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 September 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.)
1025 CENTRAL EXPRESSWAY SOUTH, SUITE 200, ALLEN, TX 75013
- --------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 881-4700
--------------
500 N. CENTRAL EXPRESSWAY, PLANO, TX 75074
- --------------------------------------------- ----------
(Former address, if changed from last report) (Zip Code)
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 November 10, 2000 there were 17,664,173 shares of the registrant's common
stock outstanding, including 2,809,600 shares of common stock in treasury.
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 2000
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
-----------
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 2000 (Unaudited) and
March 31, 2000.......................................................... 3
Unaudited Interim Consolidated Statements of Operations for the Three
and Six Month Periods Ended September 30, 2000 and 1999 ................ 4
Unaudited Interim Consolidated Statements of Cash Flows for the Six
Months Ended September 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 ......................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................... 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................ 22
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, Except Share Data)
SEPTEMBER 30, MARCH 31,
ASSETS 2000 2000
--------------- ---------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents ................................... $ 2,775 $ 28,186
Accounts receivable, net of allowance for doubtful
accounts of $5,014 and $6,031 at September 30,
2000 and March 31, 2000, respectively ................... 151,449 167,705
Inventories, net ............................................ 114,687 96,371
Prepaid expenses and other current assets ................... 8,963 12,352
Income taxes receivable ..................................... 375 3,714
Deferred tax asset, net ..................................... -- 249
--------------- ---------------
Total current assets .......................... 278,249 308,577
--------------- ---------------
PROPERTY AND EQUIPMENT, at cost:
Furniture, fixtures and equipment ........................... 21,480 52,491
Leasehold improvements ...................................... 2,264 5,692
--------------- ---------------
23,744 58,183
Less - Accumulated depreciation and amortization ............ (13,579) (27,523)
--------------- ---------------
Net property and equipment .................... 10,165 30,660
OTHER ASSETS .................................................... -- 528
EMPLOYEE RECEIVABLE ............................................. 539 518
EXCESS OF COST OVER NET ASSETS ACQUIRED, net .................... 38,943 37,003
--------------- ---------------
Total assets .................................. $ 327,896 $ 377,286
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ........................... $ 50,540 $ 42,392
Trade accounts payable ...................................... 102,135 97,518
Accrued expenses ............................................ 9,383 14,746
Deferred tax liability, net ................................. 321 --
--------------- ---------------
Total current liabilities ..................... 162,379 154,656
--------------- ---------------
LONG-TERM DEBT, less current portion ............................ 12 2,431
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST ............................................... -- 9,513
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000,000 shares
authorized at September 30, 2000 and March 31,
2000; none issued and outstanding ....................... -- --
Common stock, $0.01 par value; 30,000,000 shares
authorized at September 30, 2000 and March 31, 2000;
17,664,173 and 17,600,164 shares issued and
outstanding, including shares in treasury, at
September 30, 2000 and March 31, 2000, respectively ..... 177 176
Additional paid-in capital .................................. 94,545 136,736
Retained earnings ........................................... 87,090 76,340
Accumulated other comprehensive income ...................... (3,347) (2,566)
--------------- ---------------
178,465 210,686
Less cost of common stock held in treasury, 1,955,400 shares
at September 30, 2000.................................... 12,960 --
--------------- ---------------
Total shareholders' equity .................... 165,505 210,686
--------------- ---------------
Total liabilities and shareholders' equity .... $ 327,896 $ 377,286
=============== ===============
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 SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
Net revenues .......................................... $ 282,761 $ 246,689 $ 567,687 $ 479,926
Cost of revenues ...................................... 252,070 220,762 505,210 426,733
------------ ------------ ------------ ------------
Gross profit .................................. 30,691 25,927 62,477 53,193
Selling, general and administrative expenses .......... 24,216 24,098 49,917 43,386
Acquisition related costs ............................. -- 249 -- 619
Reversal of loss on disposition of business ........... -- (1,000) -- (1,000)
------------ ------------ ------------ ------------
Income from operations ........................ 6,475 2,580 12,560 10,188
Interest expense, net ................................. 1,453 1,020 2,144 1,770
------------ ------------ ------------ ------------
Income before income taxes .................... 5,022 1,560 10,416 8,418
Provision for income taxes ............................ 1,901 608 4,362 3,283
------------ ------------ ------------ ------------
Income before minority interest ............... 3,121 952 6,054 5,135
