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 June 30, 2002
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 August 9, 2002 there were 18,394,262 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 ...................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 15
Item 6. Exhibits and Reports on Form 8-K .................................. 15
SIGNATURES...................................................................... 16
</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>
JUNE 30, MARCH 31,
2002 2002
--------- ---------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents .................................................... $ 10,559 $ 4,147
Accounts receivable, net of allowance for doubtful accounts of
$4,413 and $4,038 at June 30, 2002 and March 31, 2002, respectively ...... 255,734 175,921
Inventories, net ............................................................. 161,802 115,377
Prepaid expenses and other current assets .................................... 23,273 13,259
--------- ---------
Total current assets .................................................. 451,368 308,704
--------- ---------
Property and equipment, at cost:
Furniture, fixtures and equipment ............................................ 48,023 38,176
Leasehold improvements ....................................................... 4,827 3,875
--------- ---------
52,850 42,051
Less accumulated depreciation and amortization ............................... (23,137) (21,245)
--------- ---------
Net property and equipment ............................................ 29,713 20,806
Investment in ISA .............................................................. -- 28,082
Other assets ................................................................... 10,321 1,928
Goodwill, net .................................................................. 82,487 54,870
--------- ---------
Total assets .......................................................... $ 573,889 $ 414,390
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ............................................ $ 63,756 $ 7,069
Trade accounts payable ....................................................... 144,641 84,718
Accrued expenses and other current liabilities ............................... 14,013 13,575
--------- ---------
Total current liabilities ............................................. 222,410 105,362
--------- ---------
Long-term debt, less current portion ........................................... 149,741 111,343
Other liabilities .............................................................. 2,446 1,665
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; 19,952,838 shares
issued at June 30, 2002 and 19,684,711 shares issued at March 31, 2002 ...... 200 197
Additional paid-in capital ................................................... 120,918 117,946
Retained earnings ............................................................ 105,510 103,268
Accumulated other comprehensive loss ......................................... (15,644) (13,699)
Treasury stock at cost, 1,773,905 at June 30, 2002 and March 31, 2002 ........ (11,692) (11,692)
--------- ---------
Total shareholders' equity ............................................ 199,292 196,020
--------- ---------
Total liabilities and shareholders' equity ............................ $ 573,889 $ 414,390
========= =========
</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
JUNE 30,
-------------------
2002 2001
-------- --------
Net revenues ........................................................ $402,496 $272,952
Cost of revenues .................................................... 363,807 241,504
-------- --------
Gross profit ................................................ 38,689 31,448
Selling, general and administrative expenses ........................ 29,974 21,394
Depreciation and amortization ....................................... 1,970 1,255
Restructuring and nonrecurring costs ................................ 2,153 4,425
-------- --------
Income from operations ...................................... 4,592 4,374
Interest expense, net ............................................... 2,928 1,554
-------- --------
Income from continuing operations before income taxes ....... 1,664 2,820
Provision for income taxes .......................................... 267 1,084
-------- --------
Income from continuing operations before equity in net income
of affiliate and minority interest ............................ 1,397 1,736
Equity in net income of affiliate and minority interest ............. 845 --
-------- --------
Income from continuing operations ........................... 2,242 1,736
Discontinued operations
Income from operations of discontinued subsidiary, net of tax -- 35
-------- --------
Net income .................................................. $ 2,242 $ 1,771
======== ========
Net income per common share:
Basic
Income from continuing operations ............................ $ 0.12 $ 0.12
Income from operations of discontinued subsidiary, net of tax -- --
-------- --------
Net income ................................................... $ 0.12 $ 0.12
======== ========
Diluted
Income from continuing operations ............................ $ 0.12 $ 0.11
Income from operations of discontinued subsidiary, net of tax -- --
-------- --------
Net income ................................................... $ 0.12 $ 0.11
======== ========
Weighted average common and common share equivalents outstanding:
Basic ........................................................ 17,990 14,729
Diluted ...................................................... 19,415 15,995
</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>
THREE MONTHS ENDED
JUNE 30,
--------------------
2002 2001
-------- --------
Net cash used in operating activities from continuing operations $(19,416) $(11,460)
Cash flows from investing activities:
Purchases of property and equipment ........................ (808) (1,588)
Acquisition of Memphis distribution assets ................. -- (10,700)
Acquisitions of businesses, net of cash acquired ........... (8,124) (14,256)
Increase in note receivable and other assets ............... (95) (4)
-------- --------
Net cash used in investing activities .......... (9,027) (26,548)
-------- --------
Cash flows from financing activities:
Proceeds from lines of credit, net ......................... 34,693 30,920
Net proceeds from exercise of stock options and issuance
of common stock .......................................... 954 7,370
-------- --------
Net cash provided by financing activities ...... 35,647 38,290
Effect of exchange rates on cash and cash equivalents .......... (792) 155
-------- --------
Net increase in cash and cash equivalents ...................... 6,412 437
Cash and cash equivalents, beginning of period ................. 4,147 1,971
-------- --------
Cash and cash equivalents, end of period ....................... $ 10,559 $ 2,408
======== ========
Net cash provided by operating activities from discontinued
operations .................................................. $ -- $ 4,271
Activities not affecting cash:
Property and equipment acquired under capital leases ......... $ 3,422 $ 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, 2002. 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. The income from
operations of discontinued subsidiary for the three months ended June 30, 2001
is presented net of a tax expense of approximately $20,000 and includes net
revenues of approximately $51.4 million.
