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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2001
[ ] 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
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DAISYTEK INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 75-2421746
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1025 CENTRAL EXPRESSWAY SOUTH, SUITE 200, ALLEN, TEXAS 75013
(Address of principal executive offices, including zip code)
(Registrant's telephone number, including area code) (972) 881-4700
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of June 15, 2001 (based on the closing price as reported by
the National Association of Securities Dealers Automated Quotation System) was
approximately $242.6 million. Solely for purposes of the preceding calculation,
outstanding shares of common stock held by directors, executive officers and 10%
or greater shareholders have been treated as held by affiliates. As of June 15,
2001, there were 15,305,867 shares of the registrant's Common Stock, $.01 par
value, outstanding, excluding 3,352,305 shares of common stock in treasury.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates by reference certain information
contained in the proxy statement of Daisytek International Corporation for its
annual meeting of shareholders to be held during 2001.
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INDEX
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 9
Item 3. Legal Proceedings........................................... 9
Item 4. Submission of Matters to a Vote of Security Holders......... 9
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters......................................... 10
Item 6. Selected Consolidated Financial Data........................ 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 12
Item 7A. Quantitative and Qualitative Disclosure About Market Risk... 25
Item 8. Financial Statements and Supplementary Data................. 27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 53
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 53
Item 11. Executive Compensation...................................... 53
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 53
Item 13. Certain Relationships and Related Transactions.............. 53
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 54
SIGNATURES............................................................. 60
Unless otherwise indicated, all references to "Daisytek," "we," "us" and
"our" refer to Daisytek International Corporation, a Delaware corporation, and
its direct and indirect subsidiaries, including Daisytek, Incorporated, which is
Daisytek's primary operating subsidiary. All references to "PFSweb" refer to
PFSweb, Inc., a Delaware corporation, and its subsidiaries. References in this
Report to Daisytek's fiscal year means the twelve-month period ending on March
31 of such year.
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PART I
ITEM 1. BUSINESS
Daisytek is a leading wholesale distributor of computer and office supplies
and professional tape products, in addition to providing marketing and demand
generation services. We sell our products and services in the United States,
Canada, Australia, Mexico, South America and Europe. Prior to the spin-off of
PFSweb during July 2000, we also provided transaction management services to
both traditional and electronic commerce companies. We were originally
incorporated in 1978.
COMPUTER AND OFFICE SUPPLIES
The computer and office supplies segment distributes over 17,000 nationally
known, name-brand computer and office supplies products to more than 35,000
customer locations. Customers include value-added resellers ("VARs"), computer
supplies dealers, office product dealers, contract stationers, buying groups,
computer and office product superstores, grocery stores, drugstores, web-based
resellers, and other retailers who resell the products to end-users. This
segment also includes Virtual Demand, our wholly-owned subsidiary which provides
marketing and demand generation services, and our subsidiary Business Supplies
Distributors, which distributes print and media supplies under IBM distribution
agreements. We began computer and office supplies distribution in the United
States in the 1980s and expanded internationally into Canada in 1989, Mexico in
1994, Australia in 1996 and Argentina in 2000. In addition, we began
distribution to Central and South America in 1996 from our Miami facility. In
October 1999, we strengthened our offering of copier and fax consumables with
the purchase of Arlington Industries, Inc. and, in May 2000, we began offering
traditional office products with the acquisition of B.A. Pargh Company, LLC. We
believe we are one of the world's largest independent wholesale distributors of
computer and office supplies. Computer and office supplies revenues represented
approximately 92.4% of Daisytek's total revenues in fiscal year 2001, including
approximately 59.3% from domestic revenues and approximately 33.1% from
international revenues.
Computer and office supplies 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. We regularly update our
product line to reflect advances in technology and to provide a wide product
range of the most popular products. Our major product and service categories can
generally be classified as follows:
Non-Impact Printer Supplies. Non-impact printer supplies include toner
cartridges, inkjet cartridges, optical photo conductor kits, copier supplies and
fax supplies. Non-impact printers, such as laser printers, personal copiers and
fax machines, continue to grow in popularity and have a wide range of
applications.
Office Products. Office products include envelopes and business forms,
writing instruments, office machines and all desktop supplies.
Magnetic Media Products. Magnetic media products include computer tapes,
data cartridges, diskettes, optical disks, compact disc recordable drives and
media, zip drives and media, and other products which store or record computer
information and are used in a variety of computers ranging from notebook and
personal computers to large mainframe computer systems.
Impact Printer Supplies. Impact printer supplies include printwheels,
ribbons, elements, fonts and other consumable supplies used in impact printers
ranging from electronic typewriters to high-speed dot matrix printers. While new
technology is moving toward non-impact printing, we believe that a base of
impact printers, such as dot matrix printers, are still in use and require a
continuing amount of computer supplies products.
Accessories and Other Products. Accessories include cleaning supplies,
disk storage boxes, data cartridge storage, racks, surge protection devices,
workstation accessories and anti-glare screens. We also sell a number of other
products such as specialty paper, banking supplies and selected business
machines.
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Daisytek's wholly-owned subsidiary Virtual Demand offers a fee-based menu
of marketing and demand generation services which build on our core competencies
in customer service and proactive demand generation. In these programs, Daisytek
takes over, on behalf of the manufacturer or reseller partner, the management of
customer relationships in defined parts of our partner's existing business, or
possibly in new business areas. Services provided fall under categories
including database management, proactive outbound telemarketing, inbound
customer support and e-marketing. As an example, Virtual Demand has been engaged
to provide a solution for lead qualification, lead generation, marketing and
other support of a client's business machine sales effort. Fees are earned on a
transaction basis. A sales team has been dedicated to this subsidiary and is
currently marketing these service programs to a variety of companies.
PROFESSIONAL TAPE PRODUCTS
The professional tape products segment is headquartered in Elmhurst,
Illinois and operates as a distributor of media products to the film,
entertainment and multimedia industries. Daisytek began operating the
professional tape products segment in 1998 and currently distributes more than
2,800 professional tape products to over 23,500 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. Professional tape
products revenues represented 6.9% of Daisytek's total revenues in fiscal year
2001.
PFSWEB
During fiscal year 2001, Daisytek completed the spin-off of PFSweb, our
international provider of transaction management services to both traditional
and e-commerce companies. In December 1999, PFSweb completed an initial public
offering of 3,565,000 shares of its common stock representing 19.9% of
Daisytek's ownership (the "IPO"). On July 7, 2000, we announced the completion
of the spin-off of PFSweb by means of a tax-free distribution of Daisytek's
remaining 80.1 percent ownership of PFSweb after we 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.
As part of the IPO, PFSweb and Daisytek entered into various agreements
governing the transaction management services that PFSweb provided for Daisytek.
Additionally, PFSweb purchased from Daisytek certain fixed assets in the central
distribution complex in Memphis, Tennessee. On May 25, 2001, we completed a
transaction to terminate certain transaction management services agreements
between the two companies and to purchase certain Memphis distribution assets
from PFSweb, including those assets previously sold to PFSweb at the time of the
IPO. The aggregate cost of this transaction is estimated to be approximately $16
million, including $11 million payable to PFSweb and $5 million to implement
segregated information technology platforms and to expand fulfillment
capabilities. We expect to recognize a special charge of approximately $2.7
million after taxes during the first quarter of fiscal year 2002 related to this
transaction. Prior to completion of the transaction, we received a favorable
supplemental ruling from the Internal Revenue Service that the acquisition of
certain fixed assets would not adversely affect the June 2000 Internal Revenue
Service ruling. PFSweb will continue to offer services to Daisytek under a new,
separate fee agreement for a six-month period to support the transfer of
fulfillment operations and transaction processing back to Daisytek, including
the transition to a separate information technology platform.
The existing master distribution agreements with IBM, under which our
subsidiary Business Supplies Distributors acts as the master distributor and
PFSweb records revenues for providing transaction management services, are due
to expire at varying dates prior to December 31, 2001. We do not intend to renew
the master distribution agreements and have notified IBM of these intentions.
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SEGMENTS
See Note 13 to the Consolidated Financial Statements included elsewhere in
this document for additional information on our operating segments and
geographic areas.
BUSINESS STRATEGY
Daisytek's focus is as a low cost distributor in the growing computer and
office supplies industry and a provider of value-added supply chain and
marketing services in the United States and international markets. We base our
continued growth on the following strategies:
1) Expansion of our existing offering of products;
2) Growth of our customer base by investing in the development of
emerging customer channels such as web-based resellers, drug and grocery
stores, mass merchants and direct marketers;
3) Leverage of Daisytek's customer management systems to sell services
(Virtual Demand);
4) Continued expansion of our product and service offerings into new
international markets; and
5) Pursuit of acquisitions, where appropriate, to support operating
strategies.
Our computer and office supplies segment specializes in (1) computer
supplies that have longer life cycles and lower risk of technological
obsolescence than hardware and software products and (2) traditional office
products.
We believe that the end-user demand for computer supplies 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, late order cutoff times, order confirmation,
product drop-shipping and customized product catalogs.
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 and specialized buying groups, who are aggressively seeking a lower
cost alternative to the traditional higher cost office products national
wholesale model. Our centralized distribution model and freight partnerships
will allow us to service these customers at lower costs. We have completed our
first full line computer and office supplies catalog to an initial test group of
customers and will continue the roll-out of these products to our remaining
customer base during the next twelve to eighteen months.
We are also focusing on new customer channels such as mass merchants, drug
and grocery stores, direct mail marketers and web-based resellers. We have
dedicated an internal team to leverage our experience in e-commerce,
telemarketing and computer and office 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.
Our wholly-owned subsidiary Virtual Demand leverages our experience in
database management, proactive outbound telemarketing, inbound customer care and
e-marketing to offer a fee-based menu of marketing and proactive demand
generation services for many of our existing manufacturers and reseller
partners. In addition, Virtual Demand is developing new opportunities to promote
the sale of computer and office supplies on behalf of new partners.
We continue to research new and existing markets to expand our
international computer and office supplies business. We believe many
international markets have higher growth opportunities for consumable computer
supplies in particular than the United States. We operate sales and distribution
centers in Canada, Mexico, Australia and Argentina and export products into
Latin America. We recently opened
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additional offices and facilities in Perth, Australia, and Mexico City and
Monterrey, Mexico. We believe our computer and office supplies experience and
broad product range place us in a favorable competitive position in emerging
international markets.
We plan to enhance growth by seeking strategic acquisition opportunities or
adding selected product lines and customers that can capitalize on Daisytek's
expertise in distribution and call-center management or add technology and
service offerings to our business.
SUPPLIERS
Our computer and office supplies products are manufactured by over 250
suppliers, with computer supplies manufacturers such as Hewlett-Packard, Canon,
Lexmark, IBM, Sharp, Okidata, Apple, Panasonic, Imation, Epson, Sony, Xerox,
Brother and Maxell, and office products manufacturers such as GBC Office
Products Group, Sanford Corporation, Smead Manufacturing Company and Avery
Dennison Corporation. During fiscal year 2001, approximately 78% of the computer
and office supplies product net revenues were derived from products supplied by
the computer and office supplies segment's ten largest suppliers. The sale of
Hewlett-Packard products accounted for approximately 39% of computer and office
supplies net revenues and the sale of IBM products accounted for approximately
13% of computer and office supplies net revenues. The sales of the other eight
largest suppliers each accounted for between 2% to 6% of computer and office
supplies net revenues. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Risk Factors -- The loss of key suppliers
and/or shipping companies could adversely affect our business."
Many of our suppliers offer rebate programs under which, subject to our
purchasing certain predetermined amounts of inventory, we receive rebates based
on a percentage of the dollar volume of total rebate program purchases. We also
take advantage of several other programs offered by many of our suppliers. These
include price protection plans under which we receive credits if the supplier
lowers prices on previously purchased inventory and stock rotation or stock
balancing privileges under which we can return slow moving inventory in exchange
for other products. In addition, in order to introduce new products, many
suppliers will permit us to return all unsold inventory after an introductory
trial period.
We have entered into written distribution agreements with Hewlett-Packard,
Canon, Lexmark, IBM, Xerox, Epson, Brother and Okidata and many of the other
major suppliers of the products we distribute. As is customary in the industry,
these agreements generally provide non-exclusive distribution rights, have
one-year renewable terms and are terminable by either party at any time, with or
without cause.
Although we purchase most of our products directly from authorized United
States manufacturers, we also import products from foreign sources, particularly
when fluctuations in foreign exchange rates or product prices make it attractive
to do so. Similarly, depending upon product pricing and availability, we also
purchase products from secondary sources, such as other wholesalers and selected
dealers, rather than directly from the manufacturer. We utilize our ability to
purchase imported and secondary source products in order to provide our
customers with competitive prices and a wide range of product lines. In order to
ensure that such imported and secondary source products are not produced by
unauthorized manufacturers, we have established various procedures which we
believe enable us to identify unauthorized products and, to the extent possible,
return such unauthorized products to the foreign or secondary source.
Our professional tape products are supplied by over 30 manufacturers,
including Sony, Fuji, Maxell, Quantegy, Panasonic, EMTEC-BASF, TDK, Kodak, JVC
and Russ Bassett. During fiscal 2001, approximately 85% of the professional tape
products net revenues were derived from products supplied by the segment's five
largest suppliers, with Sony, Fuji and Maxell accounting for approximately 49%,
15% and 11%, respectively. Sales of the remaining suppliers each accounted for
less than 10% of professional tape products net revenues.
Our purchases of computer and office supplies and professional tape
products inventory are closely tied to sales and are generally based upon the
sales volume of the most recent six to ten week periods.
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SALES AND MARKETING
Computer and Office Supplies
The computer and office supplies segment utilizes sophisticated
telemarketing, direct mail programs and frequent innovative sales promotions and
other marketing efforts to market its computer and office supplies.
The customer and prospect database for computer supplies products includes
United States, Canadian, Australian, Mexican, Latin American and other foreign
computer supplies dealers, office product dealers, VARs, contract stationers,
buying groups, computer and office product superstores, grocery stores, drug and
convenience stores, web-based resellers, direct marketers and other retailers
who resell the products to end-users. The traditional computer and office
supplies customer is a small-sized to medium-sized reseller who does not have
the resources to establish direct purchasing relationships with multiple
manufacturers and, instead, must rely on wholesale distributors like us. We also
sell our products to a number of large customers, including computer and office
product superstores, contract stationers and grocery and drugstores, which
benefit from our product breadth, timely delivery of fast-moving products, and
efficient distribution of a variety of product lines to multiple locations. No
single customer accounts for more than 10% of the total computer and office
supplies sales for any of the fiscal years ended March 31, 2001, 2000 and 1999.
Our computer and office supplies sales and telemarketing department is
divided into several groups or teams, each having its own particular sales
objective. For example, the retail department focuses specifically on large
computer retailers and office product superstores. Similarly, separate groups of
sales representatives are responsible for a select group of national accounts,
such as contract stationers, office products dealers and buying groups, while
other groups focus on new accounts, VARs, convenience stores and mass merchant
customers, existing business or international and export sales. Each sales team
is led by a business manager and a pricing broker and is supported by a group of
highly trained in-bound call center specialists who are dedicated to serving
each customer's unique needs. We believe this sales structure ensures the
highest level of service for our customers. By utilizing sophisticated
telemarketing software and call management systems, including caller
identification, sales representatives are able to verify customer account
numbers and contact persons and quickly identify a customer's buying patterns,
recent purchases, credit availability and other sales and marketing information.
The telecommunications software also enables sales and marketing management to
better identify, control and monitor sales representatives' prospecting activity
with customers.
We provide extensive training for new computer and office supplies sales
personnel with special emphasis on the need for regular customer contact, prompt
response to customers' demands for product information and the continuous need
to inform customers of technological advancements and new product introductions
by our suppliers. Together with our major suppliers, we provide our sales
personnel with ongoing product-specific training and education emphasizing
computer supplies as well as new technologies, new products, new product
applications and vertical market intelligence.
In order to maintain our position as a low cost wholesale distributor, we
regularly monitor the efficiency of our sales staff. By utilizing sophisticated
telecommunications equipment, we are able to measure the number of calls being
fielded by a sales representative, their success rate in terms of orders
obtained compared to calls taken, and customer service statistics such as
abandoned call rates and average response times. Our sales force receives a base
salary as well as varying sales incentives based on gross profit margin
achievements. In addition, a number of suppliers periodically offer sales bonus
programs in connection with specific product sales campaigns.
One of our primary marketing tools in the computer supplies business is a
quarterly catalog known as the "Book of Deals." In order to promote our image as
a low cost wholesaler and provider of value-added services, the Book of Deals
usually highlights a theme related to specific products, customer services or a
combination of the two. Our domestic computer supplies business presently
distributes a total of approximately 45,000 catalogs and contract price books to
its active customers in the United States each
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quarter. The international computer supplies businesses each distribute a
separate Book of Deals designed specifically for the international markets.
Other computer supplies marketing tools include customized catalogs produced by
us for resellers to distribute to their end-user customers and direct mail
vehicles such as flyers, postcards and mini catalogs, which announce new product
line additions or special promotions and are usually inserted in the Book of
Deals or mailed directly to customers. We also market our products through trade
show exhibits and trade publication advertising, and are increasingly utilizing
web-based vehicles such as the Daisytek internet site (www.daisytek.com),
permission based e-mail broadcasts and internet advertising.
During the fourth quarter of fiscal year 2001, we completed our first full
line computer and office supplies catalog. This catalog has been mailed to an
initial group of test customers which will soon be expanded to include those
customers who are within a one to two day delivery distance from Memphis. This
integrated catalog will eventually be available nationwide and will enable
customers to take advantage of a "one-box" solution, whereby computer supplies
and office products may be ordered at the same time and delivered in a single
package.
Although the Book of Deals remains one of our primary marketing tools, we
also use electronic commerce marketing tools as well. We believe we have
established ourselves as a leader in the deployment of electronic commerce in
the computer supplies products industry. These tools are designed to win further
market share and to reduce cost in the customer relationship by automating
information flow. By accepting both externally developed commercially available
technologies as well as internally developed proprietary technologies, we can
offer a suite of electronic commerce solutions including: traditional X.12;
proprietary EDI; integrated FTP; third party software systems such as DDMS,
Copas, and The Systems House; internet; intranet; and extranet systems.