Minority interest ..................................... -- -- 47 --
------------ ------------ ------------ ------------
Net income .................................... $ 3,121 $ 952 $ 6,101 $ 5,135
============ ============ ============ ============
Net income per common share:
Basic .......................................... $ 0.19 $ 0.06 $ 0.36 $ 0.30
============ ============ ============ ============
Diluted ........................................ $ 0.19 $ 0.05 $ 0.35 $ 0.29
============ ============ ============ ============
Weighted average common and common share
equivalents outstanding:
Basic .......................................... 16,453 17,171 17,043 17,168
Diluted ........................................ 16,587 17,365 17,422 17,581
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)
SIX MONTHS ENDED
SEPTEMBER 30,
------------------------------
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ....................................................... $ 6,101 $ 5,135
Adjustments to reconcile net income to net cash provided by
(used in) operating activities --
Depreciation and amortization ................................. 3,611 4,020
Provision for doubtful accounts ............................... 1,764 5,354
Minority interest ............................................. (47) --
Deferred income tax (benefit) provision ....................... 565 (1,950)
Changes in operating assets and liabilities --
Accounts receivable ....................................... 8,094 (14,625)
Inventories, net .......................................... (12,742) (11,844)
Prepaid expenses and other current assets ................. (1,112) (419)
Trade accounts payable and accrued expenses ............... 2,107 (1,579)
Income tax receivable ..................................... 3,387 (809)
------------ ------------
Net cash provided by (used in) operating activities .. 11,728 (16,717)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .............................. (3,774) (6,887)
Disposition of subsidiary ........................................ (22,113) --
Acquisitions of businesses, net of cash acquired ................. (2,710) (2,325)
Advances to employees, net ....................................... (24) (79)
Decrease (increase) in note receivable and other assets .......... 1,655 (344)
------------ ------------
Net cash used in investing activities ................ (26,966) (9,635)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit, net ...................... 8,799 27,723
Payments on capital leases and notes payable ..................... (6,596) (112)
Purchase of treasury stock ....................................... (12,960) --
Net proceeds from exercise of stock options and issuance
of common stock ................................................ 621 116
------------ ------------
Net cash provided by (used in) financing activities .. (10,136) 27,727
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS ................ (37) (336)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................. (25,411) 1,039
CASH AND CASH EQUIVALENTS, beginning of period ....................... 28,186 1,551
------------ ------------
CASH AND CASH EQUIVALENTS, end of period ............................. $ 2,775 $ 2,590
============ ============
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 computer and office automation
supplies and accessories ("computer and office supplies") and professional-grade
video and audio media products ("professional tape products"). Prior to the
spin-off of PFSweb, Inc. ("PFSweb") on July 6, 2000, the Company was also a
leading provider of transaction management services to both traditional and
electronic commerce, or e-commerce, companies. The Company's remaining two
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, South America, the Pacific Rim and Europe.
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 Spin-off
In December 1999, PFSweb completed an initial public offering ("IPO") of
3,565,000 shares of its common stock. 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. See also Note 8 of these Notes to Unaudited Interim
Consolidated Financial Statements.
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table represents the balance sheet information for PFSweb as
of the date of the spin-off, and is provided to assist in understanding the
impact of the disposition on the consolidated balance sheet of the Company
(amounts in thousands):
ASSETS
Cash......................................... $ 22,113
Accounts receivable, net..................... 10,879
Prepaid expenses and other current assets.... 3,420
Property and equipment, net.................. 21,557
Other assets................................. 501
--------
Total assets................................. $ 58,470
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current portion of long-term debt............ $ 281
Trade accounts payable....................... 5,190
Accrued expenses............................. 3,336
Long-term debt, less current portion......... 2,342
Shareholders' equity......................... 47,321
--------
Total liabilities and shareholders' equity... $ 58,470
========
The 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.
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.
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, although certain terms and provisions of various agreements
continue to be the subject of ongoing negotiations. 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.
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 September 30, 2000, its results of operations for the
three and six months ended September 30, 2000 and 1999, and its results of cash
flows for the six months ended September 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").
