SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _______ to _______
Commission File Number 0-25400
DAISYTEK INTERNATIONAL CORPORATION
----------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 75-2421746
- ------------------------ --------------------------
(State of Incorporation) (I.R.S. Employer I.D. No.)
1025 CENTRAL EXPRESSWAY SOUTH, SUITE 200, ALLEN, TEXAS 75013
- ------------------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 881-4700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---
At February 5, 2002 there were 17,694,165 shares of the registrant's common
stock outstanding, excluding 1,773,905 shares of common stock in treasury.
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
INDEX
<Table>
<Caption>
PART I. FINANCIAL INFORMATION PAGE NUMBER
-----------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets (unaudited)................................ 3
Condensed Consolidated Statements of Operations (unaudited) ..................... 4
Condensed Consolidated Statements of Cash Flows (unaudited)..................... 5
Notes to Condensed Consolidated Financial Statements (unaudited)................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................ 18
Item 6. Exhibits and Reports on Form 8-K ................................................ 18
SIGNATURES ............................................................................. 19
</Table>
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
DECEMBER 31, MARCH 31,
2001 2001
-------------- ---------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 5,328 $ 1,971
Accounts receivable, net of allowance for doubtful accounts of
$4,195 and $4,979 at December 31, 2001 and March 31, 2001, respectively...... 156,131 134,966
Inventories, net................................................................. 105,033 83,615
Prepaid expenses and other current assets........................................ 14,844 7,194
Deferred tax asset, net.......................................................... 1,874 --
Current assets of discontinued subsidiary........................................ -- 94,682
------------- --------------
Total current assets...................................................... 283,210 322,428
------------- --------------
Property and equipment, at cost:
Furniture, fixtures and equipment................................................ 37,096 23,325
Leasehold improvements........................................................... 3,929 3,641
------------- --------------
41,025 26,966
Less accumulated depreciation and amortization................................... (19,923) (15,569)
------------- --------------
Net property and equipment................................................ 21,102 11,397
Other assets....................................................................... 20,448 550
Goodwill, net ..................................................................... 53,766 46,493
------------- --------------
Total assets.............................................................. $ 378,526 $ 380,868
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................................. $ 7,212 $ 1,436
Trade accounts payable............................................................ 78,451 39,762
Accrued expenses and other liabilities............................................ 17,694 10,471
Current liabilities of discontinued subsidiary................................... -- 93,490
------------- --------------
Total current liabilities.................................................. 103,357 145,159
------------- --------------
Long-term debt, less current portion................................................ 81,570 76,607
Other liabilities................................................................... 2,217 --
Commitments and contingencies
Shareholders' equity:
Preferred stock, $1.00 par value; 1,000,000 shares authorized, none issued and
outstanding...................................................................... -- --
Common stock, $0.01 par value; 30,000,000 shares authorized; 19,272,437 shares
issued at December 31, 2001 and 17,689,850 shares issued at March 31, 2001....... 193 177
Additional paid-in capital........................................................ 114,002 94,663
Retained earnings................................................................. 99,391 92,415
Accumulated other comprehensive loss.............................................. (10,512) (6,043)
Treasury stock at cost, 1,773,905 at December 31, 2001 and 3,352,305 shares at
March 31, 2001................................................................... (11,692) (22,110)
------------- --------------
Total shareholders' equity................................................. 191,382 159,102
------------- --------------
Total liabilities and shareholders' equity................................. $ 378,526 $ 380,868
============= ==============
</Table>
The accompanying notes are an integral part of these financial statements.
-3-
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------ -------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net revenues........................................ $ 309,338 $ 251,034 $ 861,059 $ 748,064
Cost of revenues.................................... 278,400 222,662 769,052 662,001
--------- --------- --------- ---------
Gross profit................................ 30,938 28,372 92,007 86,063
Selling, general and administrative expenses........ 20,639 19,593 63,666 59,723
Depreciation and amortization....................... 1,537 1,622 3,901 5,233
Restructuring and nonrecurring costs................ 2,044 2,843 6,469 5,031
--------- --------- --------- ---------
Income from operations...................... 6,718 4,314 17,971 16,076
Interest expense, net............................... 1,850 1,050 5,190 2,513
--------- --------- --------- ---------
Income from continuing operations before
income taxes.............................. 4,868 3,264 12,781 13,563
Provision for income taxes.......................... 1,752 1,260 4,720 5,579
--------- --------- --------- ---------
Income from continuing operations before
minority interest ........................ 3,116 2,004 8,061 7,984
Minority interest................................... -- -- -- 47
--------- --------- --------- ---------
Income from continuing operations .......... 3,116 2,004 8,061 8,031
Discontinued operations (Note 2)
Income (loss) from operations of
discontinued subsidiary, net of tax ...... -- 202 (1,085) 276
--------- --------- --------- ---------
Net income ................................. $ 3,116 $ 2,206 $ 6,976 $ 8,307
========= ========= ========= =========
Net income per common share:
Basic
Income from continuing operations............ $ 0.20 $ 0.13 $ 0.52 $ 0.49
Income (loss) from operations of discontinued
subsidiary, net of tax..................... -- 0.02 (0.07) 0.02
--------- --------- ---------- ---------
Net income................................... $ 0.20 $ 0.15 $ 0.45 $ 0.51
========= ========= ========= =========
Diluted
Income from continuing operations............ $ 0.18 $ 0.13 $ 0.48 $ 0.49
Income (loss) from operations of discontinued
subsidiary, net of tax..................... -- 0.02 (0.07) 0.01
--------- --------- ---------- ---------
Net income................................... $ 0.18 $ 0.15 $ 0.41 $ 0.50
========= ========= ========= =========
Weighted average common and common share
equivalents outstanding:
Basic........................................ 15,899 14,989 15,378 16,356
Diluted...................................... 17,315 15,065 16,811 16,453
</Table>
The accompanying notes are an integral part of these financial statements.