Daisytek offers an exclusive online ordering and information system known
as SOLOnet. SOLOnet provides customers with on-line ordering capabilities;
fingertip access to up-to-date pricing, product and order information; search
and retrieval capabilities based on part numbers, manufacturers, product
description, retail price, machine compatibility and other factors; convenient
access to manufacturers' product literature and training videos; and access to
view their own customer account information.
We have developed technology that is specifically targeted at quickly
integrating and synchronizing our systems with those of our customers and
clients with a high degree of accuracy and reliability. Using our suite of
e-business applications, we enable our customers and clients to easily integrate
to their web sites or ERP systems to our systems for real-time transaction
processing without regard to their specific hardware platform or operating
system. This application suite is an open systems XML-based set of products that
allows for quick implementation and universal compatibility. This high level of
systems integration allows our customers and clients to automatically process
orders, process credit card payments, obtain shipment tracking information and
transact other key e-commerce information. We also have developed systems to
track information sent to us by customers and clients as it moves through our
systems in the same manner a package would be tracked by a carrier throughout
the delivery process. Our systems enable us to trace at a detailed level what
information was received, transmission timing and any errors or special handling
that had to take place to process it and what was transmitted back to the
client.
Many of our computer and office supplies manufacturers provide us with
cooperative advertising programs, marketing development funds and other types of
incentives and discounts, which offset the production costs of our quarterly
Book of Deals, other published marketing tools and related costs.
Professional Tape Products
The professional tape products segment markets its products through the use
of direct-mail campaigns, trade show exhibitions, industry-publication
advertising, web-based lead generation techniques, manufacturer-sponsored
frequent buyer promotional programs, and various other marketing efforts,
primarily to entertainment industry customers, broadcast television stations,
educational institutions, advertising agencies, governmental agencies and cable
television providers.
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Account executives serving major markets in the United States actively
solicit new business from high-volume customers through personal sales calls,
maintaining regular customer contact and providing information on products and
technological advancements. Account executives are teamed with inbound customer
service personnel who supplement customer service by providing a high level of
personalized service and stability to the customer. A sophisticated
telemarketing approach is utilized to obtain new business in remote geographic
areas and unique market segments and to develop business in a higher number of
middle to lower volume accounts located throughout major markets. We also
utilize sales automation software to increase efficiency and track performance.
We publish and distribute a semi-annual catalog (both a paper and cd-rom
version) and maintain a web site and online catalog. Several web-based
techniques are used to generate sales leads through responding to customer
demand for product and technical information. We offer frequent promotions to
customers in conjunction with certain of our suppliers. With many of these
programs, professional tape products customers earn and accumulate points on
select purchases, which can be redeemed for merchandise or services.
MANAGEMENT INFORMATION SYSTEMS
Daisytek utilizes advanced management information systems and has automated
virtually all key business functions using on-line, real time systems. These
on-line systems provide management with information concerning sales and
margins, inventory levels, customer payments and other operations which are
essential for us to operate as a low cost, high efficiency wholesale
distributor.
The implementation of these systems has allowed us to offer an advanced
suite of electronic commerce tools to our customers so that we can communicate
with their computer systems and automatically process, send and receive purchase
orders, invoices and acknowledgments. We offer "customer links" to provide
customers with direct access to a proprietary database to examine pricing,
credit information, product description and availability and promotional
information. This link also allows customers to place orders directly into our
order processing system. These systems allow us to offer similar features to our
customers through SOLOnet.
We have also invested in advanced telecommunications, voice response
equipment, scanning, wireless technology, bar coding, fiber optic network
communications and automated inventory management. We have developed and utilize
telecommunications technology which provides for automatic customer call
recognition and customer profile recall for inbound telemarketing
representatives and computer generated outbound call objectives for outbound
telemarketing representatives.
We plan to continue to invest in various management information systems
enhancements and upgrades to improve efficiency, monitor our operations, manage
inventory risks and offer faster and higher levels of service to our customers
and vendors.
As part of our transaction to purchase certain fixed assets in the central
distribution complex in Memphis, Tennessee, from PFSweb and terminate certain
transaction management services agreements with PFSweb, a project plan has been
developed to transition certain electronic data and applications currently
existing on PFSweb computer systems to Daisytek computer systems.
DISTRIBUTION OF PRODUCTS
Daisytek operates a 400,000 square foot central distribution complex in
Memphis, Tennessee. Certain distribution assets in this complex were recently
purchased from PFSweb, which had initially acquired the distribution assets from
us in connection with its IPO. PFSweb had been offering distribution services to
Daisytek under a transaction services agreement. See "-- PFSweb" for a more
complete description of this transaction. This central distribution center
contains computerized sorting equipment, powered material handling equipment,
scanning and bar-coding systems and automated conveyors, in-line scales and
digital cameras to photograph shipment content for automatic accuracy checking.
The receiving and material
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handling system at the Memphis distribution complex includes several advanced
technology enhancements, including:
- radio frequency technology in product receiving processing to ensure
accuracy;
- an automated package routing system;
- a "pick to light" paperless order picking system;
- a scale which measures every package to compare the expected weight of
the products picked to the actual weight of the box; and
- Omniscan 3000, which photographs the contents of every box prior to it
being sealed for a tracking mechanism to detect any short-shipments.
These advanced distribution systems provide the ability to warehouse an
extensive number of stock keeping units ("SKUs"), while at the same time
retaining the ability to pick, pack and ship single SKUs to individual customers
in fulfillment of customer orders. This complex is located about four miles from
the Memphis International Airport, where both Federal Express and United Parcel
Service operate large hub facilities.
The computer supplies products sold by us are particularly suited to
cost-effective overnight delivery because of their unique value to weight
characteristics. We have entered into an agreement with Federal Express whereby
almost all of our domestic computer supplies package orders are shipped via
Federal Express, except for certain "heavyweight" packages or as otherwise
requested by the customer. In addition, substantially all of these same products
are distributed from the centralized distribution center in Memphis, Tennessee.
The combined effect of the agreement with Federal Express, the centralized
distribution model and the center's location allows us to offer our computer
supplies customers next business day delivery in most areas of the United
States. To service international markets we began to operate smaller regional
sales and distribution centers in these countries and we operate a regional
sales office and distribution center in Miami, Florida, which services certain
South American markets. See "Properties" for a complete listing of leased sales
and distribution facility locations. Currently, office products are being
distributed from our centralized distribution center in Memphis. In order to
offer ground-based delivery within one to two days nationwide, we have announced
plans to add up to four regional fulfillment facilities in the United States.
Our professional tape products segment operates regional warehouses to
effectively service its local markets on a same-day delivery basis. See
"Properties" for a complete listing of leased regional warehouse locations.
EMPLOYEES
As of March 31, 2001, we had approximately 880 employees, including
approximately 580 employees within the United States and approximately 300
persons employed outside of the United States. Approximately 180 employees were
added upon the purchase of certain fixed assets in the central distribution
complex in Memphis, Tennessee from PFSweb on May 25, 2001. We believe that our
employee relations are good. None of our employees are represented by a labor
union, and we have never suffered an interruption of business as a result of a
labor dispute.
COMPETITION
Most, if not all, of our computer and office supplies and professional tape
customers maintain several sources of supply for their product requirements.
Accordingly, our computer and office supplies segment competes with product
manufacturers, general office supply wholesalers, other national and regional
wholesale computer supplies distributors, computer hardware and software
distributors and, to a lesser extent, non-specialized wholesaler distributors.
The professional tape products segment competes with product manufacturers,
mail-order houses, video and audio equipment distributors, and other regional
and
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local professional tape distributors. Competition in the distribution business
is generally based on price, breadth of product lines, product and credit
availability, delivery time and the level and quality of customer services. The
computer and office supplies and professional tape products segments compete
primarily on the basis of their ability to offer competitive prices and quality
service while maintaining a high level of operating efficiency. We believe our
competitive advantages over product manufacturers and other wholesale
distributors include, among others, our ability to:
- efficiently maintain a wide selection of name brand products in stock
ready to be shipped on a same-day basis and delivered overnight;
- efficiently distribute our products;
- provide innovative and high quality value-added customer service
programs; and
- respond to changing customer demands and product development.
REGULATION
Our businesses are either subject to or may be affected by current and
future governmental regulation in many different jurisdictions. The rules,
regulations, policies and procedures affecting these businesses are constantly
subject to change.
ITEM 2. PROPERTIES
The computer and office supplies business is headquartered in Allen, Texas,
a Dallas suburb. Daisytek has a seven year lease on the 46,000 square foot
office space. Daisytek operates a 400,000 square foot central distribution
center in Memphis, Tennessee, and we operate regional sales and distribution
centers in Toronto, Ontario; Mexico City and Monterrey, Mexico; Vancouver,
British Columbia; Sydney and Perth, Australia; Buenos Aires, Argentina; and
Miami, Florida. The computer and office supplies segment also has facilities
dedicated to its copier and fax consumables, with headquarters in Libertyville,
Illinois and regional offices in Kearney, New Jersey; Atlanta, Georgia; Los
Angeles, California; and Miami, Florida.
The professional tape products segment is headquartered in Elmhurst,
Illinois, a Chicago suburb. Regional offices are operated in New York, New York;
Hollywood, California; Atlanta, Georgia; Philadelphia, Pennsylvania; Detroit,
Michigan; Minneapolis, Minnesota; Cincinnati, Ohio; Dallas, Texas; Kansas City,
Kansas; and Seattle, Washington.
All of our facilities are leased.
ITEM 3. LEGAL PROCEEDINGS
Daisytek is involved in certain litigation arising in the ordinary course
of business. Management believes that such litigation will be resolved without
material adverse effect on our financial position, results of operations or
liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Daisytek's common stock is listed and trades on the Nasdaq Stock Market
under the symbol DZTK. As of June 15, 2001, there were approximately 88
shareholders of record. This figure does not include an estimate of the number
of beneficial holders whose shares may be held of record by brokerage firms and
clearing agencies. The table below sets forth for the period indicated the high
and low sale price for the common stock as reported by the Nasdaq National
Market.
On July 7, 2000, Daisytek completed the spin-off of PFSweb and distributed
approximately 0.81 shares of PFSweb common stock for each share of Daisytek
common stock owned by Daisytek shareholders. Daisytek's closing stock price
reported by Nasdaq on July 6, 2000, the date of the PFSweb spin-off, was $9.1875
and the opening stock price reported by Nasdaq on July 7, 2000 was $5.7875. The
market prices prior to July 7, 2000 in the table below have not been adjusted to
give effect to the spin-off.
On July 10, 2000, Daisytek announced the authorization by the Board of
Directors of the repurchase of up to 10% of the outstanding shares of its common
stock, and on September 13, 2000, we announced the authorization of the
repurchase of up to an additional 10% of the then outstanding shares of common
stock. As of March 31, 2001, the two approved share buy-back programs were
completed and a total of approximately 3.4 million shares have been repurchased
using cash of approximately $22 million.
PRICE
-------------------
HIGH LOW
-------- --------
Fiscal Year 2000
First Quarter............................................. $18.8750 $12.5000
Second Quarter............................................ 17.2500 9.0000
Third Quarter............................................. 24.5000 13.0000
Fourth Quarter............................................ 25.1250 13.5000
Fiscal Year 2001
First Quarter............................................. 16.1250 8.1250
Second Quarter............................................ 9.5625 5.2500
Third Quarter............................................. 8.2500 4.4375
Fourth Quarter............................................ 9.7500 6.5625
Note: PFSweb spin-off and tax free dividend on July 6, 2000.
Daisytek has never paid cash dividends on its common stock and does not
anticipate the payment of cash dividends on its common stock in the foreseeable
future. We currently intend to retain all earnings to finance further
development of our business. The payment of any future cash dividends will be at
the discretion of our Board of Directors and will depend upon, among other
things, future earnings, operations, capital requirements, the general financial
condition of the company and general business conditions. In addition, new
credit facilities contain restrictive covenants that significantly limit the
discretion of the Board of Directors with respect to the payment of dividends.
We refer you to "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and "Risk
Factors -- Our credit facilities impose restrictions with respect to various
business matters."
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below has been derived
from our annual audited consolidated financial statements, and should be read in
conjunction with the consolidated financial statements of Daisytek and with the
related notes thereto and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" set forth in Part II -- Item 7
herein.
The selected consolidated financial data for fiscal years 1998 and 1997 has
been restated to combine the results of operations and financial positions of
Daisytek with The Tape Company, which was acquired
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during June 1998 and accounted for as a pooling of interests. See Note 2 to the
Consolidated Financial Statements included elsewhere in this document for
further discussion.
During the fourth quarter of fiscal year 2001, Daisytek restated all prior
periods to classify freight costs billed to customers and rebates paid to
customers as components of net revenues in compliance with Emerging Issues Task
Force Issues No. 00-10, Accounting for Shipping and Handling Fees and Costs, and
No. 00-14, Accounting for Certain Sales Incentives. Freight costs billed to
customers and rebates paid to customers had previously been recorded as a
component of cost of sales.
FISCAL YEARS ENDED MARCH 31,
--------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF
INCOME DATA:
Net revenues......................................... $1,189,656 $1,070,263 $916,518 $806,800 $644,766
Cost of revenues..................................... 1,060,981 962,366 808,151 719,256 576,703
---------- ---------- -------- -------- --------
Gross profit......................................... 128,675 107,897 108,367 87,544 68,063
Selling, general and administrative expenses......... 104,124 95,600 70,648 55,974 41,870
Acquisition related costs............................ -- 619 1,111 735 --
Loss on disposition of business...................... -- (1,000) 2,800 -- --
---------- ---------- -------- -------- --------
Income from operations............................... 24,551 12,678 33,808 30,835 26,193
Interest expense..................................... 5,559 4,035 2,797 3,134 1,847
---------- ---------- -------- -------- --------
Income before income taxes........................... 18,992 8,643 31,011 27,701 24,346
Provision for income taxes........................... 7,613 4,670 11,823 10,185 8,432
---------- ---------- -------- -------- --------
Income before minority interest and cumulative effect
of accounting change............................... 11,379 3,973 19,188 17,516 15,914
Minority interest.................................... 47 566 -- -- --
Cumulative effect of accounting change, net of tax... -- -- (405) -- --
---------- ---------- -------- -------- --------
Net income........................................... $ 11,426 $ 4,539 $ 18,783 $ 17,516 $ 15,914
========== ========== ======== ======== ========
PER SHARE DATA:
Net income per common share:
Basic
Income before cumulative effect of accounting
change......................................... $ 0.72 $ 0.26 $ 1.12 $ 1.20 $ 1.14
Cumulative effect of accounting change, net of
tax............................................ -- -- (0.02) -- --
---------- ---------- -------- -------- --------
Net income....................................... $ 0.72 $ 0.26 $ 1.10 $ 1.20 $ 1.14
========== ========== ======== ======== ========
Diluted
Income before cumulative effect of accounting
change......................................... $ 0.71 $ 0.25 $ 1.08 $ 1.14 $ 1.08
Cumulative effect of accounting change, net of
tax............................................ -- -- (0.02) -- --
---------- ---------- -------- -------- --------
Net income....................................... $ 0.71 $ 0.25 $ 1.06 $ 1.14 $ 1.08
========== ========== ======== ======== ========
Weighted average common and common share
equivalents outstanding:
Basic............................................ 15,904 17,248 17,101 14,541 13,909
Diluted.......................................... 16,108 18,186 17,789 15,318 14,801
AS OF MARCH 31,
------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Working capital........................................ $177,269 $153,921 $138,764 $123,986 $ 82,389
Total assets........................................... 380,868 372,746 315,879 257,845 185,226
Total debt............................................. 78,043 44,823 43,167 19,926 31,116
Shareholders' equity................................... 159,102 210,686 157,170 137,731 70,383
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and related notes thereto appearing
elsewhere in this document. See Note 13 to the Consolidated Financial Statements
included elsewhere in this document for additional information on our operating
segments and geographic areas.
RESULTS OF OPERATIONS
Fiscal Year Ended March 31, 2001 Compared to Fiscal Year Ended March 31, 2000
Net Revenues. Net revenues for the year ended March 31, 2001 increased by
$0.1 billion, or 11.2%, to $1.2 billion as compared to $1.1 billion for fiscal
year 2000. The growth is attributable to our computer and office supplies
segment, which experienced a revenue increase of 15.4% primarily due to (1)
higher international computer supplies sales; (2) product expansion including
traditional office products which we began offering with the acquisition of B.A.
Pargh Company, LLC, on May 3, 2000; (3) the impact of the copier and fax
consumables we began offering with the acquisition of Arlington Industries, Inc.
on October 1, 1999; (4) revenue earned by our new subsidiary Virtual Demand; and
(5) growth in IBM product sales. Increases were primarily volume-related. United
States computer supplies net revenues, excluding B.A. Pargh and IBM product
sales, increased by approximately 5% compared to the prior year. The computer
and office supplies revenue increase was partially offset by a 12.7% revenue
decrease in our professional tape products segment primarily due to prior year
industry price decreases which continued to affect our revenues on a comparable
basis. Management has recently implemented a restructuring plan to improve both
revenues and earnings for the professional tape products segment, which focused
on new leadership, efforts to rationalize warehouses to reduce costs and improve
customer service, better utilization of inside telemarketing teams and
development of new sales and marketing initiatives. The overall net revenue
increase was also offset by the impact of the PFSweb spin-off completed in July
2000. PFSweb net revenues included in our consolidated results of operations,
net of intercompany eliminations, were $8.5 million for fiscal year 2001 and
$24.0 million for fiscal year 2000.
As previously mentioned, international sales were a primary contributor to
our growth during the last fiscal year. International computer and office
supplies net revenues, excluding revenues related to the IBM master distribution
agreements, increased by approximately 17% compared to last year. Effective
March 31, 2000, we elected to close our Singapore operation and consolidate the
remaining business activity into our Asia Pacific headquarters in Australia.
This reduction in revenue was offset by the acquisition of Etertin y CIA, S.A.
in October 2000, which added revenue in Argentina. All of our other
international regions experienced growth in fiscal year 2001 except for our
Latin America subsidiary based in Miami (due to a change in certain tariffs,
which has made it more attractive for our customers to source product locally
rather than import from our Miami facility).
Gross Profit. Gross profit as a percent of net revenues was 10.8% for the
year ended March 31, 2001, compared to 10.1% for the prior year. Our gross
profit for the prior year was negatively impacted by incremental operational
charges of $5.0 million. These charges represent costs for the closure of our
Singapore operations, write-downs of inventory and vendor programs. We believe
that these charges were incremental to normal operations during this period.