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
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
from net income, such as unrealized gains and losses on investments available
for sale and foreign currency translation gains and losses. 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 SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
Net income ......................... $ 3,121 $ 952 $ 6,101 $ 5,135
Comprehensive income adjustments:
Foreign currency translation
adjustment ................. (539) (322) (781) (2)
------------ ------------ ------------ ------------
Comprehensive income ............... $ 2,582 $ 630 $ 5,320 $ 5,133
============ ============ ============ ============
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 SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
NUMERATOR:
Net income ...................................... $ 3,121 $ 952 $ 6,101 $ 5,135
============ ============ ============ ============
DENOMINATOR:
Denominator for basic earnings per share -
Weighted average shares ....................... 16,453 17,171 17,043 17,168
Effect of dilutive securities:
Employee stock options ........................ 134 194 379 413
------------ ------------ ------------ ------------
Denominator for diluted earnings per share -
Adjusted weighted average shares and
assumed conversions ........................... 16,587 17,365 17,422 17,581
============ ============ ============ ============
NET INCOME PER COMMON SHARE:
Basic ......................................... $ 0.19 $ 0.06 $ 0.36 $ 0.30
============ ============ ============ ============
Diluted ....................................... $ 0.19 $ 0.05 $ 0.35 $ 0.29
============ ============ ============ ============
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.
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS)
SIX MONTHS ENDED
SEPTEMBER 30,
-----------------------
2000 1999
-------- --------
Cash paid during the period for:
Interest................ $ 2,121 $ 1,374
Income taxes............ $ 432 $ 5,624
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 or six month periods ended September 30, 2000 and 1999.
The following tables set forth information as to the Company's reportable
segments (in thousands):
COMPUTER
AND PROFESSIONAL
OFFICE TAPE INTERSEGMENT
SUPPLIES PRODUCTS PFSWEB ELIMINATIONS TOTAL
---------- ------------ ---------- ------------- ----------
THREE MONTHS ENDED SEPTEMBER 30, 2000
Net revenues ........................... $ 261,589 $ 21,172 $ -- $ -- $ 282,761
Operating contribution ................. 7,187 842 -- -- 8,029
THREE MONTHS ENDED SEPTEMBER 30, 1999
Net revenues ............................ $ 218,580 $ 24,453 $ 9,831 $ (6,175) $ 246,689
Operating contribution .................. 8,681 1,650 (902) -- 9,429
SIX MONTHS ENDED SEPTEMBER 30, 2000
Net revenues ........................... $ 519,515 $ 42,091 $ 13,370 $ (7,289) $ 567,687
Operating contribution ................. 13,161 2,092 (505) -- 14,748
SIX MONTHS ENDED SEPTEMBER 30, 1999
Net revenues ............................ $ 426,244 $ 47,014 $ 19,081 $ (12,413) $ 479,926
Operating contribution .................. 15,417 3,329 (1,339) -- 17,407
ASSETS
September 30, 2000 ...................... $ 285,654 $ 42,242 $ -- $ -- $ 327,896
March 31, 2000 .......................... 273,347 43,638 60,405 (104) 377,286
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. Certain
corporate assets are also not allocated to Professional Tape Products, and
primarily relate to the Company's centralized management information, warehouse
and telephone systems and leasehold improvements on shared facilities.
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Reconciliation of segment operating contribution to consolidated income
before taxes is as follows (in thousands):
THREE MONTHS ENDED SEPTEMBER 30, SIX MONTHS ENDED SEPTEMBER 30,
-------------------------------- ------------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Segment operating contribution ............... $ 8,029 $ 9,429 $ 14,748 $ 17,407
Acquisition related costs (a) ................ -- (249) -- (619)
Transition and other unallocated costs (b).... (1,554) (7,600) (2,188) (7,600)
Reversal of loss on disposition of business... -- 1,000 -- 1,000
Interest expense ............................. (1,453) (1,020) (2,144) (1,770)
---------- ---------- ---------- ----------
Consolidated income before income taxes ...... $ 5,022 $ 1,560 $ 10,416 $ 8,418
========== ========== ========== ==========
(a) These charges relate to the Professional Tape Products segment.
(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, and during the
three and six month periods ended September 30, 1999, to increase
allowances for bad debts, legal and professional fees related to an
unsolicited acquisition offer, and other operating charges.
