income adjustments:
Foreign currency translation
adjustment .............. (242) 320
------- -------
Comprehensive income ............ $ 2,738 $ 4,503
======= =======
NOTE 3 - NET INCOME PER COMMON SHARE
Basic net income per common share is calculated by dividing net income by
the weighted-average number of common shares outstanding for each period.
Diluted net income per share is calculated by dividing net income by the
weighted average common shares and common share equivalents outstanding for each
period. The difference between the Company's basic and diluted weighted average
common shares outstanding is due to dilutive common stock options outstanding.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
THREE MONTHS ENDED
JUNE 30,
-------------------
2000 1999
------- -------
NUMERATOR:
Net income ........................................ $ 2,980 $ 4,183
======= =======
DENOMINATOR:
Denominator for basic earnings per share -
Weighted average shares.......................... 17,639 17,166
Effect of dilutive securities:
Employee stock options .......................... 81 594
------- -------
Denominator for diluted earnings per share -
Adjusted weighted average shares and
assumed conversions .......................... 17,720 17,760
======= =======
Net income per common share:
Basic ........................................... $ 0.17 $ 0.24
======= =======
Diluted ......................................... $ 0.17 $ 0.24
======= =======
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - BUSINESS COMBINATIONS
On May 3, 2000, the Company acquired certain assets and liabilities of B.A.
Pargh Company, LLC, a wholesaler of office products and customer of PFSweb, for
approximately $3.0 million, of which approximately $1.0 million is subject to
adjustment for realization of assets at lower than book value acquired. In
addition, as part of this acquisition, the Company paid off approximately $6.5
million in assumed debt. The acquisition was accounted for by the purchase
method of accounting for business combinations and resulted in approximately
$3.0 million of goodwill, which is being amortized over 20 years. The entire
cost of the acquisition was funded through the Company's availability under its
credit facility. This acquisition is not material to the financial position or
results of operations of the Company.
NOTE 5 - SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS)
THREE MONTHS ENDED
JUNE 30,
-------------------
2000 1999
---- ----
Cash paid during the period for:
Interest .................. $692 $591
Income taxes .............. $843 $402
NOTE 6 - SEGMENT AND GEOGRAPHIC INFORMATION
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 and Office Supplies
segment, which is eliminated as part of the intersegment elimination. In
addition, PFSweb and Computer and Office 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 three month periods ended June 30, 2000 and 1999. The following
tables set forth information as to the Company's reportable segments (in
thousands):
COMPUTER PROFESSIONAL
AND OFFICE TAPE INTERSEGMENT
SUPPLIES PRODUCTS PFSWEB ELIMINATIONS TOTAL
---------- ------------ --------- ------------ ---------
THREE MONTHS ENDED JUNE 30, 2000
Net revenues .................... $ 257,926 $ 20,919 $ 13,370 $ (7,289) $ 284,926
Operating contribution .......... 5,974 1,250 (505) -- 6,719
THREE MONTHS ENDED JUNE 30, 1999
Net revenues .................... $ 207,664 $ 22,561 $ 9,250 $ (6,238) $ 233,237
Operating contribution .......... 6,736 1,679 (437) -- 7,978
ASSETS
June 30, 2000 ................... $ 300,147 $ 42,129 $ 55,557 $ -- $ 397,833
March 31, 2000 .................. 268,807 43,638 60,405 (104) 372,746
The Company's Computer and Office 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.
Reconciliation of segment operating contribution to consolidated income
before taxes is as follows (in thousands):
THREE MONTHS ENDED JUNE. 30,
----------------------------
2000 1999
-------- --------
Segment operating contribution ................... $ 6,719 $ 7,978
Acquisition related costs (a) .................... -- (370)
Transition costs (b) ............................. (634) --
Interest expense ................................. (691) (750)
------- -------
Consolidated income before income taxes .......... $ 5,394 $ 6,858
======= =======
(a) These charges relate to the Professional Tape Products segment.
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(b) Transition costs paid by the Company have not been allocated to the
reportable segments. These costs relate to certain repositioning and
separation activities associated with the spin-off of PFSweb and
certain other charges as a result of these activities.
NOTE 7 - NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires that an entity
recognize all derivative financial instruments as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. If certain conditions are met, a derivative may be used to hedge certain
types of transactions, including foreign currency exposures of a net investment
in a foreign operation. SFAS No. 133 is effective for fiscal years beginning
after June 15, 2000, with initial application as of the beginning of an entity's
fiscal quarter. The Company is currently evaluating the provisions of SFAS No.
133 and its effect, if any, on the Company's financial statements.
During 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition." SAB No. 101 requires that
revenue generally is realized or realizable and earned when all of the following
criteria are met: (i) persuasive evidence of an arrangement exists, (ii)
delivery has occurred or services have been rendered, (iii) the seller's price
to the buyer is fixed or determinable, and (iv) collectibility is reasonably
assured. SAB No. 101 is effective for the Company's fourth quarter ending March
31, 2001. The Company is currently evaluating the provisions of SAB No. 101 and
its effect, if any, on the Company's financial statements.