Excluding these incremental charges for the prior year, our gross profit was
10.5%. The increase in gross profit percentage, on a basis adjusted for these
incremental charges, was the result of several different factors. In the United
States and international business divisions, the prior year gross profit amounts
for the quarter ended December 31, 1999 reflect the beginning of our intense
focus on improving the key balance sheet areas of inventory and accounts
receivable. In order to make improvements in this area, we avoided certain
vendor incentive programs, which negatively impacted our gross margins during
this period. Since then, we have elected not to participate in certain of the
programs. This is part of our ongoing focus on improving inventory levels to
strengthen our balance sheet position and improve our overall return on invested
capital. Additionally, we have focused during the past fiscal year on improving
all aspects of customer profitability, which has had a favorable impact on gross
margins. These increases in gross profit percentage were partially offset by a
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decline due to the relatively higher revenue growth in IBM product sales, which
are typically at lower margins. Also negatively impacting our gross profit
percentage was the reduction in our professional tape products revenue and
PFSweb revenue (resulting from the spin-off), which have typically carried
higher margin percentages than the remainder of our business.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") for the year ended March 31, 2001 were $104.1
million, or 8.8% of net revenues, as compared to $95.6 million, or 8.9% of net
revenues, for the year ended March 31, 2000, excluding acquisition related costs
and the amounts related to the disposition of a business. Our SG&A expenses for
the year ended March 31, 2001 were negatively impacted by certain non-recurring
costs of $6.9 million relating to separation costs associated with the PFSweb
spin-off, as well as certain costs related to the closure of B.A. Pargh's
Nashville headquarters and restructuring activities for the professional tape
products division. Our SG&A expenses for the year ended March 31, 2000 were
negatively impacted by non-recurring costs of $6.1 million related to certain
repositioning and separation activities associated with the PFSweb spin-off,
increases in allowances for bad debts related primarily to issues in our Latin
American accounts receivable, legal and professional fees related to an
unsolicited acquisition offer, costs incurred in connection with closing our
Singapore operation, and certain other charges.
Excluding these incremental charges, our SG&A percentages would be 8.2% and
8.4%, respectively, for the years ended March 31, 2001 and 2000. Excluding
PFSweb SG&A expenses included for the full year in fiscal year 2000 and for the
first quarter of fiscal year 2001, the increase in overall expenses is due to
the acquisitions of Arlington Industries, Inc. in October 1999, B.A. Pargh
Company, LLC in May 2000, and Etertin y CIA, S.A. in October 2000. The decline
in SG&A as a percentage of net revenues is primarily attributable to the
significant investments in resources and technology to implement new contracts
and further develop the infrastructure for PFSweb during the prior fiscal year.
This impact was partially offset by a reduction in net revenues to certain large
customers, which typically have lower SG&A expense ratios. However, we
experienced a corresponding favorable impact on the increase in IBM product
sales, which typically have lower SG&A expense ratios. As a result of our
purchase of the Memphis distribution assets in May 2000 and the termination of
the transaction services agreement with PFSweb, we believe that, beginning the
latter half of fiscal 2002, our SG&A costs as a percentage of revenue will
decline compared to fiscal 2001. Our cost to operate the Memphis distribution
facility should be lower than the fee previously paid to PFSweb to perform this
service.
During the fourth quarter of fiscal year 2001, we began to invest in
additional logistics and information technology personnel costs in anticipation
of our purchase of the Memphis Superhub. We anticipate that these cost
redundancies will exist in the first two quarters of fiscal year 2002, but will
be eliminated during the third quarter of fiscal year 2002. Beginning in the
third quarter of fiscal year 2002, we expect that this purchase transaction will
be accretive to earnings. See "Business -- PFSweb." Additionally, during fiscal
year 2001, SG&A has been impacted by continuing investments in our high growth
areas of office products and Virtual Demand, in advance of expected revenue
streams.
Interest Expense. Interest expense increased 37.8% during fiscal year
2001, primarily due to (1) our repurchase of 3.4 million shares of common stock;
(2) the acquisitions of Arlington Industries, Inc., B.A. Pargh Company, LLC and
Etertin y CIA, S.A.; and (3) growth in the working capital requirements of our
IBM business. Additionally, interest rate increases during calendar year 2000
negatively impacted our interest expense for the current year. These increases
have been partially offset by recent decreases in interest rates. The weighted
average interest rate was 7.9% and 6.5% for the fiscal years ended March 31,
2001 and 2000, respectively.
As discussed in "Business -- PFSweb," our existing master distribution
agreements with IBM expire on varying dates prior to December 31, 2001. We do
not intend to renew these agreements and have notified IBM of this intention. As
a result, our financial results for fiscal 2002 will be impacted. Revenue should
decline as a result of no longer operating this business. Our consolidated gross
profit percentage should increase since this business typically operates at
lower gross profit margins. Our SG&A percentage should also increase since costs
are lower than in our normal business. Our net operating income as a
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percentage of sales should improve. Interest costs should decline since we will
no longer have the working capital requirements of this business.
For information concerning the provision for income taxes as well as
information regarding differences between effective rates and statutory rates,
see Note 9 of the Notes to Consolidated Financial Statements.
Fiscal Year Ended March 31, 2000 Compared to Fiscal Year Ended March 31, 1999
Net Revenues. Net revenues for the year ended March 31, 2000 increased
$0.2 billion, or 16.8%, to $1.1 billion as compared to $0.9 billion for the year
ended March 31, 1999. Computer and office supplies net revenues increased 18.7%
for the year ended March 31, 2000, compared to the year ended March 31, 1999.
The computer and office supplies business segment includes our domestic and
international computer 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 acquisition, growth in the
international computer supplies business and growth in IBM product sales. U.S.
computer supplies net revenues, excluding Arlington and IBM product sales,
declined by 1.4% compared to the prior year. This business experienced a decline
in the first quarter of fiscal 2000 compared to the prior year's quarter, but
improved to low single digit growth rates in the remaining quarters of the year.
In the two years ended March 31, 2000, the growth in wholesale sales for the
domestic computer supplies business slowed from previously realized levels. We
believe this reduction was due, in large part, to slower wholesale industry
growth, large channel shifts, turmoil in certain customer segments and slower
printer placements.
Net revenues in the international computer supplies operations, excluding
revenues related to the IBM master distribution agreements, increased by
approximately 22% for the year ended March 31, 2000 compared to the prior year.
We experienced growth in all international subsidiaries within this segment,
with particularly strong growth rates in Mexico and Australia. Effective March
31, 2000, we elected to close our Singapore operation and consolidate the
remaining business activity into our Asia Pacific headquarters in 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 revenues decreased 9.3% for fiscal 2000 compared to the prior
year due primarily to price degradation in certain product lines and the
disposition of the Steadi-Systems professional hardware business in March of
1999. This decline was partially offset by the acquisition of certain
professional tape businesses during fiscal 2000. PFSweb also experienced an
increase in its service fee-based activity as a result of new contracts and
expansion of existing contracts.
Gross Profit. Gross profit as a percent of net revenues was 10.1% for the
year ended March 31, 2000 as compared to 11.8% for the prior year. Our gross
profit for the year was negatively impacted by incremental operational charges
of $5.0 million. These charges represent charges for the closure of our
Singapore operations, writedowns of inventory, and vendor programs and we
believe that these charges are incremental to normal operations. Excluding these
incremental charges for the year, our gross profit was 10.5%. The decrease in
our gross profit as a percent of net revenues was primarily due to our
previously announced focus on the key balance sheet areas of inventory and
accounts receivable during the latter half of fiscal 2000. In order to make
improvements in this area, we avoided certain vendor incentive programs, that
for comparative purposes have been previously reflected in our prior year
results. Additionally, in order to improve inventory levels, we entered into
certain isolated transactions to sell certain inventory at lower than usual
margins. During fiscal 1999, we were also able to take advantage of certain
enhanced product sourcing opportunities which did not continue in fiscal 2000
and, thus, negatively impacted the fiscal 2000 gross profit percentage on a
comparative basis. Additionally, the gross profit percentage declined in the
international computer supplies business due primarily to growth in
international retail business, which typically carries lower margins. Also
contributing to the overall decline in gross profit percentage was the revenue
growth in IBM product sales, which are also typically at lower margins.
Daisytek's gross profit percentage was also negatively impacted by incremental
costs associated with PFSweb's large number of new client implementations.
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Selling, General and Administrative Expenses. SG&A expenses for the year
ended March 31, 2000 were $95.6 million or 8.9% of net revenues, as compared to
$70.6 million, or 7.7% of net revenues for the year ended March 31, 1999,
excluding acquisition related costs and the loss on disposition of business in
each period. The increase in SG&A expenses and the related increase in SG&A as a
percentage of net revenues for fiscal 2000 is primarily attributable to (i) the
acquisition of Arlington on October 1, 1999, (ii) the investments in resources
and technology to implement new contracts and further develop infrastructure for
PFSweb, and (iii) a reduction in net 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 with lower SG&A expense
ratios. SG&A expenses for the year ended March 31, 2000 included incremental
charges primarily related to certain repositioning and separation activities
associated with the PFSweb spin-off, increases in allowances for bad debts
related primarily to issues in our Latin American accounts receivable, legal and
professional fees related to an unsolicited acquisition offer, for costs
incurred in connection with closing our Singapore operation, and for certain
other charges.
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 interests in the accompanying Consolidated Financial Statements and
notes thereto. During fiscal 2000, we recorded costs of about $0.6 million
applicable to transition, integration and merger activities within our
professional tape products segment. During fiscal 1999, we incurred acquisition
and integration costs of $1.1 million related to accounting, legal and other
costs applicable to the acquisition of The Tape Company.
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 fiscal 2000, we reversed $1.0 million of this charge as management
was able to avoid some of the costs associated with this disposition.
Interest Expense. Interest expense for the year ended March 31, 2000 was
$4.0 million as compared to $2.8 million for the year ended March 31, 1999.
Interest expense was higher for the year ended March 31, 2000, primarily due to
higher debt balances caused by business acquisitions and higher working capital
levels throughout the year. These negative impacts were partially offset by
proceeds from the PFSweb initial public offering, which was completed in
December 1999. Our weighted average interest rate was 6.5% for both fiscal year
2000 and 1999.
For information concerning the provision for income taxes as well as
information regarding differences between effective rates and statutory rates,
see Note 9 of the Notes to Consolidated Financial Statements.
DILUTION
Because of the wide range of exercise prices on outstanding stock options,
the number of shares included in our dilutive earnings per share calculation and
the resulting diluted earnings per share could vary greatly depending on the
average market price of our common stock. The following table summarizes the
dilutive shares outstanding at various price points using common stock
outstanding at May 31, 2001 of 15,238,517.
DILUTED SHARES
AVERAGE SHARE PRICE OUTSTANDING
- ------------------- --------------
$12.00...................................................... 16,590,662
$13.00...................................................... 16,739,943
$14.00...................................................... 16,868,007
$15.00...................................................... 16,984,117
$16.00...................................................... 17,087,819
$17.00...................................................... 17,179,320
$18.00...................................................... 17,260,655
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LIQUIDITY AND CAPITAL RESOURCES
We expect to fund our anticipated cash requirements, including the
anticipated cash requirements 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 the next
twelve months.
Operating activities provided net cash of $8.7 million, $4.6 million and
$13.0 million in fiscal years 2001, 2000 and 1999, respectively. Working
capital, excluding the current portion of long-term debt, decreased to $178.7
million at March 31, 2001 from $196.3 million at March 31, 2000. The reduction
in working capital 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)
acquisitions of both the B.A. Pargh and Etertin businesses, (2) an increase in
inventory primarily related to the IBM products, which was offset by accounts
payable associated with this inventory, and (3) an increase in accounts
receivable related to the growth in existing business units during this fiscal
year.
Our principal use of funds for investing activities was a reduction in cash
of $22.1 million as a result of 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 $7.5 million, $15.2 million and $10.5 million for
fiscal years 2001, 2000 and 1999, respectively. In addition, we used funds for
the acquisition of businesses of $10.6 million, $21.1 million and $20.6 million
for fiscal years 2001, 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. In addition to expenditures related to the Memphis distribution assets
purchased from PFSweb during May 2001 (see "Business -- PFSweb"), we anticipate
spending approximately $5.0 million for upgrades and additions to facilities
during fiscal 2002.
Net cash provided by financing activities was $4.1 million, $49.9 million
and $24.8 million for fiscal years 2001, 2000 and 1999, respectively. In
conjunction with the acquisition of B.A. Pargh during May 2000, certain acquired
debt of approximately $6.5 million was paid in full. In addition, we acquired
debt of approximately $4.7 million in connection with the Etertin acquisition,
of which approximately $4.6 was paid down during fiscal year 2001. 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. Cash provided by financing activities for fiscal year 2000 was
primarily attributable to proceeds received from the PFSweb initial public
offering. The entire cost of the B.A. Pargh and Etertin acquisitions 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 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 March 31, 2001, both programs were
completed and we had acquired approximately 3.4 million shares at a total cost
of $22.1 million, funded with proceeds from our credit facility.
Domestic Credit Facilities
In December 2000, we entered into an agreement with certain banks for a
revolving line of credit facility in the United States that has a maximum
borrowing availability of $120.0 million and expires on December 19, 2003.
Availability under the credit facility is subject to certain borrowing base
limitations, including eligible accounts receivable and inventory, as defined.
This credit facility replaced our previous United States credit facility, which
would have expired on January 1, 2001. Borrowings under the credit
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facility accrue interest, at our option, at the prime rate of the lead bank or a
Eurodollar rate plus an adjustment ranging from 1.05% to 2.0% depending on our
financial performance. As of March 31, 2001, the outstanding balance under this
credit facility was $74.0 million and, based on our borrowing limit at March 31,
2001, $43.8 million was available for future borrowings.
The credit facility also includes an expandable feature to increase the
maximum borrowing to $170 million, subject to various conditions precedent.
During April 2001, we added another $30.0 million of available credit under this
feature, increasing the maximum borrowing availability to $150.0 million.
Foreign Credit Facilities
During August 1999, our Canadian subsidiary entered into an agreement with
a Canadian bank for a revolving term loan. The term loan, which expires on
August 31, 2001, allows us to borrow Canadian or U.S. dollars up to a maximum of
10.0 million Canadian dollars, or approximately $6.3 million. The term loan
accrues interest at our option at either the bank's prime rate plus 0.10% or the
bank's U.S. dollar commercial loan rate plus 0.10%. As of March 31, 2001, the
outstanding balance under the Canadian revolving term loan was 2.1 million
Canadian dollars, or approximately $1.3 million. We had 7.9 million Canadian
dollars, or approximately $5.0 million, available for future borrowings.
In December 2000, our Canadian subsidiary entered into an agreement with a
Canadian bank for an unsecured revolving line of credit facility in addition to
the term loan. The Canadian credit facility expires on January 1, 2002 and
replaced our previous Canadian revolving line of credit facility, which would
have expired on December 31, 2000. The Canadian credit facility allows us to
borrow Canadian or U.S. dollars up to a maximum of 5.0 million Canadian dollars,
or approximately $3.2 million. For Canadian dollar borrowings, the Canadian
credit facility accrues interest at the bank's prime rate or the bank's cost of
funds plus an adjustment ranging from 1.3% to 2.0% depending on our financial
performance. For U.S. dollar borrowings, the Canadian credit facility accrues
interest at the prime rate of the bank or a Eurodollar rate plus an adjustment
ranging from 1.3% to 2.0% depending on our financial performance. As of March
31, 2001, the outstanding balance under the Canadian revolving line of credit
facility was 2.0 million Canadian dollars, or approximately $1.3 million. We had
3.0 million Canadian dollars, or approximately $1.9 million, available for
future borrowings.
During April 2001, we refinanced the Canadian revolving term loan and
Canadian revolving credit facility with a single credit facility of 20.0 million
Canadian dollars, or approximately $12.7 million, expiring during April 2004.
Availability under the credit facility is subject to certain borrowing base
limitations, as defined. For Canadian dollar borrowings, the Canadian credit
facility accrues interest at the bank's prime rate plus 50 basis points. For
U.S. dollar borrowings, the Canadian credit facility accrues interest at the
bank's United States dollar base rate in New York plus 50 basis points.
In December 2000, our Australian subsidiary entered into an agreement with
an Australian bank for an unsecured revolving line of credit facility allowing
us to borrow Australian dollars up to a maximum of 15.0 million Australian
dollars, or approximately $7.3 million. The Australian credit facility expires
on January 1, 2002 and replaced our previous Australian revolving line of credit
facility, which would have expired on December 31, 2000. The Australian credit
facility accrues interest at the Australian Bill Rate plus an adjustment ranging
from 1.3% to 2.0% depending on our financial performance. As of March 31, 2001,
the outstanding balance under our Australian credit facility was 2.7 million
Australian dollars, or approximately $1.3 million. We had 12.3 million
Australian dollars, or approximately $6.0 million, available for future
borrowings. During June 2001, we amended the Australian credit facility to add
another 5.0 million Australian dollars, or approximately $2.4 million, to
available credit for a total maximum credit availability of 20.0 million
Australian dollars, or approximately $9.7 million.
In the future, we may attempt to acquire other businesses to expand our
existing computer and office supplies businesses in the United States 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. We currently have no binding agreements to
acquire any material businesses. However, at any time, we may have outstanding
non-binding letters of intent. Should we be successful in acquiring
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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 or integrating 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 that such funds
will be available on terms acceptable to Daisytek or at all.
OTHER MATTERS
Inventory Management
Daisytek manages its inventories held for sale in its core 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, management has not been able to
determine the specific or, if any, seasonal factors that may cause quarterly
variability in operating results. Management believes, however, that factors
that may influence quarterly variability include the overall growth in the
non-paper computer supplies industry and shifts in demand for 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 quarters in relation to sequential quarter performance.
Inflation
Our management believes that inflation has not had a material effect on our
operations.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133, as amended by SFAS No. 137 and
SFAS No. 138, was adopted by Daisytek effective April 1, 2001. This statement
establishes accounting and reporting standards for derivative instruments and
hedging activities and requires all derivative instruments to be recorded on the
balance sheet at fair value. The adoption of SFAS 133 did not have a material
impact on our financial statements.