-4-
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<Table>
<Caption>
NINE MONTHS ENDED
DECEMBER 31,
------------------------
2001 2000
---------- ----------
Net cash provided by operating activities from continuing
operations $ 11,562 $ 21,451
Cash flows from investing activities:
Purchases of property and equipment .............................. (9,158) (5,310)
Proceeds from the sale and leaseback of equipment ................ 8,000 --
Disposition of subsidiary ........................................ 923 (22,113)
Acquisition of Memphis distribution assets ....................... (10,700) --
Acquisitions of businesses, net of cash acquired ................. (16,249) (16,729)
Payment for investment in and advances to ISA .................... (18,553) --
(Increase) decrease in note receivable and other assets .......... (525) 1,610
---------- ----------
Net cash used in investing activities ................ (46,262) (42,542)
---------- ----------
Cash flows from financing activities:
Proceeds from lines of credit, net ............................... 8,095 14,505
Net proceeds from private placement of common stock .............. 16,430 --
Purchase of treasury stock ....................................... -- (18,795)
Net proceeds from exercise of stock options and issuance
of common stock ................................................ 13,338 707
Other ............................................................ (334) (1,318)
---------- ----------
Net cash provided by (used in) financing activities .. 37,529 (4,901)
Effect of exchange rates on cash and cash equivalents ................ 528 (442)
---------- ----------
Net increase (decrease) in cash and cash equivalents ................. 3,357 (26,434)
Cash and cash equivalents, beginning of period ....................... 1,971 28,172
---------- ----------
Cash and cash equivalents, end of period ............................. $ 5,328 $ 1,738
========== ==========
Net cash provided by (used by) operating activities from
discontinued operations ........................................... $ (685) $ 163
Activities not affecting cash:
Property and equipment acquired under capital leases ............... $ 3,088 $ --
</Table>
The accompanying notes are an integral part of these financial statements.
-5-
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Interim period results are not necessarily indicative of results
to be expected for the year.
These financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the Daisytek
International Corporation ("Daisytek" or the "Company") Annual Report on Form
10-K for the year ended March 31, 2001. The year-end consolidated balance sheet
data was derived from the audited financial statements, but does not include all
disclosures required by generally accepted accounting principles. Certain
reclassifications have been made to prior period financial statements to conform
to the current period presentation.
NOTE 2 - DISCONTINUED OPERATIONS
During June 2001, the Company announced its decision to exit the IBM master
distribution agreements, under which the Company's subsidiary Business Supplies
Distributors ("BSD") provided financing to enable the Company's former
subsidiary PFSweb, Inc. ("PFSweb") to service logistics contracts with IBM. As
part of the Company's plan to completely exit this business, Daisytek completed
the sale of BSD during September 2001 for net proceeds of approximately $0.9
million. The Company recorded a gain on the sale of approximately $0.2 million.
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
effective as of April 1, 2001. Under the provisions of SFAS No. 144, the results
of operations of BSD, which were previously included in the Company's computer
and office supplies business segment, are presented as discontinued operations
in the accompanying financial statements. The income (loss) from operations of
discontinued subsidiary are presented net of a tax benefit (expense) of
approximately ($0.1) million for the three months ended December 31, 2000, and
$0.6 million and ($0.2) million for the nine months ended December 31, 2001 and
2000, respectively, and include net revenues of approximately $48.9 million for
the three months ended December 31, 2000, and $66.6 million and $125.9 million
for the nine months ended December 31, 2001 and 2000, respectively.
NOTE 3 - ACQUISITIONS AND GOODWILL
During May 2001, the Company completed a transaction to terminate certain
transaction management services agreements between the Company and PFSweb and to
purchase certain Memphis distribution assets from PFSweb, including assets
previously sold to PFSweb at the time of its initial public offering in December
1999. The Company recorded goodwill of approximately $2.5 million related to
this transaction.
The Company acquired certain assets and liabilities of Digital Storage,
LLC, a value-added distributor of computer media, accessories and supplies,
during the quarter ended June 30, 2001. This acquisition was accounted for using
the purchase method of accounting for business combinations and increased the
Company's goodwill by approximately $5.5 million.
During the quarter ended September 30, 2001, the Company acquired certain
assets and liabilities of General Stationery Supplies, an Australian office
products wholesaler. This acquisition was accounted for using the purchase
method of accounting for business combinations and increased the Company's
goodwill by approximately $1.7 million.
During September 2001, the Company invested 8.0 million British pounds, or
approximately $11.6 million, in ISA International plc ("ISA"), a publicly-held
European computer consumables distributor based in the United Kingdom which
indirectly owns 47% of Kingfield Heath Limited, a privately-owned wholesaler of
office products based in the United Kingdom. The investment in ISA is in the
form of preferred shares convertible into 50% of
-6-
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ISA's outstanding shares plus one share at the Company's option any time over
the next five years. The Company receives a quarterly variable rate cumulative
preferential dividend. Daisytek was also granted warrants to purchase an
additional 15.4 million common shares for 2 million British pounds, or
approximately $2.9 million, at the Company's option any time over the next five
years. As of December 31, 2001, the Company has advanced additional funds to ISA
of approximately 4.0 million British pounds, or approximately $5.8 million, for
pro-rata participation in a shareholder rights issue by Kingfield Heath.
Subsequent to December 31, 2001, the Company advanced additional funds to ISA of
2.9 million British pounds, or approximately $4.2 million, for working capital
purposes. The advances to ISA earn interest. The investment in ISA, including
applicable acquisition costs, is carried at cost and categorized as other assets
in the Company's condensed consolidated balance sheets.
The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets,
effective April 1, 2001. Under SFAS No. 142, goodwill is no longer amortized but
reviewed for impairment annually, or more frequently if certain indicators
arise. The Company has completed the transitional impairment test required upon
adoption of SFAS No. 142 and determined that there is no impairment to its
recorded goodwill balances. Had the Company been accounting for its goodwill
under SFAS No. 142 for all periods presented, the Company's net income (in
thousands) and earnings per share would have been as follows:
<Table>
<Caption>
For the Three Months For the Nine Months
Ended December 31, Ended December 31,
------------------------- --------------------------
2001 2000 2001 2000
---------- ----------- ----------- -----------
Reported net income.................................. $ 3,116 $ 2,206 $ 6,976 $ 8,307
Add back goodwill amortization, net of tax........... -- 383 -- 989
---------- ----------- ----------- -----------
Adjusted net income.................................. $ 3,116 $ 2,589 $ 6,976 $ 9,296
========== =========== =========== ===========
Basic earnings per share:
Reported net income............................... $ 0.20 $ 0.15 $ 0.45 $ 0.51
Goodwill amortization, net of tax................. -- 0.02 -- 0.06
---------- ----------- ----------- -----------
Adjusted net income............................... $ 0.20 $ 0.17 $ 0.45 $ 0.57
========== =========== =========== ===========
Diluted earnings per share:
Reported net income............................... $ 0.18 $ 0.15 $ 0.41 $ 0.50
Goodwill amortization, net of tax................. -- 0.02 -- 0.06
---------- ----------- ----------- -----------
Adjusted net income............................... $ 0.18 $ 0.17 $ 0.41 $ 0.56
========== =========== =========== ===========
</Table>
NOTE 4 - DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
Effective April 1, 2001, the Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended. SFAS No. 133 requires
the Company to recognize all derivative instruments on the balance sheet at fair
value. Derivative instruments that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in its fair value will either be offset against the change in
fair value of the hedged asset, liability or firm commitment through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. Any ineffective portion of a derivative instrument's change in fair
value will be immediately recognized in earnings.