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 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.
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.
NOTE 8 - STOCK OPTIONS
PFSweb Spin-off
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.
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
During July 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, vest over a
three year period from the date of the grant and expire 10 years after the date
of the grant.
NOTE 9 - 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, and on September 13, 2000, announced the authorization of the
repurchase of up to an additional 10% of the outstanding shares of common stock.
These repurchase programs 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 each authorization, the Company was
authorized to repurchase up to approximately 3.35 million shares. As of
September 30, 2000, the Company had repurchased approximately 2.0 million of its
outstanding shares. Through October 31, the Company had cumulatively repurchased
approximately 2.8 million of its outstanding shares.
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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, and professional audio and video tape products. Prior
to the spin-off of PFSweb, Inc. ("PFSweb") on July 6, 2000, we were also a
leading provider of transaction management services to both traditional and
e-commerce companies. Daisytek's remaining operations are separated into two
business segments: (1) Computer and Office Supplies; and (2) Professional Tape
Products. 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 in May 2000 has
added to our Computer and Office Supply segment 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.
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;
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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) Pursuit of 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 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.
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Daisytek Stand Alone (Excluding PFSweb, Inc.)
The following is an unaudited adjusted historical financial presentation of
the Daisytek business units, excluding PFSweb, for the three and six month
periods ending September 30, 2000 and 1999. 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 separation of Daisytek and PFSweb
of approximately $1.6 million and $2.2 million, respectively, for the three and
six month periods ending September 30, 2000, which management believes are
incremental to normal operations. For the three and six month periods ending
September 30, 1999, the presentation excludes incremental costs of $7.6 million,
which included these reorganization and separation activities, increases in
allowances for bad debts, and other charges. 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, reversal of loss on disposition of business 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 SEPTEMBER 30, SIX MONTHS ENDED SEPTEMBER 30,
-------------------------------- ------------------------------
2000 1999 2000 1999
---------- --------- ---------- ---------
(IN THOUSANDS, EXCEPT (IN THOUSANDS, EXCEPT
PER SHARE DATA) PER SHARE DATA)
(UNAUDITED) (UNAUDITED)
Net revenues.................................................. $ 282,761 $ 242,876 $ 561,606 $ 472,922
Cost of revenues.............................................. 252,070 214,650 500,714 418,533
---------- --------- ---------- ---------
Gross profit................................................ 30,691 28,226 60,892 54,389
Selling, general and administrative expenses.................. 22,661 19,927 45,596 39,479
---------- --------- ---------- ---------
Income from operations...................................... 8,030 8,299 15,296 14,910
Interest expense, net......................................... 1,453 871 2,460 1,523
---------- --------- ---------- ---------
Income before income taxes.................................. 6,577 7,428 12,836 13,387
Provision for income taxes.................................... 2,491 2,901 4,897 5,225
---------- --------- ---------- ---------
Net income.................................................... $ 4,086 $ 4,527 $ 7,939 $ 8,162
========== ========= ========== =========
NET INCOME PER COMMON SHARE:
Basic....................................................... $ 0.25 $ 0.26 $ 0.47 $ 0.48
========== ========= ========== ==========
Diluted..................................................... $ 0.25 $ 0.26 $ 0.46 $ 0.46
========== ========= ========== ==========
Weighted average common and common share equivalents
outstanding:
Basic....................................................... 16,453 17,171 17,043 17,168
Diluted..................................................... 16,587 17,365 17,422 17,581
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Adjusted Balance Sheet Data:
AS OF AS OF
SEPTEMBER MARCH
30, 2000 31, 2000
---------- ---------
(IN THOUSANDS)
(UNAUDITED)
Working capital, excluding debt..................... $ 166,410 $ 168,067
Total assets........................................ 327,896 317,155
Total debt.......................................... 50,552 42,144
Shareholders' equity................................ 165,505 172,549
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. during the periods prior
to the spin-off of PFSweb.