The Financial Accounting Standards Board has proposed new accounting for
business combinations that, among other things, would change the accounting for
goodwill recorded in business acquisitions as of the date of the new Statement.
An important part of the proposed Statement is that amortization of goodwill
would cease for both assets acquired prior to the effective date of the
Statement and for any new goodwill acquired after the effective date of the
Statement. Rather than amortizing these assets, goodwill
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would be reviewed for impairment using a "market value" approach. The proposed
Statement is expected to be issued in July 2001. As the amortization of the
excess of cost over net assets acquired is a significant non-cash expense that
we currently recognize, this proposed Statement, if finalized in its current
form, could have a material impact on our financial statements.
RISK FACTORS
RISKS RELATED TO OUR BUSINESS
We face competition from many sources that could adversely affect our
business.
We operate in a highly competitive environment. Minimal barriers to entry
allow competitors to easily offer products and services that compete with those
that we currently offer or anticipate offering. Our current and potential
competitors include:
- national, regional and specialty wholesalers of computer and office
supplies;
- traditional retailers that sell or resell office products and business
services, either through storefront locations or through the internet,
where they can economically justify direct purchasing from manufacturers;
- large hardware wholesalers who sell supplies as an ancillary product
line; and
- manufacturers wishing to sell direct to resellers or end-users.
Some of these competitors are larger than we are and have greater financial
and other resources available to them than we do. We cannot assure you that we
can continue to compete successfully against these or other competitors in the
future. In addition, increased competition in the business products industry,
together with increased advertising, has heightened price awareness among end
users. This heightened price awareness has led to margin pressure on business
products. In the event that this trend continues, our profit margins could be
adversely affected.
The loss of key suppliers and/or shipping companies could adversely affect our
business.
We depend on our suppliers to provide us with the products and services we
need to serve our customers. Our agreements with our suppliers are generally
terminable at any time or on short notice, with or without cause, and, while we
consider our relationships with our suppliers to be good, we cannot assure you
that any or all of our relationships will not be terminated or that such
relationships will continue as presently in effect. Termination of such
relationships or changes by our suppliers in their policies regarding wholesale
distributors or volume discount schedules, other marketing programs applicable
to us or product pricing generally may have a material adverse effect on our
business. In addition, we rely on strategic product shipping relationships to
ship our products from our distribution centers to our customers. Loss of any of
these relationships could reduce our ability to deliver our products to our
customers on a timely basis and material changes in delivery terms and pricing
could adversely affect our business.
Our business could be adversely affected by a systems or equipment failure.
Our business depends upon the reliability of our systems and equipment,
some of which is operated by third parties. Sustained or repeated system
failures could significantly impair our ability to take orders, reduce the
traffic on our website and may impair our reputation. We may, from time to time,
experience interruptions due to several factors including hardware failures,
unsolicited bulk e-mail and operating system failures. If delays or
interruptions continue to occur, our customers could perceive our network as
being unreliable, traffic on our website could deteriorate, customers may become
less inclined to purchase from us, and our brand could be adversely affected.
Any failure on our part to minimize or prevent capacity constraints or system
interruptions could have an adverse effect on our brand and our business.
Furthermore, our operations are dependent upon our ability to protect our
distribution facilities, customer service centers, computer and
telecommunications equipment and software systems against
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damage and failures. Damage or failures could result from fire, power loss,
equipment malfunctions, system failures, natural disasters and other causes.
Although we believe we have sufficient property and business interruption
insurance, if our business is interrupted either from accidents or the
intentional acts of others, our business could be materially adversely affected.
In addition, in the event of widespread damage or failures at our facilities,
our short-term disaster recovery and contingency plans and insurance coverage
may not be sufficient.
Our clients' businesses may also be harmed from any system or equipment
failures we experience. In that event, our relationships with these clients may
be adversely affected, we may lose these clients, our ability to attract new
clients may be adversely affected and we could be exposed to liability.
Interruptions could also result from the intentional acts of others, like
"hackers." If our systems are penetrated by computer hackers, or if computer
viruses infect our systems, our computers could fail or proprietary information
could be misappropriated.
If our clients suffer similar interruptions in their operations, for any of
the reasons discussed above or for others, our business could also be adversely
affected. Many of our customers' and suppliers' computer systems interface with
our own. If they suffer interruptions in their systems, the link to our systems
could be severed and sales could be negatively impacted.
We depend on the continued operation of our distribution and fulfillment
center in Memphis, Tennessee.
We conduct a significant amount of our distribution and fulfillment
operations and our internet/direct operations' order processing and fulfillment
functions from our facility in Memphis, Tennessee. Any disruption in the
operations at our Memphis distribution and fulfillment center for any reason,
including due to damage from fire, natural disaster, power loss,
telecommunications failure or similar events could cause us to be unable to
fulfill internet/direct orders. This failure could cause us to lose customers,
would harm our business and would lead to a decline in revenues. Additionally,
we operate regional sales and distribution centers in Toronto, Ontario;
Vancouver, British Columbia; Mexico City and Monterrey, Mexico; Sydney and
Perth, Australia; and Buenos Aires, Argentina. To the extent we open additional
distribution facilities in the future, we may face significant logistical and
inventory management issues. We cannot assure you that we will be able to
successfully manage these issues in the future or that we will be able to deal
effectively with a disruption in the operation of our Memphis facility.
A significant portion of our business is conducted in foreign countries,
exposing us to additional risks in addition to those that exist in the United
States.
A major component of our business strategy is to continue to expand
internationally, and a significant portion of our operations is conducted in
foreign countries. For example, we operate regional sales and distribution
centers in Toronto, Ontario; Vancouver, British Columbia; Mexico City and
Monterrey, Mexico; Perth and Sydney, Australia; and Buenos Aires, Argentina.
Additionally, certain of our Business Supplies Distributors operations are
conducted in a distribution center operated by PFSweb in Liege, Belgium. We
cannot assure you that we will be successful in expanding into additional
international markets. In addition to the uncertainty regarding our ability to
generate revenue from foreign operations and expand our international presence,
there are risks inherent in doing business internationally, including:
- changing regulatory requirements;
- legal uncertainty regarding foreign laws, tariffs and other trade
barriers;
- political instability;
- potentially adverse tax consequences;
- foreign currency fluctuations; and
- cultural differences.
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Any one or more of these factors may materially adversely affect our
business in a number of ways, such as increased costs, operational difficulties
and reductions in revenue.
Changing manufacturers' prices and price fluctuations due to inflationary and
other market conditions could adversely impact our net sales, gross margins
and net income.
We maintain substantial inventories to accommodate the prompt service and
delivery requirements of our customers. Accordingly, we purchase our products on
a regular basis in an effort to maintain our inventory at levels that we believe
to be sufficient to satisfy the anticipated needs of our customers based upon
historic buying practices and market conditions. Although we have historically
been able to pass through manufacturers' price increases to our customers on a
timely basis, competitive conditions will influence how much of future price
increases can be passed on to our customers. Conversely, when manufacturers'
prices decline, lower sales prices could result in lower margins as we sell
existing inventory. Changes in the prices paid by us for our products therefore
could have a material adverse effect on our net sales, gross margins and net
income, and the timing of such changes throughout the year could adversely
impact quarterly results.
In addition, many of our office supply product offerings have been and are
expected to continue to be subject to significant price fluctuations due to
inflationary and other market conditions. We are generally able to pass these
increased costs on to our customers through price increases, although we may not
be able to adjust our prices immediately. Significant increases in paper, fuel
and other costs in the future could materially affect our profitability if these
costs cannot be passed through to customers on a timely basis, if at all.
A breach of our e-commerce security measures could reduce demand for our
services.
We offer several products through our SOLOnet service on our website and
may offer additional products in the future. Advances in computer capabilities
and new discoveries in the field of cryptography may compromise the security
measures we use to protect our website, access to our databases, and
transmissions to and from our website. A party who is able to circumvent our
security measures could misappropriate proprietary information or interrupt our
operations. Any compromise or elimination of our security could reduce demand
for our services.
We may be required to expend significant capital and other resources to
protect against security breaches or to address any problem they may cause.
Because our activities involve the storage and transmission of proprietary
information, such as credit card numbers, security breaches could damage our
reputation and expose us to litigation and possible liability. Our security
measures may not prevent security breaches and failure to prevent security
breaches may disrupt our operations.
We may engage in future acquisitions that could dilute our existing
stockholders, cause us to incur significant expenses or harm our business.
Our growth strategy is dependent to a substantial degree on our ability to
effect acquisitions. Some of our major competitors have similar acquisition
strategies, and the office products distribution industry is consolidating
rapidly. As a result, there is substantial competition for suitable acquisition
candidates in many markets. We are continuously engaged in the pursuit of
acquisitions and are currently in discussion with several acquisition
candidates, both domestic and foreign. Future acquisitions by us could result in
risks such as the following:
- we may be exposed to unknown liabilities of acquired companies;
- our acquisition and integration costs may be higher than we anticipated
and may cause our quarterly and annual operating results to fluctuate;
- we may experience difficulty and expense in assimilating the operations
and personnel of the acquired businesses, disrupting our business and
diverting management's time and attention;
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- we may be unable to integrate or complete the development and application
of acquired technology;
- we may experience difficulties in establishing and maintaining uniform
standards, controls, procedures and policies;
- our relationships with key customers of acquired businesses may be
impaired due to changes in management and ownership of the acquired
businesses;
- we may be unable to retain key employees of the acquired businesses;
- we may incur amortization expenses if an acquisition results in
significant goodwill or other intangible assets; and
- our stockholders may be diluted if we pay for the acquisition with equity
securities.
Any of these factors could harm our operating results. In addition, we
cannot assure you that we will be able to acquire other computer and office
products businesses on terms favorable to us.
Our credit facilities impose restrictions with respect to various business
matters.
Our credit agreements contain numerous restrictive covenants that limit the
discretion of management with respect to certain business matters. These
covenants place significant restrictions on, among other things, our ability to
incur additional indebtedness, to create liens or other encumbrances, to pay
dividends or make other payments in respect of our capital stock, to engage in
transactions with affiliates, to make certain payments and investments and to
merge or consolidate with another entity. The credit agreements also contain a
number of financial covenants that require us to meet certain financial ratios
and tests. A failure to comply with the obligations in the credit agreements
could result in an event of default under the credit agreements, which, if not
cured or waived, could permit acceleration of the indebtedness thereunder and
acceleration of indebtedness under other instruments that may contain
cross-acceleration or cross-default provisions, any of which could have a
material adverse effect on our financial condition. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
We have historically depended on PFSweb for various services.
We have historically been dependent on PFSweb for various services,
including management information systems. We have entered into a transition
services agreement with PFSweb under which PFSweb will continue to provide
certain of these services to us until November 25, 2001. When the term of this
agreement expires, we will need either to extend the term of this agreement,
engage other entities to perform these services or perform these services
ourselves. The cost of these services may be significantly higher if we purchase
services from other parties or devote resources to handle these functions
internally.
We have potential liability for certain of PFSweb's tax and credit
obligations.
For all periods in which we owned 80% or more of PFSweb's capital stock,
PFSweb is included in our consolidated group for federal income tax purposes. If
PFSweb or other members of the consolidated group fail to make any federal
income tax payments, we would be liable for the shortfall since each member of a
consolidated group is liable for the group's entire tax obligation. In addition,
in conjunction with the IPO, we have agreed to act as guarantor with respect to
certain liabilities of PFSweb under certain of its operating leases. See Note 11
to the Consolidated Financial Statements included elsewhere in this document for
additional information.
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Our quarterly operating results may be subject to significant fluctuation.
Our operating results may fluctuate from quarter to quarter as a result of
any of the following:
- the mix of products and services sold;
- pricing actions of our competitors and us;
- pricing actions of our freight providers;
- pricing actions of manufacturers;
- seasonality; and
- charges associated with acquisitions and investments.
Most of our operating expenses, such as rent expense, depreciation and
amortization expense, and employee salaries, do not vary directly with the
amount of our sales and are difficult to adjust in the short term. As a result,
if our sales in a particular quarter are below expectations for that quarter, we
may not proportionately reduce operating expenses for that quarter, and
therefore any sales shortfall would have a disproportionate effect on our net
income for the quarter.
We are dependent on our key personnel, and we need to hire and retain skilled
personnel to sustain our business.
Our performance is highly dependent on the continued services of our
executive officers and other key personnel, the loss of any of whom could
materially adversely affect our business. We currently do not have employment
agreements with our executive officers and key personnel. In addition, we need
to attract and retain other highly-skilled technical and managerial personnel
for whom there is intense competition. We cannot assure you that we will be able
to attract and retain the personnel necessary for the continuing growth of our
business. Our inability to attract and retain qualified technical and managerial
personnel would materially adversely affect our ability to maintain and grow our
business.
Our certificate of incorporation, our bylaws and Delaware corporate law make
it difficult for a third party to acquire us, despite the possible benefit to
our stockholders.
Provisions of our certificate of incorporation, our bylaws and Delaware
General Corporate Law, as well as our share rights purchase plan and change in
control agreements we have with various Daisytek executives, could make it more
difficult for a third party to acquire us, even if doing so would be beneficial
to our stockholders. For example, our certificate of incorporation provides for
a classified board of directors, meaning that only approximately one-third of
our directors will be subject to re-election at each annual stockholder meeting.
Our certificate of incorporation also permits our Board of Directors to issue
one or more series of preferred stock which may have rights and preferences
superior to those of the common stock. The ability to issue preferred stock
could have the effect of delaying or preventing a third party from acquiring us.
In addition, we have a share rights purchase plan pursuant to which preferred
stock will be issued upon the occurrence of certain triggering events, including
a change in control of Daisytek (defined as a person or group acquiring, or
announcing a tender offer to acquire, 15% or more of our common stock). Finally,
our change in control agreements provide various benefits to our executives upon
the occurrence of an acquisition or other change in control of Daisytek. These
anti-takeover measures could discourage takeover attempts and could materially
adversely affect the price of our stock.
The price of our stock may fluctuate significantly.
The market price of our common stock may fluctuate significantly in
response to a number of factors, some of which are beyond our control,
including:
- quarterly variations in operating results;
- changes in financial estimates by securities analysts; and
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- announcements by us of significant contracts, acquisitions, strategic
partnerships, joint ventures or capital commitments.
In addition, stock markets in general, and the Nasdaq National Market, have
experienced extreme price and volume fluctuations recently. These fluctuations
often have been unrelated or disproportionate to the operating performance of
these companies. These broad market and industry factors may decrease the market
price of our common stock, regardless of our actual operating performance.
If our stock price proves to be volatile, we may be subject to securities
class action litigation, which could result in substantial costs. In the past,
securities class action litigation has often been brought against a company
following periods of volatility in the market price of its securities. In the
future, we may be the target of similar litigation. Securities litigation could
result in substantial costs and divert management's attention and resources,
which could reduce our revenues or adversely affect our operating results.
RISKS RELATED TO OUR INDUSTRY
Consolidation in the business products industry could adversely affect our
business.
Consolidation continues throughout all levels of the business products
industry. Consolidation has resulted in (a) an increased ability of resellers
and end-users to buy goods directly from manufacturers on their own or through
their participation in buying groups, (b) the ability of larger resellers who
grow primarily through acquisitions to qualify for larger volume rebates than
the acquired companies would have qualified for on a stand-alone basis and (c)
fewer independent resellers to purchase from wholesalers. In addition, over the
last decade, office products superstores (which largely buy directly from
manufacturers) have entered virtually every major metropolitan market.
Continuing consolidation could adversely affect our financial results.
Our market is subject to rapid change and to compete we must continually
enhance our systems to comply with evolving standards.
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our services and the underlying
network infrastructure. If we are unable to adapt to changing market conditions,
client requirements or emerging industry standards, our business could be
adversely affected. We must continue to address the increasingly sophisticated
and varied needs of our clients and respond to technological advances and
emerging industry standards and practices on a cost-effective and timely basis.
Our industry is subject to seasonality and end-user demands may change
rapidly.
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. Any impact upon sales during this peak season could have a
disproportionate effect on our results of operations for the full year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality."
In addition, our sales and profitability are largely dependent on our
ability to continually enhance our product offerings in order to meet changing
end-user demands. End-users' traditional demands for business products have
changed over the last several years as a result of, among other things, the
widespread use of computers and other technological advances (resulting in the
reduction in use of traditional office supplies), efforts by various businesses
to establish "paperless" work environments, increased recycling efforts and a
trend toward non-traditional offices (such as home offices). Our ability to
continually monitor
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and react to such trends and changes in end-user demands will be necessary to
avoid adverse effects on our sales and profitability. In addition, our business,
financial condition and results of operations could be adversely affected if and
to the extent that end-user demand for a broad product selection or the need for
overnight delivery were to diminish substantially or end-user demand for a
higher proportion of low margin products were to increase substantially.
We operate in an uncertain regulatory and legal environment. New laws and
regulations could harm our business.
Our business is either subject to or may be affected by current and future
governmental regulation in many different jurisdictions. These rules,
regulations, policies and procedures are constantly subject to change. Our
business could suffer depending on the extent to which our activities are
regulated or proposed to be regulated. Various jurisdictions already have
enacted laws covering intellectual property, privacy and taxation that could
affect our business. If we become subject to claims that we have violated any
laws, even if we successfully defend against these claims, our business could
suffer. Moreover, new laws that impose restrictions on our ability to follow
current business practices or increase our costs of doing business could hurt
our business.
FORWARD-LOOKING STATEMENTS
Certain statements used in this annual report on Form 10-K are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements about the financial condition,
prospects, operations and business of Daisytek are generally accompanied by
words such as "anticipates," "expects," "estimates," "believes," "intends,"
"plans" or similar expressions. These forward-looking statements are subject to
numerous risks, uncertainties and other factors, some of which are beyond the
control of Daisytek that could cause actual results to differ materially from
those forecasted or anticipated in such forward-looking statements.
These risks, uncertainties and other factors include, but are 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). Because such forward-looking
statements are subject to risks, uncertainties and assumptions, you are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's view only as of the date of the Annual Report on Form 10-K.
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.
ITEM 7A. 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 Daisytek
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 $77.9 million at March 31, 2001 and
$42.1 million at March 31, 2000. To mitigate this risk, we converted $25.0
million of our outstanding balance from variable interest to a fixed rate of
5.93% for the three-year life of our United States credit facility. This
interest rate swap has a fair value loss position of $0.7 million at March 31,
2001. An 80 basis point movement in interest rates would result in approximately
$423,000 and $337,000 annualized increase or decrease in interest expense based
on the outstanding balance of the revolving line of credit at March 31, 2001 and
2000, respectively.