NOTE 8 - SUBSEQUENT EVENTS
PFSweb Spin-off
On July 7, 2000, the Company announced the completion of the spin-off of
PFSweb by means of a tax-free distribution of the Company's remaining 80.1
percent ownership of PFSweb. The pro rata distribution of 14,305,000 shares of
PFSweb was made at the close of business July 6, 2000 to Daisytek shareholders
of record as of June 19, 2000 (the "Record Date"). Based on the shares
outstanding of each company on the Record Date, Daisytek shareholders received
approximately 0.81 shares of PFSweb stock for each share of Daisytek stock they
owned on the Record Date. In June, 2000, the Company received a favorable
private letter ruling from the Internal Revenue Service regarding the tax-free
treatment of the distribution of Daisytek's remaining ownership in PFSweb. The
spin-off is intended to establish PFSweb as a stand-alone entity with objectives
separate from those of the Company.
In connection with the completion of the spin-off, as of July 6, 2000, all
outstanding Daisytek options ("Daisytek Pre-spin Options") were adjusted and/or
replaced with Daisytek options (the "Daisytek Post-spin Options") and PFSweb
options (the "PFSweb Post-spin Options," and together with the Daisytek
Post-spin Options, the "Replacement Options").
In general, the exercise price and the number of shares subject to each of
the Replacement Options was established pursuant to a formula designed to ensure
that: (1) the aggregate "intrinsic value" (i.e. the difference between the
exercise price of the option and the market price of the common stock underlying
the option) of the Replacement Option did not exceed the aggregate intrinsic
value of the outstanding Daisytek Pre-spin Option which is replaced by such
Replacement Option immediately prior to the spin-off, and (2) the ratio of the
exercise price of each option to the market value of the underlying stock
immediately before and after the spin-off was preserved.
Substantially all of the other terms and conditions of each Replacement
Option, including the time or times when, and the manner in which, each option
is exercisable, the duration of the exercise period, the permitted method of
exercise, settlement and payment, the rules that apply in the event of the
termination of employment of the employee, the events, if any, that may give
rise to an employee's right to accelerate the vesting or the time or exercise
thereof and the vesting provisions, is the same as those of the replaced
Daisytek Pre-spin Option, except that option holders who are employed by one
company are permitted to exercise, and are subject to all of the terms and
provisions of, options to acquire shares in the other company as if such holder
was an employee of such other company.
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company will continue to have significant ongoing relationships with
PFSweb. Both companies are parties to various agreements providing for the
separation of their respective business operations. The agreements govern
various ongoing relationships between the companies including the transaction
management services that PFSweb provides for Daisytek and 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 the Company and PFSweb were made in the context of a parent-subsidiary
relationship and were negotiated in the overall context of the spin-off. The
Company believes that the terms of these agreements are consistent with fair
market values. However, there can be no assurances that the prices charged to,
or by, each company under these agreements are not higher or lower than the
prices that may be charged to, or by, unaffiliated third parties for similar
services.
Stock Repurchase
On July 10, 2000, the Company's Board of Directors announced the
authorization of the repurchase of up to 10% of the outstanding shares of its
common stock. This repurchase program will occur periodically, through open
market transactions, subject to prevailing market conditions and other
considerations. Based upon the number of outstanding shares on the date of
authorization, the Company was authorized to repurchase up to approximately 1.8
million shares. As of August 8, 2000, the Company had repurchased approximately
1.5 million of its outstanding shares.
Stock Options
Subsequent to June 30, 2000, the Company granted approximately 1.8 million
stock options under terms of its stock option compensation plans. The purpose of
this grant is to benefit and advance the interests of Daisytek by rewarding
directors, officers and certain key employees for their contributions to
Daisytek and thereby motivating them to continue to make such contributions in
the future. The stock options, which were granted at market price, generally
vest over a three year period from the date of the grant and expire 10 years
after the date of the grant.
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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 document.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This document contains both historical and forward-looking statements. All
statements other than statements of historical fact are, or may be deemed to be,
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of
1934, as amended. You can identify these statements by the fact that they do not
relate strictly to historical or current facts, but rather reflect our current
expectations concerning future results and events. They include words such as
"anticipate," "will," "expect," "estimate," "believe," "intend," "plan,"
"could," "may," "future," "target," and similar expressions and variations
thereof. Forward-looking statements relating to such matters as our financial
condition and operations are based on our management's current intent, belief or
expectations regarding us or our industry. These forward-looking statements are
not guarantees of future performance and involve risks, uncertainties and
assumptions that are difficult to predict. In addition, some forward-looking
statements are based upon assumptions as to future events that may not prove to
be accurate. Therefore, actual outcomes and results may differ materially from
what is expected or forecasted in such forward-looking statements. We undertake
no obligation to update publicly any forward-looking statement for any reason,
even if new information becomes available or other events occur in the future.
Certain factors, including, but not limited to, general economic
conditions, industry trends, the loss of key suppliers or customers, the loss of
strategic product shipping relationships, customer demand, product availability,
competition (including pricing and availability), risks inherent in acquiring,
integrating and operating new businesses, concentrations of credit risk,
distribution efficiencies, capacity constraints, technological difficulties,
exchange rate fluctuations, and the regulatory and trade environment (both
domestic and foreign) could cause our actual results to differ materially from
the anticipated results or other expectations expressed in our forward-looking
statements. There may be additional risks that we do not currently view as
material or that are not presently known.
OVERVIEW
Daisytek is a leading wholesale distributor of computer, copier, fax and
office supplies products, professional audio and video tape products and also a
leading provider of transaction management services to both traditional and
e-commerce companies with operations in three business segments: (1) Computer
and Office Supplies; (2) Professional Tape Products; and (3) transaction
management services conducted by our majority owned subsidiary, PFSweb, Inc.
("PFSweb".) These reportable segments are strategic business units that offer
different products and services and are managed separately, based on fundamental
differences in their operations. We sell our products and services in the United
States, Canada, Australia, Mexico, South America, the Pacific Rim and Europe.