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
2000 1999 2000 1999
---------- ---------- ---------- ----------
CONSOLIDATED STATEMENTS OF INCOME DATA:
Net revenues ........................................... $ 282,761 $ 246,689 $ 567,687 $ 479,926
Cost of revenues ....................................... 252,070 220,762 505,210 426,733
---------- ---------- ---------- ----------
Gross profit ........................................... 30,691 25,927 62,477 53,193
Selling, general and administrative expenses ........... 24,216 24,098 49,917 43,386
Acquisition related costs .............................. -- 249 -- 619
Reversal of loss on disposition of business ............ -- (1,000) -- (1,000)
---------- ---------- ---------- ----------
Income from operations ................................. 6,475 2,580 12,560 10,188
Interest expense, net .................................. 1,453 1,020 2,144 1,770
---------- ---------- ---------- ----------
Income before income taxes ............................. 5,022 1,560 10,416 8,418
Provision for income taxes ............................. 1,901 608 4,362 3,283
---------- ---------- ---------- ----------
Income before minority interest ........................ 3,121 952 6,054 5,135
Minority interest ...................................... -- -- 47 --
---------- ---------- ---------- ----------
Net income ............................................. $ 3,121 $ 952 $ 6,101 $ 5,135
========== ========== ========== ==========
NET INCOME PER COMMON SHARE:
Basic ................................................ $ 0.19 $ 0.06 $ 0.36 $ 0.30
========== ========== ========== ==========
Diluted .............................................. $ 0.19 $ 0.05 $ 0.35 $ 0.29
========== ========== ========== ==========
Weighted average common and common share
equivalents outstanding:
Basic ............................................. 16,453 17,171 17,043 17,168
Diluted ........................................... 16,587 17,365 17,422 17,581
RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999.
The following discussion relates to Daisytek, and includes the results of
its former subsidiary, PFSweb for the first three months of fiscal year 2001 and
for the entire six months in fiscal year 2000. Since PFSweb was spun off from
Daisytek in on July 6, 2000, financial results for the three month period ended
September 30, 2000 do not include the financial results of PFSweb, as the three
business days in July are considered immaterial to the presentation of our
results. These are historical consolidated results, including costs associated
with separation activities, and may not be representative of our results
subsequent to both the spin-off of PFSweb and the completion of all related
separation activities.
Net Revenues. Net revenues for the three months ended September 30, 2000
were $282.8 million as compared to $246.7 million for the three months ended
September 30, 1999, an increase of $36.1 million, or 14.6%. Excluding PFSweb
revenues, which are included in the September 30, 1999 quarterly results, but
not included in the September 30, 2000 quarterly results, net revenues increased
by 16.4%. Net revenues for the six months ended September 30, 2000 were $567.7
million as compared to $479.9 million for the six months ended September 30,
1999, an increase of $87.8 million, or 18.3%. Excluding PFSweb revenues, which
are included in the six months ended September 30, 1999, but are included only
through the spin-off date for the six months ended September 30, 2000, net
revenues increased by 18.8%. The Computer and Office Supplies business segment
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
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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 reported levels. We believe this
reduction is due, in large part, to slower industry growth, large channel shifts
and slower growth in new 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 revenues in the international computer supplies operations increased by
11.8% (in U.S. dollars) in the quarter ended September 30, 2000 compared to the
same prior year period. This result reflects a deterioration in the Australian
dollar relative to the U.S. dollar during this period. Using local currencies,
our international computer supplies operations increased approximately 17% this
quarter compared to the same quarter in the prior year. The international
division experienced growth in all regions but Latin America (due to a change in
certain tariff restrictions, which has impacted the local market) and Singapore
(whose operations were moved to our Asia Pacific headquarters in Australia
during April 2000). We experienced particularly strong growth rates this quarter
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 13.4% for the three months
ended September 30, 2000 compared to the same prior year period primarily due to
price degradation in certain product lines throughout fiscal year 2000. Although
we have not experienced any additional price reduction during the past quarter,
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 and are currently in the process of redesigning
this business model as part of our objective to improve profitability and growth
opportunities in this segment.