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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. During fiscal year 2001 and 2000, we entered into foreign
currency exchange contracts to manage foreign currency exchange risk related to
net investment and intercompany balances denominated in foreign currencies.
These contracts typically require the exchange of a foreign currency for U.S.
dollars at a fixed rate at a future date. Foreign currency instruments generally
have maturities that do not exceed three months. We monitor our foreign exchange
exposures to ensure the overall effectiveness of our foreign currency hedge
positions.
A currency rate fluctuation of 10% from year-end rates would change the
fair value of the foreign exchange contracts outstanding at March 31, 2001 and
2000 by $1.6 million and $1.5 million, respectively. Gains or losses on the
foreign exchange contracts would be offset by gains or losses in our net
position in the related international business.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors.............................. 28
Report of Independent Public Accountants.................... 29
Consolidated Balance Sheets as of March 31, 2001 and 2000... 30
Consolidated Statements of Income for the Fiscal Years Ended
March 31, 2001, 2000 and 1999............................. 31
Consolidated Statements of Shareholders' Equity for the
Fiscal Years Ended March 31, 2001, 2000 and 1999.......... 32
Consolidated Statements of Cash Flows for the Fiscal Years
Ended March 31, 2001, 2000 and 1999....................... 33
Notes to Consolidated Financial Statements.................. 34
27
30
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of Daisytek International Corporation:
We have audited the accompanying consolidated balance sheet of Daisytek
International Corporation and subsidiaries as of March 31, 2001, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Daisytek
International Corporation and subsidiaries at March 31, 2001, and the
consolidated results of its operations and its cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States.
ERNST & YOUNG LLP
Dallas, Texas,
May 8, 2001, except as to Note 3, as to
which the date is May 25, 2001
28
31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Daisytek International Corporation:
We have audited the accompanying consolidated balance sheet of Daisytek
International Corporation (a Delaware corporation) and subsidiaries as of March
31, 2000, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the two years in the period ended March 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Daisytek International
Corporation and subsidiaries as of March 31, 2000, and the results of their
operations and their cash flows for each of the two years in the period ended
March 31, 2000, in conformity with accounting principles generally accepted in
the United States.
ARTHUR ANDERSEN LLP
Dallas, Texas,
May 4, 2000
29
32
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31,
-------------------
2001 2000
---- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 2,656 $ 28,186
Accounts receivable, net of allowance for doubtful
accounts of $5,796 and $6,031 at March 31, 2001 and
2000, respectively..................................... 172,179 167,402
Inventories, net.......................................... 135,421 96,371
Prepaid expenses and other current assets................. 12,172 8,115
Income taxes receivable................................... -- 3,714
Deferred tax asset, net................................... -- 249
-------- --------
Total current assets.............................. 322,428 304,037
-------- --------
PROPERTY AND EQUIPMENT, at cost:
Furniture, fixtures and equipment......................... 23,325 52,491
Leasehold improvements.................................... 3,641 5,692
-------- --------
26,966 58,183
Less -- Accumulated depreciation and amortization......... (15,569) (27,523)
-------- --------
Net property and equipment............................. 11,397 30,660
OTHER ASSETS................................................ 550 1,046
EXCESS OF COST OVER NET ASSETS ACQUIRED, net................ 46,493 37,003
-------- --------
Total assets...................................... $380,868 $372,746
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 1,436 $ 42,392
Trade accounts payable.................................... 131,228 92,978
Accrued expenses.......................................... 10,964 14,746
Income taxes payable...................................... 1,172 --
Deferred tax liability, net............................... 359 --
-------- --------
Total current liabilities......................... 145,159 150,116
-------- --------
LONG-TERM DEBT, less current portion........................ 76,607 2,431
COMMITMENTS AND CONTINGENCIES (Note 11)
MINORITY INTEREST........................................... -- 9,513
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000,000 shares
authorized at March 31, 2001 and 2000, none issued and
outstanding............................................ -- --
Common stock, $0.01 par value; 30,000,000 shares
authorized and 17,689,850 and 17,600,164 shares issued
at March 31, 2001 and 2000, respectively............... 177 176
Additional paid-in capital................................ 94,663 136,736
Retained earnings......................................... 92,415 76,340
Accumulated other comprehensive loss...................... (6,043) (2,566)
Treasury stock at cost, 3,352,305 shares at March 31,
2001................................................... (22,110) --
-------- --------
Total shareholders' equity........................ 159,102 210,686
-------- --------
Total liabilities and shareholders' equity........ $380,868 $372,746
======== ========
The accompanying notes are an integral part of these consolidated statements.
30
33
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEARS ENDED MARCH 31,
----------------------------------
2001 2000 1999
---------- ---------- --------
NET REVENUES.............................................. $1,189,656 $1,070,263 $916,518
COST OF REVENUES.......................................... 1,060,981 962,366 808,151
---------- ---------- --------
Gross profit............................................ 128,675 107,897 108,367
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................................ 104,124 95,600 70,648
ACQUISITION RELATED COSTS................................. -- 619 1,111
LOSS ON DISPOSITION OF BUSINESS........................... -- (1,000) 2,800
---------- ---------- --------
Income from operations.................................. 24,551 12,678 33,808
INTEREST EXPENSE.......................................... 5,559 4,035 2,797
---------- ---------- --------
Income before income taxes.............................. 18,992 8,643 31,011
PROVISION FOR INCOME TAXES................................ 7,613 4,670 11,823
---------- ---------- --------
Income before minority interest and cumulative effect of
accounting change....................................... 11,379 3,973 19,188
MINORITY INTEREST......................................... 47 566 --
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX........ -- -- (405)
---------- ---------- --------
NET INCOME................................................ $ 11,426 $ 4,539 $ 18,783
========== ========== ========
NET INCOME PER COMMON SHARE:
Basic
Income before cumulative effect of accounting
change............................................. $ 0.72 $ 0.26 $ 1.12
Cumulative effect of accounting change, net of tax... -- -- (0.02)
---------- ---------- --------
Net income........................................... $ 0.72 $ 0.26 $ 1.10
========== ========== ========
Diluted
Income before cumulative effect of accounting
change............................................. $ 0.71 $ 0.25 $ 1.08
Cumulative effect of accounting change, net of tax... -- -- (0.02)
---------- ---------- --------
Net income........................................... $ 0.71 $ 0.25 $ 1.06
========== ========== ========
WEIGHTED AVERAGE COMMON AND COMMON SHARE EQUIVALENTS
OUTSTANDING:
Basic................................................ 15,904 17,248 17,101
Diluted.............................................. 16,108 18,186 17,789
The accompanying notes are an integral part of these consolidated statements.
31
34
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TREASURY STOCK
------------------- PAID-IN RETAINED COMPREHENSIVE --------------------- TOTAL
SHARES AMOUNT CAPITAL EARNINGS LOSS SHARES AMOUNT EQUITY
---------- ------ ---------- -------- ------------- ---------- -------- --------
BALANCE AT MARCH 31,
1998................... 16,935,896 $170 $85,501 $53,991 $(1,931) -- $ -- $137,731
Net income............... -- -- -- 18,783 -- -- -- 18,783
Other comprehensive
income -- foreign
currency translation
adjustment............. -- -- -- -- (266) -- -- (266)
Comprehensive income.....
Distribution of earnings
to The Tape Company
shareholders........... -- -- -- (973) -- -- -- (973)
Net proceeds from
exercise of common
stock options.......... 223,953 2 1,838 -- -- -- -- 1,840
Issuance of common
stock.................. 2,533 -- 55 -- -- -- -- 55
---------- ---- ------- ------- ------- ---------- -------- --------
BALANCE AT MARCH 31,
1999................... 17,162,382 172 87,394 71,801 (2,197) -- -- 157,170
Net income............... -- -- -- 4,539 -- -- -- 4,539
Other comprehensive
income -- foreign
currency translation
adjustment............. -- -- -- -- (369) -- -- (369)
Comprehensive income.....
PFSweb offering.......... -- -- 42,955 -- -- -- -- 42,955
Deferred compensation
expense on PFSweb stock
options................ -- -- 48 -- -- -- -- 48
Employee stock purchase
plan................... 31,823 -- 368 -- -- -- -- 368
Net proceeds from
exercise of common
stock options.......... 402,548 4 5,926 -- -- -- -- 5,930
Issuance of common
stock.................. 3,411 -- 45 -- -- -- -- 45
---------- ---- ------- ------- ------- ---------- -------- --------
BALANCE AT MARCH 31,
2000................... 17,600,164 176 136,736 76,340 (2,566) -- -- 210,686
Net income............... -- -- -- 11,426 -- -- -- 11,426
Other comprehensive
income -- foreign
currency translation
adjustment............. -- -- -- -- (3,789) -- -- (3,789)
Disposition of PFSweb.... -- -- (42,826) 4,649 312 -- -- (37,865)
Comprehensive income.....
Treasury stock
purchases.............. -- -- -- -- -- (3,352,305) (22,110) (22,110)
Employee stock purchase
plan................... 42,801 1 328 -- -- -- -- 329
Net proceeds from
exercise of common
stock options.......... 39,333 360 -- -- -- -- 360
Issuance of common
stock.................. 7,552 -- 65 -- -- -- -- 65
---------- ---- ------- ------- ------- ---------- -------- --------
BALANCE AT MARCH 31,
2001................... 17,689,850 $177 $94,663 $92,415 $(6,043) (3,352,305) $(22,110) $159,102
========== ==== ======= ======= ======= ========== ======== ========
COMPREHENSIVE
INCOME
-------------
BALANCE AT MARCH 31,
1998...................
Net income............... $18,783
Other comprehensive
income -- foreign
currency translation
adjustment............. (266)
-------------
Comprehensive income..... $18,517
=============
Distribution of earnings
to The Tape Company
shareholders...........
Net proceeds from
exercise of common
stock options..........
Issuance of common
stock..................
BALANCE AT MARCH 31,
1999...................
Net income............... $ 4,539
Other comprehensive
income -- foreign
currency translation
adjustment............. (369)
-------------
Comprehensive income..... $ 4,170
=============
PFSweb offering..........
Deferred compensation
expense on PFSweb stock
options................
Employee stock purchase
plan...................
Net proceeds from
exercise of common
stock options..........
Issuance of common
stock..................
BALANCE AT MARCH 31,
2000...................
Net income............... $11,426
Other comprehensive
income -- foreign
currency translation
adjustment............. (3,789)
Disposition of PFSweb.... 312
-------------
Comprehensive income..... $ 7,949
=============
Treasury stock
purchases..............
Employee stock purchase
plan...................
Net proceeds from
exercise of common
stock options..........
Issuance of common
stock..................
BALANCE AT MARCH 31,
2001...................
The accompanying notes are an integral part of these consolidated statements.
32
35
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FISCAL YEARS ENDED MARCH 31,
-----------------------------
2001 2000 1999
------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $11,426 $ 4,539 $ 18,783
Adjustments to reconcile net income to net cash provided
by operating activities, net of effects of acquisitions
and dispositions:
Depreciation and amortization.......................... 7,438 9,242 6,048
Provision for doubtful accounts........................ 3,966 7,783 2,863
Minority interest...................................... (47) (566) --
Other.................................................. 16 48 --
Deferred income tax benefit............................ (394) (112) (1,683)
Change in operating assets and liabilities, net of effects
of acquisitions and dispositions:
Accounts receivable.................................... (10,088) (22,465) (12,564)
Inventories, net....................................... (30,593) 24,699 (16,279)
Prepaid expenses and other current assets.............. (692) 1,100 (1,222)
Trade accounts payable and accrued expenses............ 25,736 (15,385) 17,923
Income taxes payable................................... 1,925 (4,238) (884)
------- -------- --------
Net cash provided by operating activities................... 8,693 4,645 12,985
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (7,549) (15,175) (10,523)
Acquisitions of businesses, net of cash acquired.......... (10,607) (21,132) (20,585)
Disposition of subsidiary................................. (22,113) -- --
Disposition of business................................... -- -- 4,736
Advances of employee receivables, net..................... (45) (75) (117)
Decrease (increase) in notes receivable and other
assets................................................. 1,660 8,693 (12,070)
------- -------- --------
Net cash used in investing activities....................... (38,654) (27,689) (38,559)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments on) revolving lines of credit,
net.................................................... 36,647 (910) 28,686
Payments to acquire treasury stock........................ (22,110) -- --
Payments on capital leases and notes payable.............. (11,174) (8,533) (4,787)
Net proceeds of PFSweb initial public offering............ -- 53,014 --
Net proceeds from sale of stock, exercise of stock options
and issuance of common stock........................... 738 6,343 1,906
Distributions to former shareholders of The Tape
Company................................................ -- -- (973)
------- -------- --------
Net cash provided by financing activities................... 4,101 49,914 24,832
------- -------- --------
Effect of exchange rates on cash............................ 330 (235) 206
------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.......................................... (25,530) 26,635 (536)
CASH AND CASH EQUIVALENTS at beginning of year.............. 28,186 1,551 2,087
------- -------- --------
CASH AND CASH EQUIVALENTS at end of year.................... $ 2,656 $ 28,186 $ 1,551
======= ======== ========
The accompanying notes are an integral part of these consolidated statements.
33
36
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Daisytek International Corporation ("Daisytek" or the "Company") is a
leading wholesale distributor of computer and office supplies and professional
tape products, in addition to providing marketing and demand generation
services. The Company sells its products and services in the United States,
Canada, Australia, Mexico, South America and Europe. Prior to the spin-off of
PFSweb during July 2000, the Company also provided transaction management
services to both traditional and electronic commerce companies.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned and majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statement and accompanying notes. Actual results could differ from those
estimates.
Revenue Recognition
The Company recognizes product revenue upon shipment of product to
customers and provides for estimated returns and allowances. The Company permits
its customers to return defective products (many of which are then returned by
the Company to the manufacturer) and incorrect shipments for credit against
other purchases. The Company offers terms to its customers that it believes are
standard for its industries. PFSweb service fee revenues were recognized at the
time the service was provided to the client.
Cash and Cash Equivalents
Cash equivalents are defined as short-term highly liquid investments with
original maturities of three months or less.
Inventories
Inventories (merchandise held for resale, all of which are finished goods)
are stated at the lower of weighted average cost or market.
Property and Equipment
Property and equipment is stated at cost. Depreciation expense is computed
by a straight-line method over estimated useful lives of the respective assets
which range from three to seven years. Expenditures for maintenance and repairs
are charged to operations as incurred, whereas expenditures for renewal and
betterments are capitalized and depreciated over the remaining useful lives of
the assets.
Excess of Cost over Net Assets Acquired
Excess of cost over net assets acquired is generally amortized by the
straight-line method over estimated useful lives of 15 to 40 years. Amortization
expense for each of the fiscal years 2001, 2000 and 1999 was approximately $2.0
million, $1.5 million and $0.7 million, respectively. Accumulated amortization
of intangible assets was $5.2 million at March 31, 2001 and $3.2 million at
March 31, 2000.
34
37
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Impairment of Long-Lived Assets
The Company periodically evaluates whether events or circumstances have
occurred that indicate that excess of cost over net assets acquired and other
long-lived assets may not be recoverable or that the remaining useful life may
warrant revision. When such events or circumstances are present, the Company
assesses the recoverability of long-lived assets by determining whether the
carrying value will be recovered through the expected undiscounted future cash
flows. In the event the sum of the expected undiscounted future cash flows
resulting from the use of the asset is less than the carrying value of the
asset, an impairment loss equal to the excess of the asset's carrying value over
its fair value is recorded. To date, no such impairment has been recognized.
Foreign Currency Translation and Transactions
For the Company's Canadian and Australian subsidiaries, the local currency
is the functional currency. All assets and liabilities are translated at
exchange rates in effect at the end of the period, and income and expense items
are translated at the average exchange rates for the period. Translation
adjustments are reported as a separate component of shareholders' equity.
For the Company's Mexican and European subsidiaries, the United States
dollar is the functional currency. Monetary assets and liabilities are
translated at the rates of exchange on the balance sheet date and certain assets
(notably inventory and property and equipment) are translated at historical
rates. Income and expense items are translated at average rates of exchange for
the period, except for those items of expense which relate to assets translated
at historical rates. The gains and losses from foreign currency transactions and
translation related to these subsidiaries are included in net income and have
not been material. Effective April 1, 2001, the Eurodollar is the functional
currency for the Company's European subsidiary.
Interest Rate Swaps
The Company's interest rate swap agreements are used to manage well-defined
interest rate risks related to the Company's outstanding debt and are not used
for trading purposes. Under interest rate contracts, the differential to be paid
or received is recognized in income or expense over the life of the contract as
an adjustment to interest expense.
Cumulative Effect of Accounting Change
In 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, Reporting on the Costs of Start-up Activities,
requiring these costs to be accounted for as period expenses. During fiscal
1999, the Company adopted this pronouncement and recorded a cumulative effect
charge to income, net of income taxes, as of April 1, 1998, of $0.4 million.
Income Taxes
Deferred taxes reflect the impact of temporary differences between the
amount of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws and regulations. These differences relate
primarily to provisions for doubtful accounts, reserves for inventory, book
versus tax depreciation differences, and certain accrued expenses deducted for
book purposes but not yet deductible for tax purposes. A valuation allowance
must be provided when it is more likely than not that the deferred income tax
asset will not be realized.
35
38
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Option Plans
The Company accounts for its stock-based award plans in accordance with
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations, under which compensation expense is
recorded to the extent that the current market price of the underlying stock
exceeds the exercise price at the date of grant. Note 7 provides pro forma net
income and pro forma earnings per share disclosures as if the stock-based awards
had been accounted for using the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation.
Reclassifications
Certain prior year data has been reclassified to conform to the current
period presentation. These reclassifications had no effect on previously
reported net income, shareholders' equity or net cash flows. During the fourth
quarter of fiscal year 2001, Daisytek restated all prior periods to classify
freight costs billed to customers and rebates paid to customers as components of
net revenues in compliance with Emerging Issues Task Force Issues No. 00-10,
Accounting for Shipping and Handling Fees and Costs, and No. 00-14, Accounting
for Certain Sales Incentives. Freight costs billed to customers and rebates paid
to customers had previously been recorded as a component of cost of sales.