Our Computer and Office Supplies segment began operations in the United
States in the 1980's and expanded internationally into Canada in 1989, Mexico in
1994 and Australia/Asia in 1996. This segment distributes over 10,000 nationally
known, name-brand computer supplies products to over 30,000 customers. These
products are manufactured by over 150 original equipment manufacturers,
including Hewlett-Packard, Canon, Sharp, Lexmark, IBM, Okidata, Apple,
Panasonic, Imation, Epson, Sony, Xerox, Brother and Maxell. We believe we are
one of the world's largest wholesale distributors of computer supplies, office
products, and film and tape media. The B.A. Pargh acquisition has added to the
above, more than 7,000 additional office products and supplies which are shipped
to over 20,000 customer locations.
Our Professional Tape Products segment began in 1998 and currently
distributes more than 3,000 professional tape products to over 26,000 customers.
Our customers primarily include production and broadcast companies, advertising
and governmental agencies, cable television providers, educational institutions
and healthcare providers. Our professional tape products include videotape,
audiotape, motion picture film and data storage media.
PFSweb is an international provider of business infrastructure solutions
for manufacturers, distributors and retailers that enables the rapid development
and deployment of traditional and e-business strategies. PFSweb offers a
complete array of services to support its clients' current and future business
initiatives. PFSweb's solutions include professional consulting services, order
management, web-enabled customer contact services, billing and collection
services, information management and international fulfillment and distribution
services. PFSweb currently provides 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.
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During December 1999, we completed the first phase in our plan to spin-off
PFSweb through the completion of an initial public offering of 19.9% of PFSweb
stock. On July 6, 2000 we completed the tax-free spin-off of PFSweb through a
distribution to Daisytek shareholders of our 80.1% ownership interest in PFSweb.
See also Note 8 of the accompanying Notes to Unaudited Interim Consolidated
Financial Statements. Subsequent to the spin-off, PFSweb operates as a separate
company and Daisytek does not retain any ownership in PFSweb. As a result of the
PFSweb spin-off, the following business strategy discussion relates only to the
Daisytek business, excluding PFSweb.
BUSINESS STRATEGY
Daisytek's focus is as a low cost distributor in the growing computer and
office supplies industry in the United States and international markets. We base
our continued growth on the following strategies:
1) Expansion of our existing product offering to include a full line of
office products;
2) Growth of our customer base by investing in the development of
emerging customer channels, particularly in electronic commerce;
3) Development of client services related to our competencies in customer
care and demand generation;
4) Expansion of our product and service offerings into new international
markets; and
5) Actively pursue acquisitions, where appropriate, to support both
operating and financial strategies.
Our Computer and Office Supplies segment specializes in computer supplies
that have longer life cycles and lower risk of technological obsolescence than
hardware and software products. We believe 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 we distribute. Continuing automation of the workplace
and the tremendous growth in color printing technologies that use consumable
supplies at higher rates also fuel the demand for the computer supplies product
offering. We offer these products to our domestic 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. We plan to expand sales to existing customers including those in the
contract stationer, VAR, computer and office-product dealer, and superstore
channels, as well as develop newer customer channels.
We began our expansion of products to include a full line of office
products through the acquisition of B.A. Pargh, which was completed in May 2000.
This acquisition adds over 7,000 products to our existing product lines. In
addition, it brings new customers that previously have not purchased from us.
The consolidation in the office products industry has required dealers to focus
on gaining efficiencies in their business. As a result, there is an emerging
segment of office product dealers, particularly large contract stationers, who
possess their own distribution and delivery infrastructure and who are
aggressively seeking a lower cost alternative to the traditional higher cost
office products wholesale model. Our low cost distribution model, coupled with
our relationship with PFSweb, positions us to take advantage of the demand for a
lower cost distributor. B.A. Pargh's primary markets are in the Central and
Eastern United States and in Puerto Rico.
We are also focusing on new customer channels such as mass merchants,
grocery and convenience stores, direct mail marketers and internet business
sites. We have dedicated an internal team to leverage our experience in
e-commerce, telemarketing and computer supplies to assist these customers in
including our growing line of products into their own offerings. We intend to
use our suite of electronic services, our lower cost distribution model, our
expanding offering of products, along with our experience in selling computer
and office consumables to aggressively market to these new and emerging
channels.
Daisytek has been testing new service programs with various suppliers and
business partners. These programs build on Daisytek's core competencies in
customer service and proactive demand generation. In these programs, Daisytek
takes over, on behalf of the supplier, the management of customer relationships
in defined parts of the supplier's or partner's existing business, or possibly
in new business areas. Services provided fall under categories including
database management, proactive outbound telemarketing, high level customer
support and proactive e-marketing. These services will be provided by a newly
established, wholly-owned subsidiary of Daisytek, under the
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name Virtual Demand, which will charge fees on a transaction basis to our
clients. A dedicated sales team has been formed and is currently marketing these
service programs to a variety of companies.
We continue to research new markets to expand our international computer
supplies business. Many international markets have exponentially higher growth
opportunities for consumable computer supplies than the United States.
Presently, we operate sales and distribution centers in Canada, Mexico and
Australia and export products into Latin America, the Pacific Rim and throughout
much of the rest of the world. Our computer supplies experience and broad
product range place us in a competitive position in emerging international
markets.