Interest Rate Management
To diversify its risk associated with interest rate fluctuations, the
Company has entered into interest rate swap agreements under which 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. As of December 31, 2001, interest rate
swaps are hedging underlying variable-rate obligations with a principal amount
of $50.0 million. Under SFAS No. 133, the Company accounts for its interest rate
swap contracts as cash flow hedges whereby the fair value of the interest rate
swap agreement is reflected in the balance sheet with the corresponding offset,
net of tax, to accumulated other comprehensive income. The interest rate swap
agreements are perfect hedges and meet the criteria for accounting under the
short-cut method as defined in SFAS No. 133. Upon adoption of SFAS No. 133 on
April 1, 2001, the Company recorded a derivative liability of approximately $0.7
million. At December 31, 2001, the outstanding interest rate swap agreements had
a fair value loss position of approximately $2.2 million.
-7-
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Currency Rate Management
As of April 1, 2001, the Company had outstanding foreign currency exchange
contracts to manage foreign currency exchange risk related to its net investment
in Canadian and Australian subsidiaries, which were settled during the quarter
ended June 30, 2001. The gains upon settlement of these contracts during the
quarter ended June 30, 2001 were reflected as a cumulative translation
adjustment within accumulated other comprehensive income. As of December 31,
2001, the Company had no outstanding foreign currency exchange contracts to
manage risk associated with its net investment in foreign subsidiaries.
The Company's subsidiary Business Supplies Distributors Europe BV entered
into foreign currency exchange contracts to manage foreign currency exchange
risk related to its intercompany loan denominated in United States dollars.
These contracts terminated during the quarter ended September 30, 2001 and were
not designated as hedges under SFAS No. 133. Changes in the fair value of the
intercompany loan were recorded as foreign currency transaction gains or losses
and changes in the fair value of the foreign currency exchange contracts were
recorded as derivative gains and losses. The net income statement impact of
these transactions during the nine months ended December 31, 2001 was not
material to the operations of the Company.
The Company's Canadian subsidiary enters into foreign currency exchange
contracts to manage its risk related to intercompany inventory purchases in the
United States. These hedges are designated as cash flow hedges under SFAS No.
133, with changes in the fair value of the contract recorded as a component of
accumulated other comprehensive income. The fair value of these contracts was
not material at December 31, 2001. In addition, the Company entered into a
foreign currency exchange contract to manage risk associated with its advances
to ISA. This contract was not designated as a hedge and the value of the
contract was not material at December 31, 2001.
NOTE 5 - COMPREHENSIVE INCOME
The Company includes currency translation adjustments and changes in the
fair value of certain derivative financial instruments which qualify for hedge
accounting in comprehensive income.
Effective July 1, 2001, the functional currency for the Company's Mexican
subsidiary was changed from the United States dollar to the Mexican peso.
The functional currency for the Company's Argentina subsidiary is the
Argentinean peso. During January 2002, Argentina abandoned the fixed
dollar-to-peso exchange rate and devalued the Argentinean peso. The Company
began accounting for the devaluation effective December 21, 2001 at a rate of
1.65 Argentinean pesos to $1. As a result of the devaluation, the Company
recorded translation losses of $4.5 million as a component of accumulated other
comprehensive income during the quarter ended December 31, 2001.
The following table sets forth comprehensive income (in thousands):
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------- ----------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net income ............................................ $ 3,116 $ 2,206 $ 6,976 $ 8,307
Comprehensive income adjustments:
Foreign currency translation adjustment ........... (3,142) 256 (3,073) (525)
Cumulative effect of adoption of SFAS 133 as
of April 1, 2001, net of tax of $240 ............ -- -- (445) --
Change in fair value of derivative financial
instruments, net of tax of $81 and $512 for
the three months and nine months ended
December 31, 2001, respectively ................. 151 -- (951) --
--------- --------- --------- ---------
Comprehensive income .................................. $ 125 $ 2,462 $ 2,507 $ 7,782
========= ========= ========= =========
</Table>
-8-
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - EARNINGS PER SHARE DATA
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share amounts):
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------- ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
NUMERATOR:
Income from continuing operations ................... $ 3,116 $ 2,004 $ 8,061 $ 8,031
Income (loss) from operations of discontinued
subsidiary, net of tax .......................... -- 202 (1,085) 276
---------- ---------- ---------- ----------
Net income ........................................ $ 3,116 $ 2,206 $ 6,976 $ 8,307
========== ========== ========== ==========
DENOMINATOR:
Denominator for basic earnings per share -
Weighted average shares ........................... 15,899 14,989 15,378 16,356
Effect of dilutive securities:
Stock options ..................................... 1,416 76 1,433 97
---------- ---------- ---------- ----------
Denominator for diluted earnings per share -
Adjusted weighted average shares .................. 17,315 15,065 16,811 16,453
========== ========== ========== ==========
Basic earnings per common share:
Income from continuing operations ................. $ 0.20 $ 0.13 $ 0.52 $ 0.49
Income (loss) from operations of discontinued
subsidiary, net of tax .......................... -- 0.02 (0.07) 0.02
---------- ---------- ---------- ----------
Net income ........................................ $ 0.20 $ 0.15 $ 0.45 $ 0.51
========== ========== ========== ==========
Diluted earnings per common share:
Income from continuing operations ................. $ 0.18 $ 0.13 $ 0.48 $ 0.49
Income (loss) from operations of discontinued
subsidiary, net of tax .......................... -- 0.02 (0.07) 0.01
---------- ---------- ---------- ----------
Net income ........................................ $ 0.18 $ 0.15 $ 0.41 $ 0.50
========== ========== ========== ==========
</Table>
Employees and former employees exercised stock options to acquire 342,207
shares for proceeds of approximately $3.9 million and 1,504,658 shares for
proceeds of approximately $12.9 million during the three months and nine months
ended December 31, 2001, respectively.
NOTE 7 - DEBT
The Company's revolving line of credit facility in the United States, which
expires on December 19, 2003, 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 from $120.0
million to $150.0 million (subject to certain borrowing limitations). As of
December 31, 2001, the outstanding balance under this credit facility was $68.0
million and, based on the Company's borrowing base limit at December 31, 2001,
$44.3 million was available for future borrowings.