Gross Profit. Gross profit as a percent of net revenues was 10.9% for the
three months ended September 30, 2000 as compared to 10.5% for the three months
ended September 30, 1999. Our gross profit percentage for the quarter ended
September 30, 1999 was negatively impacted by certain incremental charges of
$3.2 million. Excluding the incremental charges, our gross profit percentage for
the quarter ended September 30, 1999 was 11.8%. Gross profit as a percent of net
sales was 11.0% for the six months ended September 30, 2000 as compared to 11.1%
for the six months ended September 30, 1999. Excluding the aforementioned
incremental charges last year of $3.2 million, gross profit as a percentage of
sales was 11.8% for the six months ended September 30, 1999. The decline in
gross profit percentage, on a basis adjusted for these incremental charges, was
the result of several different factors. In the US business, the prior year
numbers include monies earned under certain vendor incentive programs that were
at very high levels in the comparative quarter last year, reflecting various
opportunities at that time. Since then, we have elected not to participate in
certain of these programs not considered to be in the long-term interests of the
Company as part of our focus on improving inventory levels to strengthen our
balance sheet position and improve our overall return on invested capital.
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 relatively higher revenue growth in IBM
product sales, which are also at lower margins. Finally, impacting our gross
profit percentage was the reduction in our Professional Tape Products revenue
and PFSweb revenue (resulting from the spin-off), which typically carry higher
margin percentages than the remainder of our business.
During the third quarter of fiscal year 2000, in order to make these
improvements in our balance sheet, we avoided certain vendor incentive programs.
As a result, we believe the third quarter of fiscal year 2001 will reflect an
improvement in gross profit percentages compared to the prior year. We believe
that ongoing competitive pressures in the Computer and Office Supplies
operations, potential further price degradation in the Professional Tape
Products business, and continuing sales increases in our IBM products 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 September 30, 2000
were $24.2 million, or 8.6% of net sales, as compared to $24.1 million, or 9.8%
of net sales, for the three months ended September 30, 1999, excluding
acquisition related costs and the reversal of loss on disposition of business in
1999. SG&A expenses for the six months ended September 30, 2000 were $49.9
million, or 8.8% of net sales, as compared to $43.4 million, or 9.0% of net
sales, for the six months ended September 30, 1999, excluding acquisition
related costs and the reversal of loss on disposition of business in 1999. Our
SG&A expense for the three and six month periods ended September 30, 2000 was
negatively impacted
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by certain non-recurring separation costs of $1.6 million and $2.2 million,
respectively, related to the spin-off of PFSweb. Our SG&A expense for both the
three and six month periods ended September 30, 1999 was negatively impacted by
incremental charges of $4.4 million primarily related to certain repositioning
and separation activities associated with the PFSweb planned initial public
offering, certain other charges as a result of these activities, and to increase
allowances for bad debts related primarily to issues in our Latin American
accounts receivable.
Excluding these incremental charges for all periods, our SG&A percentages
would be 8.0% for both the three months ended September 30, 2000 and 1999, and
8.4% and 8.1%, respectively, for the six months ended September 30, 2000 and
1999. 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 and, (ii) a reduction in
net revenues to certain large customers, 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. In connection with the transition, integration and
merger activities associated with our Professional Tape Products segment, we
recorded costs of $0.2 million and $0.6 million, respectively, for the three and
six month periods ending September 30, 1999.
Loss on Disposition of Business. In fiscal 1999, we recorded a charge of
$2.8 million related to the disposition of our professional tape hardware
business. In the quarter ended September 30, 1999, we reversed $1.0 million of
this charge as we were able to avoid some of the costs associated with this
disposition.
Interest Expense. Interest expense for the three months ended September 30,
2000 was $1.5 million as compared to $1.0 million for the three months ended
September 30, 1999. Interest expense for the six months ended September 30, 2000
was $2.1 million as compared to $1.8 million for the six months ended September
30, 1999. Interest expense increased over last year, for both the three and six
month periods, due to interest rate increases experienced over the last twelve
months, the acquisitions of both Arlington and B.A. Pargh, and activity under
our share repurchase program. These impacts were partially offset by proceeds
received from the PFSweb initial public offering in December 1999. The weighted
average interest rate was 8.2% and 6.2% during the six months ended September
30, 2000 and 1999, respectively.