We plan to enhance growth by seeking strategic acquisition opportunities in
our computer and office supplies business, or to add selected product lines and
customers that can capitalize on Daisytek's expertise in distribution and
call-center management, or that may add technology and service offerings to our
business. In this regard, on October 1, 1999, we acquired certain assets and
liabilities of Arlington Industries, Inc., a domestic based specialty wholesaler
primarily focused on copier and fax consumable supplies. Additionally, on May 3,
2000, we acquired certain assets and liabilities of B.A. Pargh LLC, discussed
previously.
Daisytek Stand Alone (Excluding PFSweb, Inc.)
The following is an unaudited adjusted historical financial presentation of
the Daisytek business units, excluding PFSweb, for the first fiscal quarter of
2001 and 2000. This information is supplemental and is not intended to be
presented in accordance with generally accepted accounting principles. The
presentation takes into account certain one-time costs of reorganization
activities as a result of the planned separation of Daisytek and PFSweb of
approximately $0.6 million during the first quarter of fiscal 2001, which
management believes are incremental to normal operations. This presentation also
includes the estimated impact of the transaction management services agreement
between Daisytek and PFSweb for all periods presented. The presentation excludes
acquisition related costs and minority interest.
We based the following data on available information and certain
assumptions. We believe that such assumptions provide a reasonable basis for
presenting our results, excluding PFSweb and adjusting for the transactions
described above. This financial information does not reflect what our results of
operations may be in the future.
Adjusted Statements of Income Data:
THREE MONTHS ENDED JUNE 30,
---------------------------
2000 1999
-------- --------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
(UNAUDITED)
Net revenues ....................................... $278,845 $230,046
Cost of revenues ................................... 248,644 203,883
-------- --------
Gross profit ..................................... 30,201 26,163
Selling, general and administrative expenses ....... 22,935 19,552
-------- --------
Income from operations ........................... 7,266 6,611
Interest expense, net............................... 1,007 652
-------- --------
Income before income taxes ....................... 6,259 5,959
Provision for income taxes ......................... 2,406 2,324
-------- --------
Net income ......................................... $ 3,853 $ 3,635
======== ========
Net income per common share:
Basic ............................................ $ 0.22 $ 0.21
======== ========
Diluted .......................................... $ 0.22 $ 0.20
Weighted average common and common share equivalents ======== ========
outstanding:
Basic ............................................ 17,639 17,166
Diluted .......................................... 17,720 17,760
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Adjusted Balance Sheet Data:
AS OF AS OF
JUNE 30, 2000 MARCH 31, 2000
------------- --------------
(IN THOUSANDS)
(UNAUDITED)
Working capital, excluding debt ........ $171,174 $168,067
Total assets ........................... 342,276 317,155
Total debt ............................. 45,235 42,144
Shareholders' equity ................... 176,072 172,549
CONSOLIDATED RESULTS OF OPERATIONS
The following table sets forth consolidated results of operations and other
financial data from Daisytek's unaudited interim consolidated statements of
income, including our 80.1% ownership of PFSweb, Inc.
THREE MONTHS ENDED JUNE 30,
---------------------------
2000 1999
--------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
CONSOLIDATED STATEMENTS OF INCOME DATA:
Net revenues ......................................... $284,926 $233,237
Cost of revenues ..................................... 253,140 205,971
-------- --------
Gross profit ......................................... 31,786 27,266
Selling, general and administrative expenses ......... 25,701 19,288
Acquisition related costs ............................ -- 370
-------- --------
Income from operations ............................... 6,085 7,608
Interest expense, net................................. 691 750
-------- --------
Income before income taxes ........................... 5,394 6,858
Provision for income taxes ........................... 2,461 2,675
-------- --------
Income before minority interest ...................... 2,933 4,183
Minority interest .................................... 47 --
-------- --------
Net income ........................................... $ 2,980 $ 4,183
======== ========
NET INCOME PER COMMON SHARE:
Basic .............................................. $ 0.17 $ 0.24
======== ========
Diluted ............................................ $ 0.17 $ 0.24
======== ========
Weighted average common and common share equivalents
outstanding:
Basic ........................................... 17,639 17,166
Diluted ......................................... 17,720 17,760
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
The following discussion relates to Daisytek, including its majority-owned
subsidiary, PFSweb. These are historical results and may not be representative
of our results after the spin-off of PFSweb.
Net Revenues. Net revenues for the three months ended June 30, 2000
increased $51.7 million, or 22.2%, to $284.9 million as compared to $233.2
million for the three months ended June 30, 1999. Computer and Office Supplies
net revenues increased 24.2% for the three months ended June 30, 2000, compared
to the three months ended June 30, 1999. The Computer and Office Supplies
business includes our domestic and international computer and office supplies
operations and IBM product sales. The net revenue increase in the Computer and
Office Supplies business compared to the prior year is primarily attributable to
the Arlington and B.A. Pargh acquisitions (which were not a part of the Daisytek
business last year), growth in the international computer supplies business, and
growth in IBM product sales. Over the last two years, the growth in sales for
the domestic computer supplies business has slowed from previously realized
levels. We believe this reduction is due, in large part, to slower industry
growth, large channel shifts, turmoil in certain customer segments and slower
printer placements. In addition, we have focused on certain margin initiatives
that have improved profitability but reduced the amount of lower margin revenue
opportunities.
Net revenue in the international computer supplies operations increased by
16.5% for the three months ended June 30, 2000 compared to the prior year.