During April 2001, the Company refinanced a revolving term loan with a
Canadian bank expiring on August 31, 2002 and an unsecured revolving line of
credit facility with a Canadian bank expiring on January 1, 2002 with a single
revolving credit facility of 20.0 million Canadian dollars 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. During October 2001, the Company amended its Canadian credit facility
to add another 10.0 million Canadian dollars to its available credit for total
maximum credit availability of 30.0 million Canadian dollars, or approximately
$18.8 million. As of December 31, 2001, the outstanding balance under the
Canadian credit facility was 18.6 million Canadian dollars, or approximately
$11.7 million, and 11.4 million Canadian dollars, or approximately $7.2 million,
was available for future borrowings.
-9-
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During May 2001, the Company amended its unsecured revolving line of credit
facility with an Australian bank expiring on January 1, 2002 to add another 5.0
million Australian dollars to its available credit for total maximum credit
availability of 20.0 million Australian dollars, or approximately $10.2 million.
During December 2001, the Company extended the Australian credit facility to
January 1, 2003. As of December 31, 2001, the outstanding balance under the
Australian credit facility was 12.3 million Australian dollars, or
approximately $6.3 million, and 7.7 million Australian dollars, or
approximately $3.9 million, was available for future borrowings.
NOTE 8 - RESTRUCTURING AND NONRECURRING COSTS
Restructuring and nonrecurring costs consist of the following for the three
and nine month periods ended December 31, 2001 and 2000 (in thousands):
<Table>
<Caption>
For the Three Months For the Nine Months
Ended December 31, Ended December 31,
--------------------- ---------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Restructuring charges(a) ............... $ 2,044 $ -- $ 2,044 $ --
Final PFSweb separation charges(b) ..... -- -- 4,425 --
PFSweb spin-off charges(c) ............. -- 2,501 -- 4,689
Other .................................. -- 342 -- 342
--------- --------- --------- ---------
$ 2,044 $ 2,843 $ 6,469 $ 5,031
========= ========= ========= =========
</Table>
- ----------
(a) During the quarter ended December 31, 2001, the Company commenced a
restructuring plan that includes (1) information technology enhancements to
ensure growth in the business will be technologically supported; (2)
distribution improvements and consolidation of subsidiary computer and
office supplies warehouses into five new regional hub facilities in order
to leverage distribution costs; and (3) centralization of certain
back-office resources into a shared services organization to reduce costs
and improve efficiencies. Daisytek expects to complete the projects in
approximately 18 months. The Company incurred pre-tax charges of
approximately $2.0 million during the third quarter, including (1) $0.7
million related to warehouse and distribution initiatives, including the
integration of office products at the Company's central distribution center
in Memphis; (2) $1.1 million related to employees severed during the third
quarter; and (3) $0.2 million related to other back-office improvements. In
addition, inventory costs of $0.9 million related to the warehouse and
distribution initiatives of the restructuring plan are included in cost of
revenues.
(b) As part of the Company's May 2001 transaction to terminate certain
transaction management services agreements between the Company and its
former subsidiary PFSweb and to purchase certain Memphis distribution
assets from PFSweb, the Company recognized a pre-tax nonrecurring charge of
$4.4 million. This charge included transaction costs, a separation payment
and finalization of other balances between the Company and PFSweb.
(c) The Company incurred pre-tax charges of $2.5 million and $4.7 million for
the three months and nine months ended December 31, 2000 related to
reorganization and separation activities following the spin-off of the
Company's subsidiary PFSweb during July 2000.
NOTE 9 - PRIVATE PLACEMENT OF COMMON STOCK
During December 2001, the Company completed the private placement of
approximately 1.6 million shares of Daisytek common stock to a group of
institutional investors for total gross proceeds of approximately $17.7 million.
Offering costs of approximately $1.2 million were incurred as of December 31,
2001.
-10-
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - SEGMENT DATA
The Company currently operates in two reportable business segments - (1)
computer and office supplies and (2) professional tape products. Prior to the
spin-off of the Company's subsidiary PFSweb during July 2000, the Company also
provided transaction management services to both traditional and electronic
commerce companies. Separate financial data for each of the Company's operating
segments, excluding discontinued operations, is provided below (in thousands):
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------- -------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net revenues:
Computer and office supplies, excluding
discontinued operations .................. $ 291,984 $ 231,140 $ 807,195 $ 677,157
Professional tape products ................. 17,354 19,894 53,864 62,360
PFSweb ..................................... -- -- -- 15,836
Intersegment eliminations .................. -- -- -- (7,289)
----------- ----------- ----------- -----------
Consolidated ............................... 309,338 251,034 861,059 748,064
Operating contribution (loss):
Computer and office supplies, excluding
discontinued operations ................ 8,776 6,427 21,967 18,790
Professional tape products ............... 886 730 3,373 2,822
PFSweb ................................... -- -- -- (505)
----------- ----------- ----------- -----------
Consolidated ............................. 9,662 7,157 25,340 21,107
</Table>
The Company's computer and office supplies segment includes certain
expenses 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.
Restructuring and nonrecurring costs of $2.9 million and $2.8 million for the
three months ended December 31, 2001 and 2000, respectively, and $7.4 million
and $5.0 million for the nine months ended December 31, 2001 and 2000,
respectively, have not been allocated to the reportable segments and must be
included to reconcile to the income from operations reported in the Company's
consolidated financial statements.
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
Consolidated Financial Statements and related notes thereto appearing elsewhere
in this document. 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. References in
the Report to Daisytek's fiscal year mean the twelve-month period ending on
March 31 of such fiscal year.
Daisytek is a leading global wholesale distributor of computer and office
supplies and professional tape products. To enhance our relationship with our
computer and office supplies customers worldwide, we also provide unique,
value-added services such as direct marketing, merchandising and demand
generation. We sell our products and services in the United States, Canada,
Australia, Mexico and South America. Prior to the spin-off of our subsidiary
PFSweb, Inc. ("PFSweb") during July 2000, we also provided transaction
management services to both traditional and electronic commerce companies.
RECENT DEVELOPMENTS
During May 2001, we terminated certain transaction management services
agreements between Daisytek and PFSweb and purchased certain Memphis
distribution assets from PFSweb, including assets previously sold to PFSweb at
the time of its initial public offering in December 1999. In connection with
this transaction, PFSweb continued to offer services to Daisytek under a
separate fee agreement for a six-month period in order to support the transfer
of fulfillment operations and transaction processing back to Daisytek, including
the transition to a separate information technology platform. During October
2001, we announced the completion of our transition to an information technology
platform separate from PFSweb.