Income Taxes. Our effective tax rate was 37.9% and 39.0% for the three
months ended September 30, 2000 and 1999, respectively. The effective tax rate
for the six months ended September 30, 2000 and 1999 was 41.9% and 39.0%,
respectively. The decrease for the second quarter of fiscal year 2001, compared
to the same quarter in fiscal year 2000 is due to a reduction in taxes resulting
from adjustments in connection with finalizing our fiscal 2000 tax return,
combined with an overall reduction in state income taxes resulting from the
spin-off of PFSweb. The increase in the effective tax rate for the six months
ended September 30, 2000 compared to the six months ended September 30, 1999 is
due to losses generated by PFSweb's European subsidiary during the first quarter
of fiscal 2001 for which no income tax benefit was recorded.
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.
Historically, our primary source of cash has been from financing
activities. Net cash used in financing activities was $10.1 million for the six
months ended September 30, 2000 compared to net cash provided by financing
activities of $27.7 million for the six months ended September 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 the B.A. Pargh acquisition was funded through our availability
under our credit facility and cash provided by operating activities.
Additionally, during the second quarter of fiscal year 2001, our Board of
Directors initially authorized a share buyback program of up to 10% of the
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outstanding shares of common stock. That program was completed in September 2000
and, at that time, the Board of Directors authorized an additional 10%
repurchase program. As of September 30, 2000 we had acquired approximately 2.0
million shares at a total cost of $13.0 million. The combination of these
factors has resulted in a net use of funds for financing activities during this
period. During the six months ended September 30, 1999, cash provided by
financing activities was generated primarily from proceeds from revolving lines
of credit.
Net cash provided by operating activities was $11.7 million for the six
months ended September 30, 2000 compared to net cash used in operating
activities of $16.7 million for the six months ended September 30, 1999. Working
capital declined to $115.9 million at September 30, 2000 from $153.9 million at
March 31, 2000. This result was primarily attributable to the spin-off of PFSweb
on July 6, 2000, which resulted in a reduction in net current assets, including
cash. In addition, our working capital position was impacted during the period
by 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 this fiscal year.
Our principal use of funds for investing activities was $22.1 million in
cash related to the disposition of our investment in PFSweb in connection with
the spin-off on July 6, 2000. Additionally, we have used funds for capital
expenditures of $3.8 million and $6.9 million for the six months ended September
30, 2000 and 1999, respectively, and for acquisition of businesses of $2.7
million and $2.3 million for the six months ended September 30, 2000 and 1999,
respectively. The capital expenditures consisted primarily of additions to
upgrade our management information systems, costs associated with new
facilities, and historically have also included costs related to the expansion
of 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 $6 million to $9 million, of which approximately $1.4
million reflects capital expenditures incurred by PFSweb during the first
quarter of fiscal 2001. The Company's PFSweb subsidiary had a long-term
contractual agreement with one of its clients pursuant to which PFSweb financed
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 six
months ended September 30, 2000 and used net cash flows of $0.3 million for the
six months ended September 30, 1999. Effective with the spin-off of PFSweb on
July 6, 2000, Daisytek no longer has this PFSweb client inventory in its
financial results.
At September 30, 2000, our unsecured revolving lines of credit provided for
borrowings up to approximately $127.0 million. There were outstanding balances
on the lines of credit totaling $51.3 million (including an outstanding letter
of credit of $0.8 million) at September 30, 2000, leaving approximately $75.7
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 $105 million. This amendment also
provided for the release of PFSweb subsidiaries as guarantors of the Facility
upon the occurrence of certain events, which have subsequently taken place. The
Facility was also amended to increase the interest rate, effective March 1,
2000, to Eurodollar rate plus 1.0% to 1.75% from Eurodollar rate plus .625% to
1.125%. The expiration date of the Facility was also extended to January 1,
2001.
We are currently in negotiations regarding new credit facilities and we
expect to finalize these negotiations and to contract for new facilities before
the end of calendar year 2000. Management believes that any new facilities will
be on substantially comparable terms to the current facilities.
We believe that international markets represent further opportunities for
growth. We attempt to protect ourselves from foreign currency fluctuations by
denominating substantially all our non-Canadian and non-Australian international
sales in U.S. dollars. In addition, we have entered into various forward
Canadian and Australian currency exchange contracts in order to hedge our net
investments in, and our intercompany payables applicable to, our Canadian and
Australian subsidiaries. We have the following forward currency exchange
contracts outstanding as of September 30, 2000:
US$ CONTRACT
CURRENCY TYPE 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
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As of September 30, 2000, we had incurred net unrealized gains of
approximately $0.4 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. During the second quarter of fiscal 2000, we 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.