Growth in this business was impacted by the closing of our Singapore operations,
which were consolidated into our Asia Pacific headquarters in Australia at the
end of March 2000. Additionally, the strong U.S dollar during the period
relative to the Canadian and Australian dollars had a negative
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impact on U.S. dollar growth rates in this business. The international business
grew by over 21% for the three months ended June 30, 2000 compared to the prior
year when calculated using only local currencies. Excluding Singapore, we
experienced growth in all international subsidiaries within this segment, with
particularly strong growth rates in Mexico and Australia.
Net revenues related to our IBM product sales increased due to higher sales
volumes under both our North American and European distributor agreements.
Professional Tape Products net revenue decreased 7.3% for the three months
ended June 30, 2000 compared to the prior year due primarily to price
degradation in certain product lines throughout fiscal year 2000. We may
continue to experience price degradation in our Professional Tape Products
segment in the future, which might have a negative impact on future growth
rates. We continually evaluate the business plans and future operating prospects
within this segment. PFSweb also experienced an increase in its service
fee-based activity primarily as a result of new contracts and expansion of
existing contracts.
Gross Profit. Gross profit as a percent of net revenues was 11.2% for the
three months ended June 30, 2000 as compared to 11.7% for the prior year. In the
U.S. business, the decrease in our gross profit as a percent of net revenues was
primarily due to our previously announced focus on inventory levels during the
latter half of fiscal 2000 which continued into the first quarter of 2001. In
order to make ongoing working capital improvements, we avoided certain vendor
incentive programs, that for comparative purposes have been previously reflected
in our prior year results. 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 at lower margins. We believe that
competitive pressures in the Computer and Office Supplies operations and
potential price degradation in the Professional Tape Products business may
continue to impact gross margins during the next year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") for the three months ended June 30, 2000 were
$25.7 million or 9.0% of net revenues, as compared to $19.3 million or 8.3% for
the three months ended June 30, 1999. Our SG&A expense for the three months
ended June 30, 2000 was negatively impacted by certain non-recurring transition
costs of approximately $0.6 million associated with the PFSweb spin-off.
Excluding these costs, our SG&A expense as a percentage of revenues would be
8.8% for the current quarter. The increase in SG&A expenses and the related
increase in SG&A as a percentage of net revenues is primarily attributable to
(i) the acquisitions of Arlington in October 1999 and B.A. Pargh in May, 2000,
(ii) the investments in resources and technology to implement new contracts and
further develop infrastructure for PFSweb and, iii) a reduction in net revenues
to large office superstores, which typically have lower SG&A expense ratios.
This impact on the SG&A percentage was partially offset by an increase in IBM
product sales and international retail sales, which typically have lower SG&A
expense ratios.
Acquisition Related Costs. In June 1998, we completed the acquisition of
the Tape Company through a stock-for stock merger, which was accounted for as a
pooling of interest in the accompanying Unaudited Interim Consolidated
Financial Statements and notes thereto. During the first quarter of fiscal 2000,
we recorded costs of $0.4 million applicable to transition, integration and
merger activities within our Professional Tape Products segment.
Interest Expense, net. Interest expense for the three months ended June 30,
2000 was $0.7 million as compared to $0.8 million for the three months ended
June 30, 1999. Interest expense was lower for the three months ended June 30,
2000 primarily due to interest income earned by PFSweb on its remaining proceeds
from its initial public offering, which was completed in December 1999. This
impact was offset by an increase in interest rates during the last year. Our
weighted average interest rate was 8.0% for the three months ended June 30, 2000
compared to 6.0% for the three months ended June 30, 1999.
Income Taxes. Our effective tax rate was approximately 45.6% for the three
months ended June 30, 2000 compared to 39.0% for the three months ended June 30,
1999. The income tax provision was negatively impacted during the quarter
primarily due to losses generated by our PFSweb European subsidiary for which no
income tax benefit has been recorded. Due to PFSweb's limited operating history
in Europe, it is uncertain whether it is "more likely than not" that we will be
able to utilize our cumulative tax losses and therefore no tax benefit has been
recorded related to these losses. Additionally, upon completion of the spin-off,
PFSweb will cease to be included in Daisytek's consolidated tax return.
Accordingly, because a sufficient history of earnings has not been established
by PFSweb on a stand-alone basis, a valuation allowance has been provided for
the net deferred income tax asset related to PFSweb as of June 30, 2000.
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LIQUIDITY AND CAPITAL RESOURCES
We expect to fund our anticipated cash requirements, including the
anticipated cash requirement of our capital expenditures and acquisition
activity, if any, with internally generated funds and other various external
sources of funds that may be available to us. The external sources of funds
include our credit agreements and amendments thereto and may include the future
issuance of debt, equity or other securities. However, we cannot assure you that
we will be able to access capital markets in the future on terms that will be
satisfactory to us. We believe that such internally and externally generated
funds will provide us with adequate liquidity and capital necessary for fiscal
2001.
Our cash at June 30, 2000 is primarily related to the remaining proceeds
from the PFSweb Offering, which are intended to be used for PFSweb's anticipated
capital expenditures, future PFSweb working capital needs, and possible
acquisitions by PFSweb. The remaining proceeds from the Offering cannot be
utilized by us to pay down our outstanding balance under our credit facility.
Subsequent to the Offering, PFSweb has been prohibited from borrowing from
Daisytek, except in the normal course of business, and no longer participated in
Daisytek's centralized cash management system.