NOTE 2 -- RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections, effective April 1, 2002. SFAS No.
145 rescinds SFAS No. 4 and SFAS No. 64 related to classification of gains and
losses on debt extinguishment such that most debt extinguishment gains and
losses will no longer be classified as extraordinary; amends SFAS No. 13 with
respect to sales-leaseback transactions; and amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The adoption of SFAS No.
145 did not have a material impact on the Company's reported results of
operations or financial position. Approximately $0.2 million of debt termination
costs that would have been classified as extraordinary under the provisions of
SFAS No. 4 are included in restructuring and nonrecurring costs for the quarter
ended June 30, 2002.
NOTE 3 -- ACQUISITION OF ISA
On May 23, 2002, the Company mailed a recommended offer to shareholders of
ISA International plc ("ISA"), a pan-European distributor of computer supplies,
which indirectly owns 47% of Kingfield Heath Ltd. ("Kingfield Heath"), a
U.K.-based wholesaler of office products. During the first quarter of fiscal
2003, Daisytek received acceptances from ISA shareholders totaling more than
90% of ISA ordinary shares and, on August 8, 2002, the Company exercised its
rights under U.K. law to pursue compulsory acquisition of the remainder of the
ISA ordinary shares. The Company expects to complete the acquisition of the
remainder of the ISA shares during August 2002.
During September 2001, Daisytek invested 8.0 million British pounds, or
approximately $11.4 million, in preference shares of ISA convertible into 50%
plus one share of ISA at Daisytek's option at any time over a period of five
years. The preference shares earned a quarterly variable rate cumulative
preferential dividend. ISA did not pay the preference dividend due to Daisytek
on April 1, 2002. Failure to pay a preference dividend for more than 14 days
after its due date constitutes an event of default under ISA's articles of
association, unless waived by Daisytek. Daisytek had agreed to waive the
outstanding payment, but this agreement to waive expired on May 6, 2002. As a
result of this event of default, as of May 7, 2002, Daisytek was entitled to
vote its preference shares on an as-converted basis (50% plus one share),
entitling Daisytek to majority voting control and allowing the Company to
appoint to the board of ISA a number of directors equivalent to 50%.
Accordingly, the Company began using consolidation accounting for the investment
in ISA effective May 7, 2002.
-6-
The aggregate purchase price of and investment in ISA is approximately
$38.2 million, including cash purchases of ISA shares of approximately $4.7
million, the issuance of approximately 140,000 unregistered Daisytek common
shares valued at approximately $1.9 million (based on the average Daisytek share
value upon mailing of the recommended offer) in exchange for ISA shares,
Daisytek's prior investment in ISA preference shares of approximately $11.4
million, funds previously advanced by Daisytek to ISA of approximately $16.7
million and transactions costs of $3.5 million. The acquisition of ISA provides
the Company with access to ISA's pan-European reach and local knowledge and
resulted in the recognition of approximately $26.4 million of goodwill.
The following table summarizes the estimated fair value of ISA's assets
acquired and liabilities assumed at the date of merger. This purchase price
allocation is preliminary pending completion of appraisals and other fair value
analysis of assets and liabilities.