Freight costs incurred by the Company continue to be recorded as a
component of cost of sales.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133, as
amended by SFAS No. 137 and SFAS No. 138, was adopted by the Company effective
April 1, 2001. This statement establishes accounting and reporting standards for
derivative instruments and hedging activities and requires the Company to
recognize all derivative instruments on the balance sheet at fair value. The
adoption of SFAS 133 did not have a material impact on the Company's financial
statements.
The Financial Accounting Standards Board has proposed new accounting for
business combinations that, among other things, would change the accounting for
goodwill recorded in business acquisitions as of the date of the new Statement.
An important part of the proposed Statement is that amortization of goodwill
would cease for both assets acquired prior to the effective date of the
Statement and for any new goodwill acquired after the effective date of the
Statement. Rather than amortizing these assets, goodwill would be reviewed for
impairment using a "market value" approach. The proposed Statement is expected
to be issued in July 2001. As the amortization of the excess of cost over net
assets acquired is a significant non-cash expense of the Company, this proposed
Statement, if finalized in its current form, could have a material impact on the
financial statements.
NOTE 2 -- BUSINESS COMBINATIONS
During June 1998, the Company completed the acquisition of The Tape Company
through a stock-for-stock merger. Under the terms of the acquisition, accounted
for as a pooling of interests, the Company exchanged 974,864 shares of Daisytek
common stock for all of The Tape Company's common stock. The Tape Company is an
independent distributor of professional grade audio and video media products.
In March 1999, the Company purchased the professional tape division of VTP,
a Glendale, California-based distributor of professional-grade audio and video
media and professional hardware products for approximately $13.5 million. In
addition, the Company sold certain assets of its professional hardware division
to VTP for approximately $4.7 million. The acquisition of VTP was accounted for
using
36
39
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the purchase method of accounting, and, accordingly, the purchase price has been
allocated to the assets and liabilities assumed based on fair values at the date
of acquisition. This resulted in costs in excess of fair value of approximately
$11.9 million, which is being amortized over 25 years. In connection with this
transaction, the Company recorded a $2.8 million one-time charge relating to the
disposition of its hardware division. In fiscal year 2000, the Company reversed
$1.0 million of this charge as management was able to avoid some of the costs
associated with this disposition. The accompanying consolidated financial
statements include the results of this entity from the date of acquisition. This
acquisition is not material to the financial position or results of operations
of the Company.
On October 1, 1999, the Company acquired certain assets and liabilities of
Arlington Industries, Inc., a specialty wholesaler of copier and fax
consumables, for an initial price of approximately $19.5 million. This
transaction was accounted for using the purchase method of accounting and the
related goodwill is being amortized over 20 years. The purchase agreement
provides for an adjustment to the purchase price based on certain performance
criteria for each of the twelve-month periods ended September 30, 2000 and 2001.
The first performance period has been achieved and the Company has increased the
original purchase price and goodwill by approximately $1.6 million, which is
being amortized over the remaining life of the asset. The entire cost of the
acquisition was funded through the Company's available cash. The accompanying
consolidated financial statements include the results of this entity from the
date of acquisition. This acquisition is not material to the financial position
or results of operations of the Company.
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 $2.5 million. 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
the related cost in excess of fair value of approximately $3.6 million is being
amortized over 20 years. The entire cost of the acquisition was funded through
the Company's credit facility. The accompanying consolidated financial
statements include the results of this entity from the date of acquisition. This
acquisition is not material to the financial position or results of operations
of the Company.
Effective October 1, 2000, the Company acquired the capital stock of
Etertin y CIA, S.A. in Buenos Aires, Argentina, a wholesale distributor of
computer supplies and accessories, for approximately $5.8 million, of which $1.0
million is subject to adjustment for realization of assets at lower than book
value acquired. In addition, the Company assumed approximately $4.7 million in
debt. The acquisition was accounted for by the purchase method of accounting for
business combinations and the related goodwill of approximately $6.5 million is
being amortized over 20 years. The entire cost of the acquisition was funded
through the Company's credit facility. The accompanying consolidated financial
statements include the results of this entity from the date of acquisition. This
acquisition is not material to the financial position or results of operations
of the Company.
NOTE 3 -- PFSWEB SPIN-OFF
Daisytek completed the spin-off PFSweb, its international provider of
transaction management services to both traditional and e-commerce companies,
during July 2000. 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 Daisytek'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.
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
37
40
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Service regarding the tax-free treatment of the distribution of Daisytek's
remaining ownership in PFSweb. Daisytek and PFSweb are party to a tax
indemnification and allocation agreement, which governs the allocation of tax
liabilities and sets forth provisions with respect to other tax matters.
As part of the IPO, PFSweb and Daisytek entered into various agreements
governing the transaction management services that PFSweb provided for Daisytek.
Additionally, PFSweb purchased from Daisytek certain fixed assets in the central
distribution complex in Memphis, Tennessee. On May 25, 2001, the Company
completed a transaction to terminate certain transaction management services
agreements between the two companies and to purchase certain Memphis
distribution assets from PFSweb, including those assets previously sold to
PFSweb at the time of the IPO. The aggregate cost of this transaction is
estimated to be approximately $16 million, including $11 million payable to
PFSweb and $5 million to implement segregated information technology platforms
and to expand fulfillment capabilities. The Company expects to recognize a
special charge of approximately $2.7 million after taxes during the first
quarter of fiscal year 2002 related to this transaction. Prior to completion of
the transaction, the Company received a favorable supplemental ruling from the
Internal Revenue Service that the acquisition of certain fixed assets would not
adversely affect the June 2000 Internal Revenue Service ruling. PFSweb will
continue to offer services to Daisytek under a new, separate fee agreement for a
six-month period to support the transfer of fulfillment operations and
transaction processing back to Daisytek, including the transition to a separate
information technology platform.
The existing master distribution agreements with IBM, under which the
Company's subsidiary Business Supplies Distributors acts as the master
distributor and PFSweb records revenues for providing transaction management
services, are due to expire at varying dates prior to December 31, 2001. The
Company does not intend to renew the master distribution agreements and has
notified IBM of these intentions.
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 -- minority interest.................. 9,456
Shareholders' equity -- Daisytek........................... 37,865
-------
Total liabilities and shareholders' equity....... $58,470
=======
38
41
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- DEBT
Debt as of March 31, 2001 and 2000 consists of the following (in
thousands):
MARCH 31,
------------------
2001 2000
------- --------
Revolving line of credit, United States..................... $74,000 $ 32,800
Revolving term loan, Canada................................. 1,332 --
Revolving line of credit, Canada............................ 1,275 7,948
Revolving line of credit, Australia......................... 1,287 1,365
Other....................................................... 149 2,710
------- --------
78,043 44,823
Less: Current portion of long-term debt..................... (1,436) (42,392)
------- --------
Long-term debt, less current portion........................ $76,607 $ 2,431
======= ========
Revolving Line of Credit, United States
In December 2000, the Company entered into an agreement with certain banks
for a revolving line of credit facility in the United States that has a maximum
borrowing availability of $120.0 million and expires on December 19, 2003.
Availability under the credit facility is subject to certain borrowing base
limitations, including eligible accounts receivable and inventory, as defined.
This credit facility replaced the Company's previous United States credit
facility, which would have expired on January 1, 2001. Borrowings under the
credit facility accrue interest, at the Company's option, at the prime rate of
the lead bank or a Eurodollar rate, plus an adjustment ranging from 1.05% to
2.0% depending on the Company's financial performance. The Company pays fees
ranging from 0.20% to 0.375% on the entire credit facility. The credit facility
contains various covenants including, among other things, the maintenance of
certain financial ratios including the achievement of a minimum fixed charge
ratio and minimum level of net worth, and restrictions on certain activities,
including loans and payments to related parties, incurring additional debt,
acquisitions, investments and asset sales. The credit facility is secured by a
pledge of 100% of the stock of the Company's United States subsidiaries and 65%
of the stock of the Company's material foreign subsidiaries. Upon the occurrence
of a default, the credit facility would also be secured by the Company's other
assets. As of March 31, 2001, the outstanding balance under the Company's United
States credit facility was $74.0 million with a weighted average interest rate
of 6.63%. Based on the Company's borrowing limit at March 31, 2001, $43.8
million was available for future borrowings.
The credit facility also includes an expandable feature to increase the
maximum borrowing to $170 million, subject to various conditions precedent.
During April 2001, the Company added another $30.0 million of available credit
under this feature, increasing the maximum borrowing availability to $150.0
million.
Revolving Term Loan and Revolving Line of Credit, Canada
During August 1999, the Company's Canadian subsidiary entered into an
agreement with a Canadian bank for a revolving term loan. The term loan, which
expires on August 31, 2001, allows the Company to borrow Canadian or U.S.
dollars up to a maximum of 10.0 million Canadian dollars, or approximately $6.3
million. The term loan accrues interest at the Company's option at either the
bank's prime rate plus 0.10% or the bank's U.S. dollar commercial loan rate plus
0.10%. A commitment fee of 0.25% is charged on the unused portion of the term
loan. As of March 31, 2001, the outstanding balance under the Company's Canadian
revolving term loan was 2.1 million Canadian dollars, or approximately $1.3
million, at an interest rate of 6.85%. The Company had 7.9 million Canadian
dollars, or approximately $5.0 million, available for future borrowings.
39
42
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In December 2000, the Company's Canadian subsidiary entered into an
agreement with a Canadian bank for an unsecured revolving line of credit
facility in addition to the term loan. The Canadian credit facility expires on
January 1, 2002 and replaced the Company's previous Canadian revolving line of
credit facility, which would have expired on December 31, 2000. The Canadian
credit facility allows the Company to borrow Canadian or U.S. dollars up to a
maximum of 5.0 million Canadian dollars, or approximately $3.2 million. For
Canadian dollar borrowings, the Canadian credit facility accrues interest at the
bank's prime rate or the bank's cost of funds plus an adjustment ranging from
1.3% to 2.0% depending on the Company's financial performance. For U.S. dollar
borrowings, the Canadian credit facility accrues interest at the prime rate of
the bank or a Eurodollar rate plus an adjustment ranging from 1.3% to 2.0%
depending on the Company's financial performance. A facility fee of 0.20% to
0.375% is charged on the entire amount of the Canadian credit facility. As of
March 31, 2001, the outstanding balance under the Company's Canadian revolving
line of credit facility was 2.0 million Canadian dollars, or approximately $1.3
million, at an interest rate of 6.75%. The Company had 3.0 million Canadian
dollars, or approximately $1.9 million, available for future borrowings.
During April 2001, the Company refinanced the Canadian revolving term loan
and Canadian revolving credit facility with a single credit facility of 20.0
million Canadian dollars, or approximately $12.7 million, expiring during April
2004. Availability under the credit facility is subject to certain borrowing
base limitations, as defined. For Canadian dollar borrowings, the Canadian
credit facility accrues interest at the bank's prime rate plus 50 basis points.
For U.S. dollar borrowings, the Canadian credit facility accrues interest at the
bank's U.S. dollar base rate in New York plus 50 basis points. The credit
facility includes a standby fee of 0.25% on the unused portion of the credit
facility.
Revolving Line of Credit, Australia
In December 2000, the Company's Australian subsidiary entered into an
agreement with an Australian bank for an unsecured revolving line of credit
facility allowing the Company to borrow Australian dollars up to a maximum of
15.0 million Australian dollars, or approximately $7.3 million. The Australian
credit facility expires on January 1, 2002 and replaced the Company's previous
Australian revolving line of credit facility, which would have expired on
December 31, 2000. The Australian credit facility accrues interest at the
Australian Bill Rate plus an adjustment ranging from 1.3% to 2.0% depending on
the Company's financial performance. A facility fee of 0.20% to 0.375% is
charged on the entire amount of the Australian facility. As of March 31, 2001,
the outstanding balance under the Company's Australian credit facility was 2.7
million Australian dollars, or approximately $1.3 million, at an interest rate
of 7.18%. The Company had 12.3 million Australian dollars, or approximately $6.0
million, available for future borrowings.
During May 2001, the Company amended its Australian credit facility to add
another 5.0 million Australian dollars, or approximately $2.4 million, to its
available credit for total maximum credit availability of 20.0 million
Australian dollars, or approximately $9.7 million.
Other
At March 31, 2001, other debt represents notes payable assumed in
connection with the acquisition of Etertin in Argentina, effective October 1,
2000. At March 31, 2000, other debt represents non-cancelable capital lease
agreements involving warehouse equipment and computer equipment. The Company's
property held under capital leases at March 31, 2000, included in furniture,
fixtures and equipment in the balance sheet, amounted to approximately $2.7
million, net of accumulated amortization of approximately $0.1 million.
40
43
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future maturities of long-term debt at March 31, 2001, giving effect to the
refinancing of the Canadian credit facility, are as follows (in thousands):
FISCAL YEAR ENDED MARCH 31,
- ---------------------------
2002..................................................... $ 1,436
2003..................................................... --
2004..................................................... 74,000
2005..................................................... 2,607
2006..................................................... --
Thereafter............................................... --
-------
$78,043
=======
NOTE 5 -- FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company estimates fair value based on market information and
appropriate valuation methodologies. Fair value is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation. The fair values of all non-
derivative financial instruments approximate their carrying amounts in the
accompanying consolidated balance sheets.
In the opinion of management, credit risk with respect to trade receivables
is limited due to a large number of diversified customers and the geographic
diversification of the Company's customer base. The Company performs ongoing
credit evaluations of its customers and believes that adequate allowances for
any uncollectible trade receivables are maintained. The Company's derivative
instruments are subject to credit risk of non-performance by counterparties
under such agreements. However, this risk is minimal as the Company selects
counterparties with high credit ratings and the majority of the Company's
derivative instruments are with participating banks under its credit facilities.
Currency Rate Management
During fiscal year 2001 and 2000, the Company periodically entered into
foreign currency exchange contracts to manage its foreign currency exchange risk
related to the net investment and intercompany balances applicable to its
foreign subsidiaries. These contracts typically require the exchange of a
foreign currency for U.S. dollars at a fixed rate at a future date. At March 31
2001, many of the Company's outstanding hedges were offset by contracts to
exchange U.S. dollars for a foreign currency at a fixed rate at a future date.
At March 31, 2001, the outstanding contract amounts in U.S. dollars totaled
$16.3 million, including $12.4 million for Eurodollars, $2.6 million for
Australian dollars, and $1.3 million for Canadian dollars. At March 31, 2000,
the outstanding contract amounts in U.S. dollars totaled $19.7 million,
including $11.5 million for Australian dollars and $8.2 million for Canadian
dollars. The Company had incurred net unrealized gains (losses) on its foreign
currency exchange contracts of ($0.5) million and $0.6 million at March 31, 2001
and 2000, respectively, which are included as a component of shareholders'
equity. Due to the short-term nature of these contracts, fair value approximates
the recorded net unrealized gain (loss).
Interest Rate Management
The Company may enter into interest rate swaps to diversify its risk
associated with interest rate fluctuations. Under these interest rate swaps, the
Company agrees with other parties to exchange, at specified intervals, the
difference between fixed rate and floating rate interest amounts calculated by
reference to an agreed notional principal amount. At March 31, 2001, the Company
had an interest rate swap agreement with a notional amount of $25.0 million and
a fair value loss position of $0.7 million.
41
44
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- SHAREHOLDERS' EQUITY
Public Offerings
In December 1999, PFSweb successfully completed the IPO of 19.9% of its
outstanding stock and sold 3,565,000 shares of common stock at $17 per share.
Net proceeds from the IPO aggregated $53 million and were used to repay PFSweb's
intercompany payable to Daisytek of approximately $27 million and to acquire
from Daisytek all fixed assets in its Memphis distribution facility, as well as
certain assets providing information technology services, for $5.0 million.
Daisytek used these proceeds to repay bank debt. As a result of the IPO, the
Company's additional paid-in capital increased by approximately $43 million.
On July 7, 2000, Daisytek completed the spin-off of PFSweb and distributed
approximately 0.81 shares of PFSweb common stock for each share of Daisytek
common stock owned by Daisytek shareholders. Daisytek's stock price was adjusted
on July 7, 2000 to exclude the value of PFSweb.
Shareholder Rights Plan
On October 15, 1999, the Daisytek Board of Directors declared a dividend
distribution of one Daisytek preferred stock purchase right (a "right") for each
share of the Company's common stock outstanding on October 25, 1999. Each right
entitles the registered shareowners to purchase from the Company one
one-thousandth of a share of preferred stock at an exercise price of $70.00,
subject to adjustment. The rights are not currently exercisable, but would
become exercisable if certain events occurred relating to a person or group
acquiring or attempting to acquire 15 percent or more of the outstanding shares
of common stock. The rights expire on October 25, 2009, unless redeemed or
exchanged by the Company earlier.
Stock Repurchase
On July 10, 2000, the Company announced the authorization by the Board of
Directors of the repurchase of up to 10% of the outstanding shares of its common
stock, and on September 13, 2000, the Company announced the authorization of the
repurchase of up to an additional 10% of the then outstanding shares of common
stock. As of March 31, 2001, the two approved share buy-back programs were
completed and a total of approximately 3.4 million shares have been repurchased
using cash of approximately $22 million.
42
45
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reconciliation of Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts). Weighted-average
shares excluded from the calculation that related to potentially dilutive
securities amount to approximately 1.3 million, 0.7 million and 0.6 million for
the years ended March 31, 2001, 2000 and 1999, respectively.