Historically, our primary source of cash has been from financing
activities. Net cash used in financing activities was $2.8 million for the three
months ended June 30, 2000 compared to net cash provided by financing activities
of $12.9 million for the three months ended June 30, 1999. In conjunction with
the acquisition of B.A. Pargh during May 2000, certain acquired debt of
approximately $6.5 million was paid in full. This impact was partially offset by
proceeds received from the exercise of stock options and proceeds received on
the issuance of stock under an employee stock purchase program. The entire cost
of this acquisition was funded through our availability under our credit
facility and cash provided by operating activities, which has resulted in a net
use of funds for financing activities during this period. During the three
months ended June 30, 1999, cash provided by financing activities was generated
primarily from proceeds from revolving lines of credit.
Net cash provided by operating activities was $5.1 million for the three
months ended June 30, 2000 compared to net cash used in operating activities of
$6.0 million for the three months ended June 30, 1999. Working capital declined
to $153.6 million at June 30, 2000 from $153.9 million at March 31, 2000. This
result was primarily attributable to 1) acquisition of the B.A. Pargh business,
2) an increase in inventory primarily related to the IBM product, which was
offset by accounts payable associated with this inventory, and 3) a reduction in
accounts receivable due to improved collection efforts in certain business units
during the quarter.
Our principal use of funds for investing activities was capital
expenditures of $3.2 million and $2.6 million for the three months ended June
30, 2000 and 1999, respectively, and for acquisition of businesses of $2.6
million and $2.3 million for the three months ended June 30, 2000 and 1999,
respectively. See Note 4 of Notes to Unaudited Interim Consolidated Financial
Statements. The capital expenditures consisted primarily of additions to upgrade
our management information systems and expansion of our PFSweb distribution
facilities, both domestic and foreign. We anticipate that our total investment
in upgrades and additions to facilities for fiscal 2001 will be approximately
$10 million to $15 million, of which $7 million to $10 million will be incurred
by PFSweb. The Company's PFSweb subsidiary has had 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. During
fiscal 2000, this client indicated to PFSweb that they would not have PFSweb
finance this inventory in the future. This financing agreement provided net cash
flows of $1.7 million for the three months ended June 30, 2000 and used net cash
flows of $0.2 million for the three months ended June 30, 1999.
At June 30, 2000, our unsecured revolving lines of credit provided for
borrowings up to approximately $127.9 million. There were outstanding balances
on the lines of credit totaling $45.6 million (including an outstanding letter
of credit of $0.4 million) at June 30, 2000, leaving approximately $82.3 million
available for additional borrowings.
In October 1999, we amended one of our unsecured revolving line of credit
agreements (the "Facility"), effective in November 1999, to increase the maximum
borrowing availability from $85 million to $105 million. This amendment also
provided for the release of PFSweb subsidiaries as guarantors of the Facility
upon the occurrence of certain events, which have subsequently taken place.
Additionally, this amendment also prohibits Daisytek from advancing funds to
PFSweb, except in the normal course of business. The Facility was also amended
to increase the interest rate, effective March 1, 2000, to Eurodollar rate plus
1.0% to 1.75% from Eurodollar rate plus .625% to 1.125%. The expiration date of
the Facility was also extended to January 1, 2001.
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We are currently in negotiations regarding new credit facilities and we
expect to finalize these negotiations and to contract for new facilities before
the end of calendar year 2000. Management believes that any new facilities will
be on substantially comparable terms to the current facilities.
We believe that international markets represent further opportunities for
growth. We attempt to protect ourselves from foreign currency fluctuations by
denominating substantially all our non-Canadian and non-Australian international
sales in U.S. dollars. In addition, we have entered into various forward
Canadian and Australian currency exchange contracts in order to hedge our net
investments in, and our intercompany payables applicable to, our Canadian and
Australian subsidiaries. We have the following forward currency exchange
contracts outstanding as of June 30, 2000:
CURRENCY TYPE US$ CONTRACT AMOUNT CONTRACT TYPE EXPIRATION
- ----------------- ------------------- ----------------------- -------------
Canadian Dollars $8.6 million Sell Canadian Dollars November 2000
Australian Dollars $7.0 million Sell Australian Dollars November 2000
Australian Dollars $2.9 million Sell Australian Dollars November 2000
Australian Dollars $2.5 million Sell Australian Dollars August 2000
As of June 30, 2000, we had incurred net unrealized gains of approximately
$0.2 million on these outstanding Canadian and Australian forward exchange
contracts, which are included as a component of shareholders' equity. We may
consider entering into other forward exchange contracts in order to hedge our
net investment in our Canadian, Australian and Mexican subsidiaries, 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
existing computer and office supplies businesses in the U.S. or internationally,
expand our product lines (similar to our entry into the office supplies
business) and expand our services or capabilities in connection with our efforts
to grow our business. Subsequent to June 30, 2000, we have signed a non-binding
letter of intent for one potential acquisition opportunity. We have no other
binding agreements to acquire any material businesses. Should we be successful
in acquiring other businesses, we may require additional financing to consummate
such a transaction. Acquisitions involve certain risks and uncertainties,
therefore, we can give no assurance with respect to whether we will be
successful in identifying such a business to acquire, whether we will be able to
obtain financing to complete such an acquisition, or whether we will be
successful in operating the acquired business.
We believe that we will be able to satisfy our working capital needs for
the next twelve months, as well as business growth and planned capital
expenditures, through funds available under our various line of credit
facilities, trade credit, lease financing, internally generated funds and by
increasing the amount available under our credit facilities. Further, depending
on market conditions and the terms thereof, we 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.