<Table>
<Caption>
(in thousands)
Current assets........................................... $ 121,127
Property and equipment................................... 6,379
Deferred tax asset....................................... 8,624
Goodwill................................................. 26,392
Other assets............................................. 30
Current liabilities...................................... (71,229)
Long-term debt........................................... (53,151)
------------
Total net assets acquired.............................. $ 38,172
===========
</Table>
The results of operations for the three months ended June 30, 2002 include
the operations of ISA from May 7, 2002, based on the Company's ownership
percentages during this period. Unaudited pro forma consolidated results of
operations, assuming that the Company acquired 100% of ISA on April 1, 2001
follow:
<Table>
<Caption>
THREE MONTHS ENDED
JUNE 30,
-------------------------
2002 2001
----------- -----------
Net revenues .................................. $ 458,581 $ 389,997
Net income .................................... $ 2,205 $ 124
Net income per common share - Basic ........... $ 0.12 $ 0.01
Net income per common share - Diluted ......... $ 0.11 $ 0.01
</Table>
The pro forma information is not necessarily indicative of the actual
results that would have been achieved had the ISA acquisition occurred for the
periods presented, nor is it indicative of future results of operations.
NOTE 4 -- INVESTMENT
The Company indirectly owns a 47% investment in Kingfield Heath, a
U.K.-based wholesaler of office products. The Company is accounting for this
investment using the equity method. The investment was obtained as part of the
ISA acquisition. Therefore, the Company's 47% interest in the results of
operations of Kingfield Heath are included from May 7, 2002, based on the
Company's ownership percentages of ISA and Kingfield Heath during this period.
Summarized income statement financial information for Kingfield Heath follows
(in thousands):
<Table>
Net revenues ............................................. $43,347
Gross profit ............................................. 9,065
Net income ............................................... 2,028
</Table>
-7-
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. The following table sets forth comprehensive
income (in thousands):
<Table>
<Caption>
THREE MONTHS ENDED
JUNE 30,
------------------
2002 2001
------- -------
Net income ................................................................. $ 2,242 $ 1,771
Comprehensive income adjustments:
Foreign currency translation adjustment ............................... (1,437) 1,596
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
($273) and $43 for the three months ended June 30, 2002 and 2001,
respectively .......................................................... (508) 80
------- -------
Comprehensive income ....................................................... $ 297 $ 3,002
======= =======
</Table>
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
JUNE 30,
------------------
2002 2001
------- -------
NUMERATOR:
Income from continuing operations ............................. $ 2,242 $ 1,736
Income from operations of discontinued subsidiary, net of tax -- 35
------- -------
Net income .................................................. $ 2,242 $ 1,771
======= =======
DENOMINATOR:
Denominator for basic earnings per share -
Weighted average shares ..................................... 17,990 14,729
Effect of dilutive securities:
Stock options ............................................... 1,425 1,266
------- -------
Denominator for diluted earnings per share -
Adjusted weighted average shares ............................ 19,415 15,995
======= =======
Basic earnings per common share:
Income from continuing operations ........................... $ 0.12 $ 0.12
Income from operations of discontinued subsidiary, net of tax -- --
------- -------
Net income .................................................. $ 0.12 $ 0.12
======= =======
Diluted earnings per common share:
Income from continuing operations ........................... $ 0.12 $ 0.11
Income from operations of discontinued subsidiary, net of tax -- --
------- -------
Net income .................................................. $ 0.12 $ 0.11
======= =======
</Table>
Employees and former employees exercised stock options to acquire 102,298
shares for proceeds of approximately $1.0 million during the three months ended
June 30, 2002.
-8-
NOTE 7 -- DEBT
During April 2002, Daisytek signed a $200 million senior secured debt
facility expiring on April 24, 2005, which was amended and increased to $250
million during June 2002. This credit facility replaced the existing $150
million credit facility expiring on December 19, 2003. Availability under the
credit facility is subject to certain borrowing base limitations, including
eligible accounts receivable and inventory, as defined. Borrowings under the
credit facility accrue interest, at the Company's option, at the prime rate of
the lead bank plus an adjustment ranging from 0.0% to 0.75% or the LIBOR rate
plus an adjustment ranging from 2.0% to 2.75%, both of which are limited by a
maximum rate, as defined. The Company pays fees of 0.375% per annum on the
unused portion of the 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 tangible net worth, and restrictions on certain activities, including
loans and payments to related parties, payment of dividends, capital
expenditures, acquisitions, investments and asset sales.
During July 2002, the Company's Mexican subsidiary entered into a secured
revolving line of credit facility with a Mexican bank with maximum credit
availability of 90.0 million Mexican pesos, or approximately $9.0 million,
expiring during July 2005. Availability under the credit facility is subject to
certain borrowing base limitations, as defined. The facility accrues interest at
the Interbank Equilibrium Interest Rate in Mexico City plus 325 basis points.