During June 2001, we announced our decision to exit the IBM master
distribution agreements, under which our subsidiary Business Supplies
Distributors ("BSD") provided financing to enable PFSweb to service logistics
contracts with IBM. As part of our plan to completely exit this business, we
completed the sale of BSD during September 2001. The exit of this business has
allowed us to redeploy the working capital required by this business to other
strategic business opportunities that provide higher returns on our investments.
We adopted Statement of Financial Accounting Standards ("SFAS") No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, effective as of
April 1, 2001. Under the provisions of SFAS No. 144, the results of operations
of BSD, which were previously included in our computer and office supplies
business segment, are presented as discontinued operations in the accompanying
financial statements.
During September 2001, we invested 8.0 million British pounds, or
approximately $11.6 million, in ISA International plc ("ISA"), a publicly-held
European computer consumables distributor based in the United Kingdom which
indirectly owns 47% of Kingfield Heath Limited, a privately-owned wholesaler of
office products based in the United Kingdom. The investment in ISA is in the
form of preferred shares convertible into 50% of ISA's outstanding shares plus
one share at our option any time over the next five years. We receive a
quarterly variable rate cumulative preferential dividend. We were also granted
warrants to purchase an additional 15.4 million common shares for 2 million
British pounds, or approximately $2.9 million, at our option any time over the
next five years. As of December 31, 2001, we have advanced additional funds to
ISA of approximately 4.0 million British pounds, or approximately $5.8 million,
for pro-rata participation in a shareholder rights issue by Kingfield Heath.
Subsequent to December 31, 2001, we advanced additional funds to ISA of 2.9
million British pounds, or approximately $4.2 million, for working capital
purposes. The advances to ISA earn interest.
Additionally, we acquired certain assets and liabilities of Digital
Storage, LLC ("Digital Storage"), a value-added distributor of computer media,
accessories and supplies, during the first quarter of fiscal year 2002 and
acquired certain assets and liabilities of office products wholesaler General
Stationery Supplies in Australia during the second quarter of fiscal year 2002.
During the quarter ended September 30, 2001, we expanded our computer and
office supplies product line to include computer peripheral and connectivity
products, announcing agreements to distribute products from Logitech
International and iBIZ Technology Corp. During the quarter ended December 31,
2001, we announced a strategic alliance with eCommerce Industries Inc. (ECI2) to
provide technology tools to help our resellers and the acquisition of exclusive
rights to distribute OpenSupply, a software that monitors toner and ink usage.
-12-
Argentina has recently undergone significant economic and political change.
During January 2002, Argentina abandoned the fixed dollar-to-peso exchange rate
and devalued the Argentinean peso. Our Argentina subsidiary began accounting for
the effect of the devaluation effective December 21, 2001 at a rate of 1.65
Argentinean pesos to $1. As a result of the devaluation, we recorded translation
losses of $4.5 million as a component of accumulated other comprehensive income
during the quarter ended December 31, 2001. Although we are working closely with
customers and vendors in Argentina, we anticipate some earnings impact in the
short term.
We are working to build a centralized distribution and business support
platform that will position Daisytek for continued growth, improve financial
performance and support us in our vision to be the largest distributor of
computer supplies, office products and accessories in the world. During the
third quarter of fiscal year 2002, we commenced a restructuring plan that
includes (1) information technology enhancements to ensure growth in the
business will be technologically supported; (2) distribution improvements and
consolidation of subsidiary computer and office supplies warehouses into five
new regional hub facilities in order to leverage distribution costs; and (3)
centralization of certain back-office resources into a shared services
organization to reduce costs and improve efficiencies. We expect that the
projects will take about 18 months to complete.
RESULTS OF OPERATIONS
Three Months Ended December 31, 2001 Compared to Three Months Ended
December 31, 2000
Net Revenues. Net revenues for the three months ended December 31, 2001
increased 23.2% to $309.3 million compared to $251.0 million for the three
months ended December 31, 2000. Computer and office supplies net revenues
increased 26.3% for the quarter ended December 31, 2001 compared to the prior
year as a result of (1) growth in the emerging customer channels such as
web-based resellers, drug and grocery stores, mass merchants and direct
marketers; (2) growth in the international computer supplies business; and (3)
the acquisitions of Digital Storage and General Stationery Supplies. Increases
were primarily volume-related. Within the computer and office supplies segment,
domestic operations increased approximately 30% compared to the prior year and
international operations increased approximately 22% in U.S. dollars compared to
the prior year. For comparative purposes, we continue to see a deterioration in
the value of both the Canadian and Australian dollar relative to the U.S dollar,
which has negatively impacted growth in U.S. dollars. Using local currencies for
both interim periods, growth for the three months ended December 31, 2001 was
approximately 27% compared to the prior year. Our divisions in Australia, Canada
and Mexico, which represent approximately 80% of our international business, all
experienced revenue growth relative to the same quarter in the prior year. Our
Latin American business continues to be impacted (on a comparable basis with
prior year results) due to the change in certain tariffs, which has made it more
attractive for our customers to source product locally rather than import from
our Miami facility. Also, as previously mentioned, our Argentinean division was
negatively impacted during the quarter ended December 31, 2001 due to the
political and economic uncertainties in that country. See "Recent Developments."
The computer and office supplies revenue increase for the quarter ended
December 31, 2001 was partially offset by a 12.8% revenue decrease in our
professional tape products segment, due to decreases in volume and prior year
industry price decreases which continued to impact our revenues on a comparable
basis. We have recently completed our restructuring plan to improve both
revenues and earnings for the professional tape products segment, which has
focused on new leadership for the business, rationalizing warehouses to reduce
costs and improve customer service, utilizing more efficient inside
telemarketing teams versus outside sales people and developing new sales and
marketing initiatives.
Gross Profit. Gross profit as a percentage of net revenues was 10.0%
for the quarter ended December 31, 2001 compared to 11.3% for the prior year.
This decrease in margin percentage is primarily attributable to the lower
contributions from foreign product sourcing opportunities following the events
of September 11, 2001 and the acquisition of Digital Storage, which typically
operates at lower gross margins than the remainder of our business. In addition,
we incurred restructuring charges of $0.9 million related to our warehouse and
distribution initiatives which are included in cost of sales for the quarter
ended December 31, 2001.