CONTINGENCIES
The Company is party from time to time to ordinary litigation incidental to
its business, none of which is expected to have a material adverse effect on the
results of operations, financial position or liquidity of the Company.
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 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.
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 owned and operated by PFSweb in Memphis, Tennessee. Although we have
established certain disaster recovery procedures, which include other warehouse
and distribution locations
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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, are 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 October 31, 2000, after giving effect to the issuance of the Daisytek
Post-spin Options described above, combined with the additional options granted
during the second quarter of fiscal 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"), assuming a base average
share price of $6, 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 1.0 million. If the average
share price was $13, the weighted average share count would increase by
approximately 1.5 million. For example, at October 31, 2000, the average shares
outstanding were 14.9 million. Using an average share price of $10 per share,
the fully diluted weighted average shares outstanding would be approximately
15.9 million.
The following table summarizes information about the Company's outstanding
stock options as of October 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
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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.
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.
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 $50.5 million at September 30, 2000.
A 50 basis point movement in interest rates would result in approximately
$253,000 annualized increase or decrease in interest expense based on the
outstanding balance of the revolving line of credit at September 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 September
30, 2000 we had three outstanding foreign currency forward contracts. If the
foreign exchange rates of the Canadian and Australian currencies fluctuate 10%
from the September 30, 2000 rates, gains or losses in fair value on the three
outstanding contracts would be approximately $1.3 million, which would offset an
underlying opposite gain or loss in our net position with our hedged
international businesses.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information pertaining to this item is incorporated herein from Part 1.
Financial Information (Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Contingencies).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 13, 2000 the Company held its Annual Meeting of Stockholders. The
following matters were acted upon and votes cast or withheld:
1. Election of three Class III directors:
Peter P.J. Vikanis:
For: 13,991,273 Withheld: 1,199,052
James F. Reilly:
For: 13,990,390 Withheld: 1,199,935
Dale A. Booth:
For: 13,990,688 Withheld: 1,199,632
2. Appointment of Arthur Andersen LLP as auditors for the 2001 fiscal
year:
For: 14,164,593 Against: 1,023,352 Abstained: 2,380
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a) Exhibits.
10.1(*) Tenth Amendment to Credit Agreement dated July 11,
2000 between Daisytek, Incorporated, as Borrower,
Daisytek International and Borrower's Subsidiaries, as
Guarantors, and Citizens Bank of Massachusetts, Bank
One, IBM Credit Corporation, and Chase Bank of Texas,
N.A., as Lenders.
10.2(*) Eleventh Amendment to Credit Agreement dated
August 17, 2000 between Daisytek, Incorporated, as
Borrower, Daisytek International and Borrower's
Subsidiaries, as Guarantors, and Citizens Bank of
Massachusetts, Bank One, IBM Credit Corporation, and
Chase Manhattan Bank, as Lenders.
27.1(*) Financial Data Schedule for six months ended September
30, 2000.
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(*) Filed herewith.
b) Reports on Form 8-K:
1. On July 21, 2000, the Company filed a current report on Form
8-K to report, under Items 2 and 7, the Company's dividend
of PFSweb common stock declared by the Company's Board of
Directors in order to effect the spin-off of PFSweb and the
affiliated unaudited pro-forma balance sheet presentation
giving effect to this distribution as if it had occurred on
April 1, 1999.
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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: November 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
------- -----------
10.1(*) Tenth Amendment to Credit Agreement dated July 11, 2000
between Daisytek, Incorporated, as Borrower, Daisytek
International and Borrower's Subsidiaries, as Guarantors, and
Citizens Bank of Massachusetts, Bank One, IBM Credit Corporation,
and Chase Bank of Texas, N.A., as Lenders.
10.2(*) Eleventh Amendment to Credit Agreement dated August 17, 2000
between Daisytek, Incorporated, as Borrower, Daisytek
International and Borrower's Subsidiaries, as Guarantors, and
Citizens Bank of Massachusetts, Bank One, IBM Credit Corporation,
and Chase Manhattan Bank, as Lenders.
27.1(*) Financial Data Schedule for six months ended September 30, 2000.
- ----------
(*) Filed herewith.