OTHER MATTERS
Inventory Management
Daisytek 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 we add new product lines and make
large purchases from suppliers to take advantage of attractive terms. To reduce
the risk of loss due to supplier price reductions and slow moving inventory, we
have entered into purchasing agreements with many of our suppliers, including
most of our major suppliers, which contain price protection and stock return
privileges under which we receive credits if the supplier lowers prices on
previously purchased inventory or if we return slow moving inventory in exchange
for other products.
Seasonality
Although historically we have experienced our greatest sequential quarter
revenue growth in our fourth fiscal quarter, our management has not been able to
determine the specific or, if any, seasonal factors that may cause quarterly
variability in operating results. Our 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 our computer
supplies products due to a variety of factors, including sales increases
resulting from the introduction
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of new products. We generally experience a relative slowness in sales during the
summer months, which may adversely affect our first and second fiscal quarter
results in relation to sequential quarter performance.
The seasonality of PFSweb's business is dependent upon the seasonality of
their clients' business and of their sale of their products. Accordingly, our
management must rely upon the projections of PFSweb's customers 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
quarters ending December 31.
We believe results of operations for a quarterly period may not be
indicative of the results for any other quarter or for the full year.
Memphis Facility
The majority of our U.S. Computer and Office Supplies inventory and
distribution activity is located in a centralized warehouse and distribution
facility operated by PFSweb in Memphis, Tennessee. Although we have established
certain disaster recovery procedures, which include other warehouse and
distribution locations operated by Daisytek in the U.S., there can be no
assurance that the loss of this Memphis facility for any extended period of time
would not have a material effect on our business.
Inflation
Our management believes that inflation has not had a material effect on our
operations.
Stock Options
In connection with the completion of the spin-off, as of July 6, 2000, all
outstanding Daisytek options ("Daisytek Pre-Spin Options") were adjusted and/or
replaced with Daisytek options (the "Daisytek Post-spin Options") and PFSweb
options (the "PFSweb Post-Spin Options," and together with the Daisytek
Post-spin Options, the "Replacement Options.")
In general, the exercise price and the number of shares subject to each of
the Replacement Options was established pursuant to a formula designed to ensure
that: (1) the aggregate "intrinsic value" (i.e. the difference between the
exercise price of the option and the market price of the common stock underlying
the option) of the Replacement Option does not exceed the aggregate intrinsic
value of the outstanding Daisytek Pre-Spin Option which is replaced by such
Replacement Option immediately prior to the spin-off, and (2) the ratio of the
exercise price of each option to the market value of the underlying stock
immediately before and after the spin-off is preserved.
Substantially all of the other terms and conditions of each Replacement
Option, including the time or times when, and the manner in which, each option
is exercisable, the duration of the exercise period, the permitted method of
exercise, settlement and payment, the rules that apply in the event of the
termination of employment of the employee, the events, if any, that may give
rise to an employee's right to accelerate the vesting or the time or exercise
thereof and the vesting provisions, is the same as those of the replaced
Daisytek Pre-spin Option, except that option holders who are employed by one
company are permitted to exercise, and are subject to all of the terms and
provisions of, options to acquire shares in the other company as if such holder
was an employee of such other company.
As of July 31, 2000, after giving effect to the issuance of the Daisytek
Post-spin Options described above, combined with the additional options granted
subsequent to June 30, 2000 discussed in Note 8 of the Unaudited Interim
Consolidated Financial Statements, there were approximately 5.4 million options
outstanding with an overall weighted average exercise price of $7.44. For
purposes of the weighted average share count included in determining fully
diluted earnings per share, using an average of the daily closing price for each
day in the reported period (the "average share price"), and assuming no other
changes, if the average share price of our stock is $7, the weighted average
share count would increase by approximately 0.2 million. If the average share
price was $10, the weighted average share count would increase by approximately
0.9 million. If the average share price was $13, the weighted average share
count would increase by approximately 1.5 million.
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The following table summarizes information about the Company's outstanding
stock options as of July 31, 2000:
RANGE OF OPTIONS WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE
--------------- ----------- ----------------
$ 1.50 - $ 3.00 288 $ 1.65
$ 5.00 - $ 6.50 2,595,998 $ 6.16
$ 6.51 - $ 8.00 871,895 $ 7.75
$ 8.01 - $ 9.50 1,599,496 $ 8.08
$ 9.51 - $11.00 96,024 $ 9.72
$11.01 - $12.50 16,188 $11.57
$12.51 - $14.00 2,998 $13.22
$14.01 - $15.50 250,849 $14.31
Impact of Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." ("SFAS 133") effective for fiscal years
beginning after June 15, 2000. SFAS No. 133 requires companies to recognize all
derivative financial instruments as either assets or liabilities in the balance
sheet 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 requires gains or losses on these financial instruments to be recognized in
other comprehensive income as a part of the cumulative translation adjustment.
In June 1999, the FASB approved the issuance of SFAS 137 deferring the effective
date of SFAS 133 for one year. Consequently, Daisytek is required to adopt SFAS
133 by April 1, 2001. The impact of SFAS 133 on our financial statements will
depend on a variety of factors, including future interpretative guidance from
the FASB, the future level of forecasted and actual foreign currency
transactions, the extent of our hedging activities, the types of hedging
instruments used and the effectiveness of such instruments. We presently utilize
derivative financial instruments only to hedge our net investments in some of
our foreign operations. The Company is currently evaluating the provisions of
SFAS 133 and its effect on the accounting treatment of these financial
instruments. Due to our limited use of derivative instruments, we do not
anticipate that adoption of SFAS 133 will have a material effect on our
financial statements.