-13-
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") for the quarter ended December 31, 2001 were
$20.6 million, or 6.7% of net revenues, as compared to $19.6 million, or 7.8% of
net revenues, for the quarter ended December 31, 2000. SG&A, in both dollars and
as a percentage of revenues, was impacted by (1) the acquisition of our Memphis
distribution assets and termination of the transaction services agreement with
PFSweb in May 2001, which has allowed us to operate the facility rather than pay
an outsourcing service fee; (2) the acquisition of certain assets and
liabilities of Digital Storage, which operates at lower SG&A percentages than
our other business; and (3) improvements resulting from our restructuring
activities.
Depreciation and Amortization. Depreciation and amortization for the
quarter ended December 31, 2001 was $1.5 million compared to $1.6 million for
the prior year quarter. The decrease is due to our adoption during the first
quarter of fiscal year 2002 of SFAS No. 142, Goodwill and Other Intangible
Assets, under which goodwill is no longer amortized but reviewed for impairment
at least once a year. As a result, we discontinued amortization of goodwill
effective April 1, 2001. This benefit is partially offset by depreciation
related to new capital expenditures and business acquisitions during the year.
Restructuring and Nonrecurring costs. During the quarter ended December
31, 2001, we incurred pre-tax restructuring charges of $2.0 million, including
$0.7 million related to warehouse and distribution initiatives (including the
integration of office products at our central distribution center in Memphis),
$1.1 million related to employees severed during the third quarter and $0.2
million related to other back-office improvements. During the quarter ended
December 31, 2000, we recognized pre-tax costs of $2.8 million primarily related
to reorganization and separation activities following the spin-off of our
subsidiary PFSweb during July 2000.
Interest Expense, net. Interest expense was $1.9 million for the
quarter ended December 31, 2001 and $1.1 million for the quarter ended December
31, 2000. Comparatively, debt levels increased due to: (1) the repurchase of 20%
of our outstanding shares under terms of a share buyback program we completed
during the last fiscal year; (2) the impact of the acquisitions of Digital
Storage and General Stationery Supplies during fiscal year 2002; (3) the
acquisition of our Memphis distribution assets; and (4) our investment in ISA.
These increases to debt levels and corresponding impact to interest expense were
partially offset by lower interest rates during the most recent quarter and debt
reductions using cash proceeds from the exercise of stock options and the
completion of a private placement of common stock on December 20, 2001. The
weighted average interest rate, including the effects of our interest rate
swaps, was 6.3% and 8.4% for the three-month periods ended December 31, 2001 and
2000, respectively.
Income Taxes. Our effective income tax rate was 36.0% and 38.6% for the
three months ended December 31, 2001 and 2000, respectively. This decline is
attributable to the finalization of prior year tax returns, which favorably
impacted foreign taxes at higher marginal tax rates as well as certain state tax
liabilities. Additionally, eliminating the book amortization of non-deductible
goodwill has improved the overall effective tax rate compared to the prior year.
Based on these results, we expect our effective tax rate to approximate 38% in
future quarters.
Nine months Ended December 31, 2001 Compared to Nine months Ended
December 31, 2000
Net Revenues. Net revenues for the nine months ended December 31, 2001
increased 15.1% to $861.1 million compared to $748.1 million for the nine months
ended December 31, 2000. Results for the prior year include our former
subsidiary PFSweb, which was spun off during July 2000. Excluding PFSweb
revenues (net of intercompany eliminations) in the first quarter of fiscal year
2001, revenue growth was 16.4%. Computer and office supplies net revenues
increased 19.2% for the nine months ended December 31, 2001 compared to the
prior year, attributable to (1) growth in the emerging customer channels such as
web-based resellers, drug and grocery stores, mass merchants and direct
marketers; (2) growth in the international computer supplies business; and (3)
the acquisitions of Digital Storage, General Stationery Supplies and Etertin y
CIA, S.A. ("Etertin"). Increases were primarily volume-related. Within the
computer and office supplies segment, domestic operations increased
approximately 18.9% and international operations increased approximately 19.7%
in U.S. dollars compared to the prior year. For comparative purposes, we
continue to see a deterioration in the value of both the Canadian and Australian
dollar relative to the U.S. dollar, which has negatively impacted growth in U.S.
dollars.
The computer and office supplies revenue increase for the nine months
ended December 31, 2001 was also partially offset by a 13.6% revenue decrease in
our professional tape products segment, due to decreases in volume and prior
year industry price decreases which continued to impact our revenues on a
comparable basis.
-14-
The growth in net revenues for the nine months ended December 31, 2001
was also partially offset by operational disruptions following the United States
terrorist attacks on September 11, 2001. All United States subsidiaries
experienced declines in orders and sales immediately subsequent to this date.
Gross Profit. Gross profit as a percentage of net revenues was 10.7%
for the nine months ended December 31, 2001 compared to 11.5% for the prior
year. Excluding PFSweb revenues and gross margin in the first quarter of fiscal
year 2001, gross profit percentage was 11.4%. PFSweb's service fee based
business typically operated at higher margins than the consolidated Daisytek
business. The decline in gross margin percentage from 11.4% to 10.7% is
attributable to (1) the lower contributions from foreign product sourcing
opportunities following the events of September 11, 2001; (2) the acquisition of
certain assets and liabilities of Digital Storage, which typically operates at
lower gross margins than the remainder of our business; and (3) the reduction in
revenue in the professional tape products segment, which typically operates at
higher gross margin percentages. The sell-off during the first quarter of fiscal
2002 of certain overstocked inventory (purchased in anticipation of a price
increase) at lower than expected margins also contributed to the decreased
margin. In addition, we incurred restructuring charges of $0.9 million related
to our warehouse and distribution initiatives which are included in cost of
revenues for the nine months ended December 31, 2001.
Selling, General and Administrative Expenses. SG&A for the nine months
ended December 31, 2001 was $63.7 million, or 7.4% of net revenues, as compared
to $59.7 million, or 8.0% of net revenues, for the nine months ended December
31, 2000. Excluding SG&A costs related to PFSweb in the first quarter of fiscal
year 2001, SG&A was $58.5 million, or 7.9% of net revenues. As mentioned
previously, the service-based component of PFSweb's business operated at higher
gross margins and higher SG&A percentages and is reflected in the prior year
results, but not the current year due to the spin-off of PFSweb during July
2000. Excluding PFSweb, the increase in SG&A was impacted by (1) the acquisition
of our Memphis distribution assets and termination of the transaction services
agreement with PFSweb in May 2001, which has allowed us to operate the facility
rather than pay an outsourcing service fee; (2) the acquisition of Digital
Storage, which operates at lower SG&A percentages than our other business; and
(3) improvements resulting from our restructuring activities. This favorable
impact was partially offset by certain incremental costs incurred relative to
the events of September 11, 2001.