FISCAL YEARS ENDED MARCH 31,
-----------------------------
2001 2000 1999
-------- ------- --------
NUMERATOR:
Income before cumulative effect of accounting change...... $11,426 $4,539 $19,188
Cumulative effect of accounting change.................... -- -- (405)
------- ------ -------
Net income................................................ $11,426 $4,539 $18,783
======= ====== =======
DENOMINATOR:
Denominator for basic earnings per share -- Weighted average
shares.................................................... 15,904 17,248 17,101
Effect of dilutive securities:
Stock options............................................. 204 938 688
------- ------ -------
Denominator for diluted earnings per share -- Adjusted
weighted average shares................................... 16,108 18,186 17,789
Net income per common share:
Basic:
Income before cumulative effect of an accounting
change............................................... $ 0.72 $ 0.26 $ 1.12
Cumulative effect of an accounting change.............. -- -- (0.02)
------- ------ -------
Net income............................................. $ 0.72 $ 0.26 $ 1.10
======= ====== =======
Diluted:
Income before cumulative effect of an accounting
change............................................... $ 0.71 $ 0.25 $ 1.08
Cumulative effect of an accounting change.............. -- -- (0.02)
------- ------ -------
Net income............................................. $ 0.71 $ 0.25 $ 1.06
======= ====== =======
NOTE 7 -- STOCK PLANS
Employee Stock Purchase Plan
Daisytek provides its employees an opportunity to acquire a proprietary
interest in the company under its 1998 Employee Stock Purchase Plan qualified
under Section 423 of the Internal Revenue Code of 1986. The stock purchase plan
provides for acquisition of Daisytek common stock at a 15% discount of market
value and permits each employee of Daisytek's domestic subsidiaries who have
completed ninety days of service to elect to participate in the plan. Eligible
employees may elect to contribute up to 10% of their compensation with after-tax
dollars up to a maximum annual contribution of $25,000. The Company has reserved
250,000 shares of its common stock under the stock purchase plan. As of March
31, 2001, 74,624 shares of common stock had been purchased under the plan.
Stock Option Plans
The Company has established various stock option plans which provide for
the grant of incentive awards in the form of stock options to directors,
executive management, key employees and outside consultants of Daisytek. These
plans are administered by the Compensation Committee of the Board of Directors.
Options issued under these stock option plans have exercise prices equal to the
fair market value
43
46
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the Company's common stock on the date of issuance, generally vest over a
three-year period from the date of grant and expire ten years after the date of
grant.
In connection with the completion of the PFSweb 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"). 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. 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 March 31, 2001, Daisytek has authorized an aggregate of 5,550,000
shares of common stock for issuance under the various stock option plans.
Additionally, the Company's Board of Directors authorized an additional
1,999,026 shares for issuance outside the existing plans. The aggregate number
of options available for issuance under the Company's plans at March 31, 2001 is
1,523,953.
The following table summarizes the Company's stock option activity for the
fiscal years ended March 31, 1999, 2000 and 2001:
OPTIONS WEIGHTED AVERAGE
OUTSTANDING EXERCISE PRICE
----------- ----------------
Balance at March 31, 1998................................... 1,725,974 $11.66
Granted................................................... 2,773,892 $15.68
Exercised................................................. (223,953) $ 7.18
Canceled.................................................. (291,844) $16.41
----------
Balance at March 31, 1999................................... 3,984,069 $14.37
Granted................................................... 473,500 $ 9.83
Exercised................................................. (402,548) $11.73
Canceled.................................................. (97,226) $16.46
----------
Balance at March 31, 2000................................... 3,957,795 $13.07
Granted................................................... 25,000 $10.69
Exercised................................................. (28,800) $10.78
Canceled.................................................. (70,721) $16.20
Terminated -- PFSweb spin-off............................. (3,883,274) $14.00
Reissued -- PFSweb spin-off............................... 3,634,736 $ 8.00
Granted................................................... 2,441,000 $ 6.43
Exercised................................................. (10,533) $ 7.44
Canceled.................................................. (356,932) $ 8.00
----------
Balance at March 31, 2001................................... 5,708,271 $ 7.33
==========
44
47
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
at March 31, 2001:
OUTSTANDING EXERCISABLE
- --------------------------------------------------------------- --------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE PRICES OPTIONS CONTRACTUAL LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE
- --------------- --------- ---------------- -------------- --------- --------------
$1.65 288 2.0 years $ 1.65 288 $ 1.65
$4.88 - $7.04 2,823,164 8.7 years 6.20 638,867 6.16
$7.38 - $10.17 2,684,657 7.4 years 8.00 1,628,767 8.00
$11.10 - $14.31 200,162 7.0 years 13.73 99,321 14.00
--------- ---------
5,708,271 $ 7.33 2,367,243 $ 7.76
========= =========
As of March 31, 2001, 2000 and 1999, 2,367,243, 1,038,568 and 413,766,
respectively, of options outstanding were exercisable. The weighted-average fair
value of options granted during fiscal years 2001, 2000 and 1999 was $3.44,
$5.41 and $7.93, respectively.
The Company applies APB Opinion No. 25 in accounting for its stock option
plans and, accordingly, no compensation cost is recognized in the consolidated
financial statements for stock options which have exercise prices equal to or in
excess of the market value of the Company's common stock on the date of
issuance. Had the Company determined compensation cost based on the fair value
of stock options at the grant date under SFAS No. 123, the Company's pro forma
net income and earnings per share would have been as follows:
FISCAL YEARS ENDED MARCH 31,
------------------------------
2001 2000 1999
-------- -------- --------
Net income (loss):
As reported........................................... $11,426 $ 4,539 $18,783
Pro forma............................................. $ 5,586 $(3,801) $14,169
Earnings (loss) per share:
Basic:
As reported........................................ $ 0.72 $ 0.26 $ 1.10
Pro forma.......................................... $ 0.35 $ (0.22) $ 0.83
Diluted
As reported........................................ $ 0.71 $ 0.25 $ 1.06
Pro forma.......................................... $ 0.35 $ (0.22) $ 0.80
The fair value of the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for fiscal years 2001, 2000 and 1999: risk-free interest rates
ranging from 4.6% to 6.0%; dividend yields of 0%; expected stock volatility
ranging from 41.4% to 56.9%; and expected lives ranging from five to six years.
NOTE 8 -- SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS):
FISCAL YEARS ENDED MARCH 31,
----------------------------
2001 2000 1999
------- ------- --------
Cash paid during the period for:
Interest................................................ $5,664 $3,853 $ 2,718
Income taxes............................................ $3,892 $7,669 $14,607
Fixed assets acquired under capital leases................ $ -- $2,400 $ 347
45
48
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- INCOME TAXES
Deferred taxes reflect the impact of temporary differences between the
amount of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws and regulations. These differences relate
primarily to provisions for doubtful accounts, capitalization of inventory
costs, reserves for inventory, book versus tax depreciation differences, and
certain accrued expenses deducted for book purposes but not yet deductible for
tax purposes. A reconciliation of the difference between the expected income tax
provision, before cumulative effect of accounting change, at the U.S. Federal
statutory corporate tax rate of 35%, 34% and 35% for fiscal year 2001, 2000 and
1999, respectively, and the Company's effective tax rate is as follows (in
thousands):
FISCAL YEARS ENDED MARCH 31,
----------------------------
2001 2000 1999
------- ------- --------
Provision computed at statutory rate...................... $6,647 $2,939 $10,854
Impact of foreign taxation at different rate.............. 487 264 538
State income taxes, net of federal benefit................ 386 415 694
Expenses not deductible for tax purposes.................. 352 420 346
Impact of acquired subchapter S corporation accounted for
as a pooling of interests............................... -- -- (291)
Change in valuation reserve............................... -- 807 (203)
Other..................................................... (259) (175) (115)
------ ------ -------
Provision for income taxes.............................. $7,613 $4,670 $11,823
====== ====== =======
The provision (benefit) for income taxes is summarized as follows (in
thousands):
FISCAL YEARS ENDED MARCH 31,
----------------------------
2001 2000 1999
------- ------- --------
Current
Domestic................................................ $3,960 $1,458 $ 9,857
State................................................... 560 628 1,068
Foreign................................................. 3,487 2,696 2,581
------ ------ -------
Total current................................... 8,007 4,782 13,506
------ ------ -------
Deferred
Domestic................................................ (278) (151) (1,683)
Foreign................................................. (116) 39 --
------ ------ -------
Total deferred.................................. (394) (112) (1,683)
------ ------ -------
Total........................................... $7,613 $4,670 $11,823
====== ====== =======
46
49
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the deferred tax asset (liability) as of March 31, 2001
and 2000 are as follows (in thousands):
MARCH 31,
---------------
2001 2000
------ ------
Deferred tax assets:
Allowance for doubtful accounts........................... $1,570 $1,568
Inventory................................................. 885 880
Foreign net operating loss carryforwards.................. 3,809 1,974
Other..................................................... 376 1,113
------ ------
6,640 5,535
Less -- Valuation reserve................................. -- (915)
------ ------
Total deferred tax assets......................... 6,640 4,620
------ ------
Deferred tax liabilities:
Accounts receivable discount.............................. 571 1,038
Foreign inventory purchases............................... 2,954 2,437
Intangibles............................................... 810 391
Other..................................................... 2,664 505
------ ------
Total deferred tax liabilities.................... 6,999 4,371
------ ------
Net deferred tax asset (liability).......................... $ (359) $ 249
====== ======
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The foreign net operating loss carryforwards at
March 31, 2001 and 2000 relate primarily to taxable losses of the Company's
Mexican subsidiary. These loss carryforwards begin to expire in fiscal year
2013. The foreign net operating loss carryforwards at March 31, 2000 also
include taxable losses related to PFSweb's European subsidiary.
As of March 31, 2000, a valuation allowance was recorded due to
uncertainties regarding the Company's ability to utilize PFSweb deferred tax
assets following its spin-off from the Company. During fiscal year 2001, the
valuation allowance and related deferred tax assets were transferred to PFSweb
upon completion of the PFSweb spin-off.
The Company received a tax benefit due to the exercise of certain stock
options of $1.1 million during fiscal year 2000 and $0.4 million during fiscal
year 1999.
NOTE 10 -- RELATED PARTY TRANSACTIONS AND RELATIONSHIPS
The Company makes available one-year and three-year loans to its executive
officers and non-employee directors. The one-year loans accrue interest at the
Company's effective borrowing rate (6.9% at March 31, 2001 and 8.0% at March 31,
2000) and the three-year loans accrue interest at the Company's effective
borrowing rate plus one percent. Loan amounts classified as short-term under
these contracts are included in prepaid expenses and other current assets on the
Company's consolidated balance sheets and totaled $0.5 million and $0.3 million
at March 31, 2001 and 2000, respectively. Loan amounts classified as long-term
under these contracts are included in other assets on the Company's consolidated
balance sheets and totaled $0.6 million and $0.5 million at March 31, 2001 and
2000, respectively.
47
50
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- COMMITMENTS, CONTINGENCIES AND GUARANTEES
The Company and its subsidiaries lease facilities and warehouse, office,
transportation and other equipment under operating leases expiring in various
years. In most cases, management expects that, in the normal course of business,
leases will be renewed or replaced by other leases. As discussed in Note 3, the
Company completed a transaction during June 2001 to purchase certain
distribution assets from PFSweb and to terminate certain transaction management
services agreements with PFSweb. As a result, sublease rentals of approximately
$4.8 million that, as of March 31, 2001, were scheduled to be paid by PFSweb
will be now be paid by the Company. Minimum future annual rental payments under
non-cancelable operating leases having original terms in excess of one year are
as follows (in thousands):
2002...................................................... $ 8,549
2003...................................................... 7,031
2004...................................................... 6,176
2005...................................................... 3,225
2006...................................................... 2,653
Thereafter................................................ 3,891
-------
Total minimum lease payments.............................. 31,525
Less: sublease rentals.................................... 7,004
-------
$24,521
=======
Total rental expense under operating leases approximated $6.0 million, $8.8
million and $5.8 million for the fiscal years ended March 31, 2001, 2000 and
1999, respectively.
Although the Company carries products and accessories supplied by numerous
vendors, the Company's net revenues from products manufactured by its ten
largest suppliers were approximately 76%, 78% and 69% of total net revenues
during fiscal years 2001, 2000 and 1999, respectively. The Company has entered
into written distribution agreements with nearly all of its major suppliers. As
is customary in the industry, these agreements generally provide non-exclusive
distribution rights, have one-year renewable terms and are terminable by either
party at any time, with or without cause. Additionally, many of the Company's
suppliers offer rebate programs under which, subject to the Company purchasing
certain predetermined amounts of inventory, the Company receives rebates based
on a percentage of the dollar volume of total rebate program purchases. The
Company also takes advantage of several other programs offered by substantially
all of its suppliers. These include price protection plans under which the
Company receives credits if the supplier lowers prices on previously purchased
inventory and stock rotation or stock balancing privileges under which the
Company can return slow-moving inventory in exchange for other products.
The Company is involved in certain litigation arising in the ordinary
course of business. Management believes that such litigation will be resolved
without material effect on the Company's financial position, results of
operations or cash flows.
48
51
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the IPO of PFSweb, the Company has guaranteed certain
PFSweb operating lease obligations. The Company does not expect to make any
payments under its guarantee of the PFSweb operating leases; however, if
performance were required, the amounts listed below would be mitigated by
terminations and/or subleases. The total minimum payments for the PFSweb
operating leases which are guaranteed by the Company are as follows (in
thousands):
2002...................................................... $ 4,071
2003...................................................... 4,158
2004...................................................... 2,771
2005...................................................... 1,735
2006...................................................... 1,731
Thereafter................................................ 2,871
-------
Total........................................... $17,337
=======
NOTE 12 -- EMPLOYEE SAVINGS PLAN
The Company has a defined contribution employee savings plan under Section
401(k) of the Internal Revenue Code. Substantially all full-time and part-time
U.S. employees are eligible to participate in the plan. The Company, at its
discretion, may match employee contributions to the plan and also make an
additional matching contribution in the form of profit sharing in recognition of
Company performance. For fiscal year 2001, 2000 and 1999, the Company matched
10% of employee contributions resulting in a charge against income of
approximately $143,000, $91,000 and $88,000, respectively.
NOTE 13 -- SEGMENT DATA
The Company currently operates in two reportable business
segments -- computer and office supplies and professional tape products. Prior
to the spin-off of PFSweb during July 2000, the Company also provided
transaction management services to both traditional and electronic commerce
companies. The Company's reportable segments are strategic business units that
offer different products and services and 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 in consolidation. The accounting policies of the
segments are the same as those described in Note 1. No single customer accounted
for more than 10% of the Company's annual net revenues for the fiscal years
ended March 31, 2001, 2000 and 1999.
Computer and Office Supplies
The computer and office supplies segment distributes over 17,000 nationally
known, name-brand computer and office supplies products to more than 35,000
customer locations. Customers include value-added resellers, computer supplies
dealers, office product dealers, contract stationers, buying groups, computer
and office product superstores, grocery stores, drugstores, web-based resellers,
and other retailers who resell the products to end-users. This segment also
includes Virtual Demand, the Company's wholly-owned subsidiary which provides
marketing and demand generation services, and the Company's subsidiary Business
Supplies Distributors, which distributes print and media supplies under IBM
distribution agreements. The Company began computer and office supplies
distribution in the United States in the 1980s and expanded internationally into
Canada in 1989, Mexico in 1994, Australia in 1996 and Argentina in 2000. In
addition, the Company began distribution to Central and South America in 1996
from its Miami facility. Computer and office supplies 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.
49
52
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Professional Tape Products
The professional tape products segment is headquartered in Elmhurst,
Illinois and operates as a distributor of media products to the film,
entertainment and multimedia industries. Daisytek began operating the
professional tape products segment in 1998 and currently distributes more than
2,800 professional tape products to over 23,500 customers. Professional tape
products customers primarily include production and broadcast companies,
advertising and governmental agencies, cable television providers, educational
institutions and healthcare providers. Professional tape products include
videotape, audiotape, motion picture film and data storage media.
PFSweb
The Company's subsidiary PFSweb provided transaction management services to
both traditional and e-commerce companies and sold products and services
primarily in the United States, Canada and Europe. The Company completed the
spin-off of PFSweb during July 2000, as discussed in Note 3.
Separate financial data for each of the Company's operating segments is
provided below (in thousands):
2001 2000 1999
---------- ---------- --------
Net revenues:
Computer and office supplies.................... $1,099,319 $ 952,515 $802,191
Professional tape products...................... 81,790 93,723 103,346
PFSweb.......................................... 15,836 38,619 16,009
Intersegment eliminations....................... (7,289) (14,594) (5,028)
---------- ---------- --------
Consolidated.................................... 1,189,656 1,070,263 916,518
Operating contribution (loss):
Computer and office supplies.................... 28,913 26,363 32,956
Professional tape products...................... 3,541 5,085 4,383
PFSweb.......................................... (505) (7,940) (238)
Intersegment eliminations....................... (458) (79) 618
---------- ---------- --------
Consolidated.................................... 31,491 23,429 37,719
Identifiable assets:
Computer and office supplies.................... 342,059 268,807 198,527
Professional tape products...................... 38,809 43,638 48,295
PFSweb.......................................... -- 64,840 69,057
Intersegment eliminations....................... -- (4,539) --
---------- ---------- --------
Consolidated.................................... 380,868 372,746 315,879
The Company's computer and office supplies segment includes certain
expenses and assets that relate to the professional tape products segment which
are not allocated by management to this segment. These expenses primarily
represent: (1) costs related to the Company's centralized management
information, warehouse and telephone systems and (2) executive, administrative
and other corporate costs. The assets not allocated to the professional tape
products segment primarily relate to the Company's centralized management
information and telephone systems and leasehold improvement on shared
facilities.
Transition and certain other costs recorded by the Company have not been
allocated to the reportable segments. These expenses primarily relate to certain
repositioning and separation activities associated with the spin-off of PFSweb.
Other unallocated expenses include certain bad debt allowance increases, legal
and professional fees related to an unsolicited acquisition offer, costs related
to the closing of Singapore, write-downs of inventory, certain charges related
to the closure B.A. Pargh's Nashville headquarters and
50
53
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
restructuring activities for the professional tape products segment.
Additionally, certain costs incurred by the professional tape products segment
during fiscal years 2000 and 1999, including acquisition related costs and a
loss on disposition of the professional tape hardware business, are not included
in this segment's operating contribution.