During 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition." SAB No. 101 requires that
revenue generally is realized or realizable and earned when all of the following
criteria are met: (i) persuasive evidence of an arrangement exists, (ii)
delivery has occurred or services have been rendered, (iii) the seller's price
to the buyer is fixed or determinable, and (iv) collectibility is reasonably
assured. SAB No. 101 is effective for the Company's fourth quarter ended March
31, 2001. The Company is currently evaluating the provisions of SAB No. 101 and
its effect, if any, on the Company's financial statements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Daisytek is exposed to various market risks including interest rates on its
debt and foreign exchange rates. In the normal course of business the Company
employs established policies and procedures to manage these risks.
INTEREST RATE RISK
Our interest rate risk is limited to our outstanding balances on our
revolving lines of credit which amounted to $45.2 million at June 30, 2000. A 50
basis point movement in interest rates would result in approximately $226,000
annualized increase or decrease in interest expense based on the outstanding
balance of the revolving line of credit at June 30, 2000.
We anticipate managing our future interest rate exposure by using a mix of
fixed and floating interest rate debt and, if appropriate, financial derivative
instruments.
FOREIGN EXCHANGE RISK
Operating in international markets involves exposure to movements in
currency exchange rates. Currency exchange rate movements typically also reflect
economic growth, inflation, interest rates, government actions and other
factors. As currency exchange rates fluctuate, translation of the statements of
operations of our international businesses into U.S. dollars may affect
year-over-year comparability and could cause us to adjust our financing and
operating strategies. Accordingly, we utilize foreign currency forward contracts
to hedge our net investments and long-term intercompany payable balances. We
also monitor our foreign exchange exposures to ensure the overall effectiveness
of our foreign currency hedge positions. Foreign currency instruments generally
have maturities that do not exceed three months. We do not enter into foreign
currency instruments for speculative purposes.
Our current foreign currency exchange rate risk is primarily limited to
Mexican Pesos, Canadian Dollars, Australian Dollars and the Euro. Other
international sales and purchases are generally U.S. Dollar based. At June 30,
2000 we had four outstanding foreign currency forward contracts. If the foreign
exchange rates of the Canadian and Australian currencies fluctuate 10% from the
June 30, 2000 rates, gains or losses in fair value on the four outstanding
contracts would be approximately $2.6 million.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits.
3.1(2) Amended and Restated Certificate of Incorporation of
Daisytek International Corporation.
3.1.1(2) Certificate of Amendment of Amended and Restated
Certificate of Incorporation of Daisytek International
Corporation.
3.2(1) Amended and Restated By-laws of Daisytek International
Corporation.
3.3(3) Certificate of Amendment of Amended and Restated
Certificate of Incorporation of Daisytek International
Corporation.
3.4(4) Amendments to the Bylaws of the Company, adopted on
October 15, 1999.
10.1(*) Lease agreement between Enterprise Business Park D-2,
L.P. and Daisytek, Inc. dated May 3, 2000.
10.2(*) Asset purchase agreement between BAP Acquisition Corp.,
and B.A. Pargh Company, LLC dated May 3, 2000.
27.1(*) Financial Data Schedule for three months ended June 30,
2000.
- ----------
(*) Filed herewith.
(1) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended December 31, 1994 dated March 10, 1995.
(2) Incorporated by reference from Annual Report on Form 10-K for the Fiscal
Year Ended March 31, 1996 dated June 26, 1996.
(3) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended September 30, 1998 dated November 16, 1998.
(4) Incorporated by reference from Current Report on Form 8-K dated October 19,
1999.
b) Reports on Form 8-K:
1. On June 8, 2000, the Company filed a current report on Form 8-K
to report under Item 5 the Company's press release dated June 8,
2000, announcing the separation of PFSweb, Inc. from Daisytek by
means of a tax-free dividend of Daisytek's remaining 80.1%
ownership of PFSweb.
2. On June 20, 2000, the Company filed a current report on Form 8-K
to report under Item 5 the Company's Information Statement
related to its spin-off of PFSweb, Inc. from Daisytek.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 2000
DAISYTEK INTERNATIONAL CORPORATION
By: /s/ Ralph Mitchell
------------------------------------
Ralph Mitchell
Chief Financial Officer,
Chief Accounting Officer,
Executive Vice President - Finance
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1(2) Amended and Restated Certificate of Incorporation of
Daisytek International Corporation.
3.1.1(2) Certificate of Amendment of Amended and Restated Certificate
of Incorporation of Daisytek International Corporation.
3.2(1) Amended and Restated By-laws of Daisytek International
Corporation.
3.3(3) Certificate of Amendment of Amended and Restated Certificate
of Incorporation of Daisytek International Corporation.
3.4(4) Amendments to the Bylaws of the Company, adopted on October
15, 1999.
10.1(*) Lease agreement between Enterprise Business Park D-2, L.P.
and Daisytek, Inc. dated May 3, 2000.
10.2(*) Asset purchase agreement between BAP Acquisition Corp., and
B.A. Pargh Company, LLC dated May 3, 2000.
27.1(*) Financial Data Schedule for three months ended June 30, 2000.
- ----------
(*) Filed herewith.
(1) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended December 31, 1994 dated March 10, 1995.
(2) Incorporated by reference from Annual Report on Form 10-K for the Fiscal
Year Ended March 31, 1996 dated June 26, 1996.
(3) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended September 30, 1998 dated November 16, 1998.
(4) Incorporated by reference from Current Report on Form 8-K dated October 19,
1999.