Depreciation and Amortization. Depreciation and amortization for the
nine months ended December 31, 2001 was $3.9 million compared to $5.2 million
for the comparable prior year period. The decrease is due to our adoption during
the first quarter of fiscal year 2002 of SFAS No. 142, under which goodwill is
no longer amortized but reviewed for impairment at least once a year. As a
result, we discontinued amortization of goodwill effective April 1, 2001. This
benefit is partially offset by depreciation related to new capital expenditures
and business acquisitions during the year.
Restructuring and Nonrecurring costs. During the nine months ended
December 31, 2001, we recognized pre-tax charges of (1) $2.0 million related to
restructuring activities, including $0.7 million related to warehouse and
distribution initiatives (including the integration of office products at our
central distribution center in Memphis), $1.1 million related to employees
severed during the third quarter and $0.2 million related to other back-office
improvements and (2) $4.4 million related to the acquisition of the Memphis
distribution assets and the termination of certain transaction management
service agreements between PFSweb and Daisytek, including transaction costs, a
separation payment and finalization of other balances with PFSweb. During the
nine months ended December 31, 2000, we recognized charges of $5.0 million
primarily related to reorganization and separation activities following the
spin-off of our subsidiary PFSweb during July 2000.
Interest Expense, net. Interest expense increased to $5.2 million for
the nine months ended December 31, 2001 compared to $2.5 million for the nine
months ended December 31, 2000. Of this increase, $0.3 million represents a
reduction in net interest expense in the first quarter of the prior year due to
interest income earned by PFSweb on their existing cash balances. The remaining
increase in interest expense is attributable to increases in our debt levels due
to: (1) the repurchase of 20% of our outstanding shares under terms of a share
buyback program we completed during the last fiscal year; (2) the impact of the
acquisitions of Etertin during fiscal year 2001 and Digital Storage and General
Stationery Supplies during fiscal year 2002; (3) the acquisition of our Memphis
distribution assets; and (4) our investment in ISA. These increases to debt
levels and corresponding impact to interest expense were partially offset by
lower interest rates during the current fiscal year and debt reductions using
cash proceeds from the exercise of stock options and the completion of a private
placement of common stock on December 20, 2001. The weighted average interest
rate, including the effect of our interest rate swaps, was 6.6% and 8.2% for the
nine-month periods ended December 31, 2001 and 2000, respectively.
-15-
Income Taxes. Our effective income tax rate was 36.9% and 41.1% for the
nine months ended December 31, 2001 and 2000, respectively. The income tax
provision was negatively impacted during the first quarter of last fiscal year
primarily due to losses generated by PFSweb's European subsidiary for which no
income tax benefit was recorded. Due to PFSweb's limited operating history in
Europe at that time, it was uncertain whether it was "more likely than not" that
we would be able to utilize these cumulative tax losses and therefore no tax
benefit was recorded. In fiscal 2002, we experienced a decline in our effective
tax rate attributable to the finalization of prior year tax returns, which
favorably impacted foreign taxes at higher marginal tax rates as well as certain
state tax liabilities. Additionally, eliminating the book amortization of
non-deductible goodwill has improved the overall effective tax rate compared to
the prior year. Based on these results, we expect our effective tax rate to
approximate 38% in future quarters.
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. As the international portion
of our business grows, seasonality may become more of a factor due to holidays
and work patterns in these countries. Management believes 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.
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
diluted shares outstanding at various price points using common stock
outstanding at December 31, 2001 of 17,498,532.
<Table>
<Caption>
DILUTED SHARES
AVERAGE SHARE PRICE OUTSTANDING
------------------- --------------
$12.00........................ 18,686,825
$13.00........................ 18,832,851
$14.00........................ 18,958,125
$15.00........................ 19,070,625
$16.00........................ 19,170,666
$17.00........................ 19,258,938
$18.00........................ 19,337,401
</Table>
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities from continuing operations for the
nine months ended December 31, 2001 was $11.6 million, compared with $21.5
million for the same period in the prior year. Working capital, excluding the
current portion of long-term debt and cash balances, increased to $181.7 million
at December 31, 2001 from $176.7 million at March 31, 2001, attributable
primarily to our acquisitions of Digital Storage and General Stationery
Supplies, partially offset by a decrease in working capital as a result of our
decision to exit the IBM master distribution agreements. The working capital
requirements were funded primarily with proceeds from our credit facilities.
Net cash used in investing activities during the nine months ended December
31, 2001 was $46.3 million. Payments during the nine months ended December 31,
2001 included cash paid for the acquisitions of Digital Storage and General
Stationery Supplies, the investment in ISA, and the transaction to acquire the
Memphis distribution assets from PFSweb, which were funded with proceeds from
our credit facilities and the sale and leaseback of certain Memphis distribution
assets. Capital expenditures for the nine months ended December 31, 2001 were
$12.2 million, including $3.1 million acquired under a capital lease and $9.1
million funded with proceeds from our credit facilities. Proceeds from the
exercise of stock options and the issuance of common shares were $13.3 million
for the nine months ended December 31, 2001, which were used to reduce
outstanding balances under our credit facilities.
-16-
During December 2001, we completed the private placement of approximately
1.6 million shares of Daisytek common stock to a group of institutional
investors for total gross proceeds of approximately $17.7 million. Offering
costs of approximately $1.2 million were incurred as of December 31, 2001. The
proceeds from the private placement were initially used to reduce outstanding
balances under our credit facility.
Financing Activities
Domestic Credit Facilities. Our revolving line of credit facility in the
United States, which expires on December 19, 2003, 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 from $120.0 million to $150.0 million (subject to certain borrowing
limitations). As of December 31, 2001, the outstanding balance under this credit
facility was $68.0 million and, based on our borrowing base limit at December
31, 2001, $44.3 million was available for future borrowings.
Foreign Credit Facilities. During April 2001, we refinanced a revolving term
loan with a Canadian bank expiring on August 31, 2001 and an unsecured revolving
line of credit facility with a Canadian bank expiring on January 1, 2002 with a
single revolving credit facility of 20.0 million Canadian dollars expiring
during April 2004. During October 2001, we amended the Canadian credit facility
to add another 10.0 million Canadian dollars to its available credit for total
maximum credit availability of 30.0 million Canadian dollars, or approximately
$18.8 million. Availability under the credit facility is subject to certain
borrowing base limitations, as defined. As of December 31, 2001, the outstanding
balance under the Canadian credit facility was 18.6 million Canadian dollars, or
approximately $11.7 million, and we had 11.4 million Canadian dollars, or
approximately $7.2 million, available for future borrowings.