A reconciliation of segment operating contribution to consolidated income
from operations follows (in thousands):
2001 2000 1999
------- ------- -------
Segment operating contribution (loss)................... $31,491 $23,429 $37,719
Transition and other unallocated costs.................. (6,940) (11,132) --
Acquisition related costs............................... -- (619) (1,111)
Loss on disposition of business......................... -- 1,000 (2,800)
------- ------- -------
Consolidated income from operations..................... 24,551 12,678 33,808
======= ======= =======
Geographic Information
The Company's computer and office supplies segment has significant
international operations. A summary of this segment by geographic region
follows:
2001 2000 1999
---------- -------- --------
Net revenues -- computer and office supplies:
United States..................................... $ 705,671 $640,948 $568,906
Canada............................................ 135,440 109,698 99,153
Latin America..................................... 133,418 113,020 87,740
Australia......................................... 66,409 55,378 39,103
Europe............................................ 58,102 25,158 --
Other............................................. 279 8,313 7,289
---------- -------- --------
$1,099,319 $952,515 $802,191
========== ======== ========
Long-lived assets -- computer and office supplies:
United States..................................... $ 28,734 $ 15,336 $ 14,733
Canada............................................ 732 973 1,185
Latin America..................................... 1,715 1,090 1,027
Australia......................................... 1,910 2,528 2,734
Other............................................. -- 118 259
---------- -------- --------
$ 33,091 $ 20,045 $ 19,938
========== ======== ========
51
54
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- QUARTERLY DATA (UNAUDITED)
Summarized unaudited quarterly financial data for fiscal years 2001 and
2000 are as follows (dollars in thousands, except per share data).
FISCAL YEAR 2001
-----------------------------------------------
4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR.
-------- -------- -------- --------
(UNAUDITED)
Net revenues................................. $315,655 $299,981(a) $284,733(a) $289,287(a)
Income from operations(b).................... $ 6,781 $ 5,210 $ 6,475 $ 6,085
Operating margin........................... 2.1% 1.7% 2.3% 2.1%
Income before minority interest.............. $ 3,119 $ 2,206 $ 3,121 $ 2,933
Percent of net revenues.................... 1.0% 0.7% 1.1% 1.0%
Net income................................... $ 3,119 $ 2,206 $ 3,121 $ 2,980
Net margin................................. 1.0% 0.7% 1.1% 1.0%
Net income per common share:
Basic...................................... $ 0.21 $ 0.15 $ 0.19 $ 0.17
Diluted.................................... $ 0.21 $ 0.15 $ 0.19 $ 0.17
FISCAL YEAR 2000
-----------------------------------------------
4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR.
-------- -------- -------- --------
(UNAUDITED)
Net revenues................................. $300,417(a) $285,329(a) $248,770(a) $235,747(a)
Income (loss) from operations(b)............. $ 4,395 $ (1,905) $ 2,580 $ 7,608
Operating margin........................... 1.5% (0.7)% 1.0% 3.2%
Income (loss) before minority interest....... $ 2,225 $ (3,387) $ 952 $ 4,183
Percent of net revenues.................... 0.7% (1.2)% 0.4% 1.8%
Net income (loss)............................ $ 2,303 $ (2,899) $ 952 $ 4,183
Net margin................................. 0.8% (1.0)% 0.4% 1.8%
Net income (loss) per common share:
Basic...................................... $ 0.13 $ (0.17) $ 0.06 $ 0.24
Diluted.................................... $ 0.12 $ (0.17) $ 0.05 $ 0.24
- ---------------
(a) The Company has restated all periods prior to the fourth quarter of fiscal
year 2001 to classify freight costs billed to customers and rebates paid to
customers as components of net revenues in compliance with Emerging Issues
Task Force Issues No. 00-10, Accounting for Shipping and Handling Fees and
Costs, and No. 00-14, Accounting for Certain Sales Incentives. Freight
costs billed to customers and rebates paid to customers had previously been
recorded as a component of cost of sales.
(b) The quarterly data includes certain unusual charges that affect
comparability, including certain bad debt allowance increases, legal and
professional fees related to an unsolicited acquisition offer, costs
related to the closing of Singapore, write-downs of inventory, certain
charges related to the closure B.A. Pargh's Nashville headquarters and
restructuring activities for the professional tape products segment. These
costs totaled $6.9 million for fiscal year 2001, including $1.9 million,
$2.8 million, $1.6 million and $0.6 million for the quarters ended March
31, 2001, December 31, 2000, September 20, 2000 and June 30, 2000,
respectively. These costs totaled $11.1 million for fiscal year 2000,
including $1.8 million, $1.9 million and $7.4 million for the quarters
ended March 31, 2000, December 31, 1999, and September 31, 1999.
52
55
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Information regarding Daisytek's change in accountants was disclosed in a
Current Report on Form 8-K filed on December 22, 2000.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item regarding our directors and executive
officers is to be set forth in our Proxy Statement for our 2001 Annual Meeting
of Shareholders under the heading "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance," which information is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is to be set forth in our Proxy
Statement for our 2001 Annual Meeting of Shareholders under the heading
"Executive Compensation," which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is to be set forth in our Proxy
Statement for our 2001 Annual Meeting of Shareholders under the heading
"Security Ownership of Certain Beneficial Owners and Management," which
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is to be set forth in our Proxy
Statement for our 2001 Annual Meeting of Shareholders under the heading "Certain
Relationships and Related Transactions," which information is incorporated
herein by reference.
53
56
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. Financial Statements.
See Index to Consolidated Financial Statements on page 30 of this Form
10-K.
(a)2. Financial Statement Schedule.
The following financial statement schedule and related reports of
independent accountants are filed as part of this report and should be read in
conjunction with the consolidated financial statements.
PAGE
----
Report of Independent Auditors on Financial Statement
Schedule.................................................. 57
Report of Independent Public Accountants on Financial
Statement Schedule........................................ 58
Schedule II -- Valuation and Qualifying Accounts............ 59
All other schedules are omitted because the required information is not
present in amounts sufficient to require submission of the schedule or because
the information required is included in the financial statements or notes
thereto.
(a)3. Exhibits.
The exhibits to this Report on Form 10-K are listed under Item 14(c) below.
(b) Reports on Form 8-K
Current Report on Form 8-K (Items 5 and 7), dated and filed January 9,
2001, to announce the acquisition of Etertin y CIA, S.A. in Buenos Aires,
Argentina effective October 1, 2000.
(c) Exhibits.
3.1(3) -- Amended and Restated Certificate of Incorporation of
Daisytek International Corporation.
3.1.1(3) -- Certificate of Amendment of Amended and Restated
Certificate of Incorporation of Daisytek International
Corporation.
3.2(2) -- Amended and Restated By-laws of Daisytek International
Corporation, as amended.
3.3(4) -- Certificate of Amendment of Amended and Restated
Certificate of Incorporation of Daisytek International
Corporation.
4.1(5) -- Rights Agreement, dated as of October 15, 1999, between
Daisytek International Corporation and ChaseMellon
Shareholder Services, LLC, which includes the Certificate
of Designations in respect of the Series A Preferred
Stock as Exhibit A, the form of Right Certificate as
Exhibit B and the Summary of Rights to Purchase Series A
Preferred Stock as Exhibit C. Pursuant to the Rights
Agreement, Right Certificates will not be mailed until
after the Separation Date (as defined therein).
10.1(*) -- Director and Officer Loan Plan, dated November 9, 2000.
10.2(*) -- Form of Loan Agreement in connection with the Director
and Officer Loan Plan.
10.3(1) -- 1994 Stock Option Plan of Daisytek International
Corporation.
10.4(3) -- Non-Employee Director Stock Option and Retainer Plan.
54
57
10.5(4) -- 1998 Amended and Restated Stock Option Plan of Daisytek
International Corporation.
10.6(4) -- Daisytek International Corporation 1998 Employee Stock
Purchase Plan.
10.7(6) -- Lease Agreement between Enterprise Business Park D-2,
L.P. and Daisytek, Inc. dated May 3, 2000.
10.8(6) -- Asset purchase agreement between BAP Acquisition Corp.,
and B.A. Pargh Company, LLC dated May 3, 2000.
10.9(7) -- 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.
10.10(7) -- 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.
10.11(8) -- Credit Facility dated December 14, 2000 from Bank One
Canada, as Lender, to Daisytek Canada, as Borrower, and
Daisytek, Inc. and Daisytek International Corporation, as
Guarantors.
10.12(8) -- Guaranty by Daisytek, Inc. and Daisytek International
Corporation for the benefit of Bank One, NA under the
Credit Facility dated December 14, 2000.
10.13(8) -- Demand Note Agreement dated December 14, 2000, from
Daisytek Canada, as Borrower, for the benefit of Bank One
Canada.
10.14(8) -- Credit Agreement dated December 18, 2000, among Daisytek,
Incorporated, as Borrower, Daisytek International
Corporation, as Guarantor, with the banks listed therein
as Lenders, Bank One, N.A., as an LC Issuer and Bank One,
Texas, N.A., as Administrative Agent.
10.15(8) -- Parent Guaranty dated December 18, 2000 by Daisytek
International Corporation for the benefit of the Lenders
and the LC Issuer under the Credit Agreement.
10.16(8) -- Subsidiary Guaranty dated December 18, 2000 by Certain
Subsidiaries of Daisytek International Corporation for
the benefit of the Lenders and the LC Issuer under the
Credit Agreement.
10.17(8) -- Pledge and Security Agreement dated December 18, 2000
between Daisytek, Incorporated and Steadi-Systems, Ltd.,
as Co-Pledgors and Bank One, Texas, NA, as Administrative
Agent for the LC Issuer and the Lenders under the Credit
Agreement.
10.18(8) -- Security Agreement dated December 18, 2000 by and among
Daisytek, Incorporated and its domestic subsidiaries a
party thereto and Bank One, Texas, NA.
10.19(8) -- Credit Agreement dated December 18, 2000 between Daisytek
Australia Pty Ltd., as Borrower, and Bank One, NA, as
Lender.
21(*) -- Subsidiaries of the Registrant.
23.1(*) -- Consent of Ernst & Young LLP.
23.2(*) -- Consent of Arthur Andersen LLP.
- ---------------
(*) Filed herewith.
(1) Incorporated by reference from Registration Statement on Form S-1 (File No.
33-86926).
(2) Incorporated by reference from Registration Statement on Form S-8 (File No.
333-62840).
55
58
(3) Incorporated by reference from Annual Report on Form 10-K for the Fiscal
Year Ended March 31, 1996 dated June 26, 1996 (File No. 000-25400).
(4) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended September 30, 1998 dated November 16, 1998 (File No.
000-25400).
(5) Incorporated by reference from Current Report on Form 8-K dated October 19,
1999 (File No. 000-25400).
(6) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended June 30, 2000 dated August 14, 2000 (File No.
000-25400).
(7) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended September 30, 2000, dated November 14, 2000 (File No.
000-25400).
(8) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended December 31, 2000, dated February 14, 2001 (File No.
000-25400).
56
59
REPORT OF INDEPENDENT AUDITORS
ON FINANCIAL STATEMENT SCHEDULE
To the Shareholders of Daisytek International Corporation:
We have audited the consolidated financial statements of Daisytek
International Corporation and subsidiaries as of March 31, 2001 and for the
fiscal year ended March 31, 2001 and have issued our report thereon dated May 8,
2001, except as to Note 3, as to which the date is May 25, 2001. Our audit also
included the financial statement schedule included in Item 14(a)(2) for the
fiscal year ended March 31, 2001. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audit.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth herein.
ERNST & YOUNG LLP
Dallas, Texas
May 8, 2001
57
60
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Daisytek International Corporation:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Daisytek International Corporation (a
Delaware corporation) and subsidiaries as of March 31, 2000, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the two years in the period ended March 31, 2000 included in this report on
Form 10-K and have issued our report thereon dated May 4, 2000. Our audits were
made for the purpose of forming an opinion on the basic consolidated financial
statements taken as a whole. Schedule II of this report on Form 10-K is the
responsibility of the company's management and is presented for the purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, fairly states in all material
respects, the financial data required to be set forth therein in relation to the
basic consolidated financial statements as of March 31, 2000 and for the two
years then ended taken as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas
May 4, 2000
58
61
SCHEDULE II
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED MARCH 31, 2001
(IN THOUSANDS)
ADDITIONS
------------------------
ADDITIONS
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
OF PERIOD EXPENSES ACCOUNTS(1) DEDUCTIONS PERIOD
---------- ---------- ----------- ---------- ----------
Fiscal Year Ended March 31, 2001:
Allowance for doubtful accounts...... $6,031 3,966 554 (4,755) $5,796
Income tax valuation allowance....... $ 915 -- -- (915) $ --
Fiscal Year Ended March 31, 2000:
Allowance for doubtful accounts...... $2,857 7,783 -- (4,609) $6,031
Income tax valuation allowance....... $ 108 915 -- (108) $ 915
Fiscal Year Ended March 31, 1999:
Allowance for doubtful accounts...... $2,765 2,863 -- (2,771) $2,857
Income tax valuation allowance....... $ 311 -- -- (203) $ 108
- ---------------
(1) Additions to the allowance for doubtful accounts are related to business
acquisitions in fiscal year 2001.
59
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
DAISYTEK INTERNATIONAL CORPORATION
By: /s/ RALPH MITCHELL
------------------------------------
Ralph Mitchell
Chief Financial Officer and
Executive Vice President -- Finance
June 27, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JAMES R. POWELL Chief Executive and Operating June 27, 2001
- ----------------------------------------------------- Officer, President and acting
James R. Powell Chairman of the Board
(principal executive officer)
/s/ RALPH MITCHELL Chief Financial Officer and June 27, 2001
- ----------------------------------------------------- Executive Vice President --
Ralph Mitchell Finance (principal financial
and accounting officer)
/s/ DALE A. BOOTH Director June 27, 2001
- -----------------------------------------------------
Dale A. Booth
/s/ NICHOLAS A. GIORDANO Director June 27, 2001
- -----------------------------------------------------
Nicholas A. Giordano
/s/ DANIEL T. OWEN Director June 27, 2001
- -----------------------------------------------------
Daniel T. Owen
/s/ PETER P. J. VIKANIS Director June 27, 2001
- -----------------------------------------------------
Peter P. J. Vikanis
/s/ JOHN D. KEARNEY, JR. Director June 27, 2001
- -----------------------------------------------------
John D. Kearney, Jr.
/s/ PETER WHARF Director June 27, 2001
- -----------------------------------------------------
Peter Wharf
60
63
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1(3) -- Amended and Restated Certificate of Incorporation of
Daisytek International Corporation.
3.1.1(3) -- Certificate of Amendment of Amended and Restated
Certificate of Incorporation of Daisytek International
Corporation.
3.2(2) -- Amended and Restated By-laws of Daisytek International
Corporation, as amended.
3.3(4) -- Certificate of Amendment of Amended and Restated
Certificate of Incorporation of Daisytek International
Corporation.
4.1(5) -- Rights Agreement, dated as of October 15, 1999, between
Daisytek International Corporation and ChaseMellon
Shareholder Services, LLC, which includes the Certificate
of Designations in respect of the Series A Preferred
Stock as Exhibit A, the form of Right Certificate as
Exhibit B and the Summary of Rights to Purchase Series A
Preferred Stock as Exhibit C. Pursuant to the Rights
Agreement, Right Certificates will not be mailed until
after the Separation Date (as defined therein).
10.1(*) -- Director and Officer Loan Plan, dated November 9, 2000.
10.2(*) -- Form of Loan Agreement in connection with the Director
and Officer Loan Plan.
10.3(1) -- 1994 Stock Option Plan of Daisytek International
Corporation.
10.4(3) -- Non-Employee Director Stock Option and Retainer Plan.
10.5(4) -- 1998 Amended and Restated Stock Option Plan of Daisytek
International Corporation.
10.6(4) -- Daisytek International Corporation 1998 Employee Stock
Purchase Plan.
10.7(6) -- Lease Agreement between Enterprise Business Park D-2,
L.P. and Daisytek, Inc. dated May 3, 2000.
10.8(6) -- Asset purchase agreement between BAP Acquisition Corp.,
and B.A. Pargh Company, LLC dated May 3, 2000.
10.9(7) -- 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.
10.10(7) -- 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.
10.11(8) -- Credit Facility dated December 14, 2000 from Bank One
Canada, as Lender, to Daisytek Canada, as Borrower, and
Daisytek, Inc. and Daisytek International Corporation, as
Guarantors.
10.12(8) -- Guaranty by Daisytek, Inc. and Daisytek International
Corporation for the benefit of Bank One, NA under the
Credit Facility dated December 14, 2000.
10.13(8) -- Demand Note Agreement dated December 14, 2000, from
Daisytek Canada, as Borrower, for the benefit of Bank One
Canada.
10.14(8) -- Credit Agreement dated December 18, 2000, among Daisytek,
Incorporated, as Borrower, Daisytek International
Corporation, as Guarantor, with the banks listed therein
as Lenders, Bank One, N.A., as an LC Issuer and Bank One,
Texas, N.A., as Administrative Agent.
64
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.15(8) -- Parent Guaranty dated December 18, 2000 by Daisytek
International Corporation for the benefit of the Lenders
and the LC Issuer under the Credit Agreement.
10.16(8) -- Subsidiary Guaranty dated December 18, 2000 by Certain
Subsidiaries of Daisytek International Corporation for
the benefit of the Lenders and the LC Issuer under the
Credit Agreement.
10.17(8) -- Pledge and Security Agreement dated December 18, 2000
between Daisytek, Incorporated and Steadi-Systems, Ltd.,
as Co-Pledgors and Bank One, Texas, NA, as Administrative
Agent for the LC Issuer and the Lenders under the Credit
Agreement.
10.18(8) -- Security Agreement dated December 18, 2000 by and among
Daisytek, Incorporated and its domestic subsidiaries a
party thereto and Bank One, Texas, NA.
10.19(8) -- Credit Agreement dated December 18, 2000 between Daisytek
Australia Pty Ltd., as Borrower, and Bank One, NA, as
Lender.
21(*) -- Subsidiaries of the Registrant.
23.1(*) -- Consent of Ernst & Young LLP.
23.2(*) -- Consent of Arthur Andersen LLP.
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(*) Filed herewith.
(1) Incorporated by reference from Registration Statement on Form S-1 (File No.
33-86926).
(2) Incorporated by reference from Registration Statement on Form S-8 (File No.
333-62840).
(3) Incorporated by reference from Annual Report on Form 10-K for the Fiscal
Year Ended March 31, 1996 dated June 26, 1996 (File No. 000-25400).
(4) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended September 30, 1998 dated November 16, 1998 (File No.
000-25400).
(5) Incorporated by reference from Current Report on Form 8-K dated October 19,
1999 (File No. 000-25400).
(6) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended June 30, 2000 dated August 14, 2000 (File No.
000-25400).
(7) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended September 30, 2000, dated November 14, 2000 (File No.
000-25400).
(8) Incorporated by reference from Quarterly Report on Form 10-Q for the
Quarterly Period Ended December 31, 2000, dated February 14, 2001 (File No.
000-25400).