During May 2001, we amended our unsecured revolving line of credit facility
with an Australian bank expiring on January 1, 2002 to add another 5.0 million
Australian dollars to its available credit for total maximum credit availability
of 20.0 million Australian dollars, or approximately $10.2 million. As of
December 31, 2001, the outstanding balance under our Australian credit facility
was 12.3 million Australian dollars, or approximately $6.3 million, and we had
7.7 million Australian dollars, or approximately $3.9 million, available for
future borrowings. During December 2001, we extended this Australian credit
facility to January 1, 2003.
Contractual Obligations and Guarantees. Obligations under long-term debt,
capital leases and non-cancelable operating leases are as follows (in millions):
<Table>
<Caption>
PAYMENTS DUE BY PERIOD
-------------------------------------------------------------------------
LESS THAN AFTER
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
- ----------------------- ----------- ----------- ----------- -------------- -----------
Long-term debt..................... $ 85.9 $ 6.2 $ 79.7 $ -- $ --
Capital lease obligations.......... 2.9 1.0 1.9 -- --
Operating leases................... 35.4 8.8 14.1 8.1 4.4
Total.............................. $ 124.2 $ 16.0 $ 95.7 $ 8.1 $ 4.4
</Table>
In connection with the IPO of PFSweb, we have guaranteed certain PFSweb
operating lease obligations. Total minimum payments for the guaranteed leases
are $17.3 million, including $4.1 million due in less than one year, $6.9
million due in one to three years, $3.4 million due in four to five years and
$2.9 million due after five years. We do not expect to make payments under these
guarantees; however, if performance were required, we would seek to mitigate our
exposure with lease terminations and/or subleases.
FORWARD-LOOKING STATEMENTS
Certain statements used in this Quarterly Report on Form 10-Q 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.
-17-
These risks, uncertainties and other factors include, but are not limited
to: general economic conditions; industry trends; the loss of or inability to
hire skilled personnel; the loss of key suppliers or customers; the loss or
material decline in service of strategic product shipping relationships;
customer demand; product availability; competition (including pricing and
availability); risks inherent in acquiring, integrating and operating new
businesses and investments; concentrations of credit risk; distribution
efficiencies; capacity constraints; technological difficulties, including
equipment failure or a breach of our security measures; the volatility of our
common stock; economic and political uncertainties arising as a result of
terrorist attacks; seasonality; exchange rate fluctuations; foreign currency
devaluations; and the regulatory and trade environment (both domestic and
foreign). These risks and others are more fully described in Daisytek's Annual
Report of Form 10-K for the year ended March 31, 2001.
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 this Quarterly Report on Form 10-Q. 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As discussed in Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations, Argentina has recently undergone
significant economic and political change and, during January 2002, the country
abandoned the fixed dollar-to-peso exchange rate and devalued the Argentinean
peso. We have experienced no other material changes in interest rate risk or
foreign exchange risk during the nine months ended December 31, 2001. Our market
risk is described in more detail in our Annual Report on Form 10-K for the year
ended March 31, 2001.
PART II. OTHER INFORMATION
ITEM 1. 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 affect on our financial position, results of operations or
liquidity.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
4.1 Securities Purchase Agreement dated December 19, 2001 (incorporated by
reference to Exhibit 4.3 to the Company's Form S-3 dated December 21,
2001 (File No. 333-75802))
4.2 Registration Rights Agreement dated December 19, 2001 (incorporated by
reference to Exhibit 4.4 to the Company's Form S-3 dated December 21,
2001 (File No. 333-75802))
10.1* Daisytek International Corporation First Amendment to Non-Employee
Director Stock Option and Retainer Plan
10.2* Amended and Restated Credit Agreement dated as of April 30, 2001 among
Daisytek, Incorporated, as Borrower, the Lenders, Bank One, Texas, NA,
as Administrative Agent, Citizens Bank of Massachusetts, as Syndication
Agent, Bank of America, N.A., as Documentation Agent, and Bank One,
Texas, NA and Bank One, NA, as LC Issuers
10.3* Second Amendment to Credit Agreement among Daisytek, Incorporated, as
Borrower, the Lenders, Bank One, NA, as Administrative Agent, Citizens
Bank of Massachusetts, as Syndication Agent, Bank of America, N.A., as
Documentation Agent, and Bank One, NA, as LC Issuers dated as of
October 19, 2001
* Filed herewith.
(b) Reports on Form 8-K.
Current Report on Form 8-K (Items 5 and 7), dated December 20, 2001 and
filed December 26, 2001, to announce the completion of a private placement of
1,578,400 shares of common stock to a group of institutional investors.
-18-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 14, 2002
DAISYTEK INTERNATIONAL CORPORATION
By: /s/ Ralph Mitchell
----------------------------------------------
Ralph Mitchell
Chief Financial Officer,
Chief Accounting Officer,
Executive Vice President - Finance
-19-
EXHIBIT INDEX
<Table>
<Caption>
Exhibit
Number Description
- ------- -----------
4.1 Securities Purchase Agreement dated December 19, 2001 (incorporated by
reference to Exhibit 4.3 to the Company's Form S-3 dated December 21,
2001 (File No. 333-75802))
4.2 Registration Rights Agreement dated December 19, 2001 (incorporated by
reference to Exhibit 4.4 to the Company's Form S-3 dated December 21,
2001 (File No. 333-75802))
10.1* Daisytek International Corporation First Amendment to Non-Employee
Director Stock Option and Retainer Plan
10.2* Amended and Restated Credit Agreement dated as of April 30, 2001 among
Daisytek, Incorporated, as Borrower, the Lenders, Bank One, Texas, NA,
as Administrative Agent, Citizens Bank of Massachusetts, as Syndication
Agent, Bank of America, N.A., as Documentation Agent, and Bank One,
Texas, NA and Bank One, NA, as LC Issuers
10.3* Second Amendment to Credit Agreement among Daisytek, Incorporated, as
Borrower, the Lenders, Bank One, NA, as Administrative Agent, Citizens
Bank of Massachusetts, as Syndication Agent, Bank of America, N.A., as
Documentation Agent, and Bank One, NA, as LC Issuers dated as of
October 19, 2001
</Table>
* Filed herewith.