NOTE 8 -- RESTRUCTURING AND NONRECURRING COSTS
Restructuring and nonrecurring costs consist of the following for the three
months ended June 30, 2002 and 2001 (in thousands):
<Table>
<Caption>
THREE MONTHS ENDED
JUNE 30,
-------------------
2002 2001
------- -------
Restructuring charges(a)............................ $ 1,998 $ --
Final PFSweb separation charges(b).................. -- 4,425
Other............................................... 155 --
------- -------
$ 2,153 $ 4,425
======= =======
</Table>
- ----------
(a) During the third quarter of fiscal year 2002, the Company commenced a
United States 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. The Company incurred pre-tax charges
of approximately $2.0 million during the quarter ended June 30, 2002,
including $1.0 million related to warehouse and distribution initiatives,
including the integration of office products at the Company's central
distribution center in Memphis; $0.2 million related to the termination of
employees; and $0.8 million related to other back-office improvements.
(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, Inc. ("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.
-9-
NOTE 9 -- INCOME TAXES
The provision for income taxes for the quarter ended June 30, 2002 was
affected by a recovery of approximately $0.3 million of previously paid state
income taxes. The income tax rate is expected to be approximately 36% for the
remainder of the fiscal year, down from the prior year due to the acquisition of
ISA.
NOTE 10 -- SEGMENT DATA
The Company currently operates in two reportable business segments - (1)
computer and office supplies and (2) professional tape products. Separate
financial data for each of the Company's operating segments, excluding
discontinued operations, is provided below (in thousands):
<Table>
<Caption>
THREE MONTHS ENDED
JUNE 30,
-------------------
2002 2001
-------- --------
Net revenues:
Computer and office supplies, excluding discontinued
operations ........................................ $386,290 $254,636
Professional tape products ......................... 16,206 18,316
-------- --------
Consolidated ....................................... $402,496 $272,952
======== ========
Operating contribution:
Computer and office supplies, excluding discontinued
operations ....................................... 5,771 7,917
Professional tape products ......................... 974 882
-------- --------
Consolidated ....................................... $ 6,745 $ 8,799
======== ========
</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 $2.2 million for the three months ended
June 30, 2002 and $4.4 million for the three months ended June 30, 2001 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.
-10-
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
Condensed Consolidated Financial Statements and related notes thereto appearing
elsewhere in this Quarterly Report on Form 10-Q. 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 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, Europe, Canada, Australia,
Mexico and South America.
RESULTS OF OPERATIONS
Acquisition of ISA
On May 23, 2002, we mailed a recommended offer to shareholders of
ISA International plc ("ISA"), a pan-European distributor of computer supplies,
which indirectly owns 47% of Kingfield Heath Ltd. ("Kingfield Heath"), a
U.K.-based wholesaler of office products. During the first quarter of fiscal
2003, we received acceptances from ISA shareholders totaling more than 90% of
ISA ordinary shares and, on August 8, 2002, we exercised our rights under U.K.
law to pursue compulsory acquisition of the remainder of the ISA ordinary
shares. We expect to complete the acquisition of the remainder of the ISA
shares on during August 2002. We began using consolidation accounting for our
investment in ISA effective May 7, 2002.
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001
Net Revenues. Net revenues for the quarter ended June 30, 2002
increased 47.5% to $402.5 million compared to $273.0 million for the prior year
quarter. Computer and office supplies net revenues increased 51.7% for the
quarter ended June 30, 2002 compared to the prior year, attributable to (1) the
acquisition of ISA; (2) growth in the emerging consumer channels such as
web-based resellers, drug and grocery stores, mass merchants and direct
marketers; (3) growth in the international computer supplies business; and (4)
the acquisitions of Digital Storage and General Stationery Supplies during
fiscal year 2002. Increases were primarily volume-related. Excluding ISA,
computer and office supplies revenues increased 19.2%. Within the computer and
office supplies segment, domestic operations increased approximately 25.4% and
international operations, in U.S. dollars and excluding ISA, increased
approximately 9.5% compared to the prior year quarter. Excluding revenue from
Argentina, which has been negatively impacted by a currency devaluation and
general economic slowdown, international operations, in U.S. dollars and
excluding ISA, increased approximately 19% compared to the prior year quarter.
The computer and office supplies revenue increase for the quarter ended
June 30, 2002 was partially offset by an 11.5% revenue decrease in our
professional tape products segment, due to increased competition, decreases in
volume and industry price decreases which continued to impact our revenues.
Gross Profit. Gross profit as a percentage of net revenues was 9.6% for
the quarter ended June 30, 2002 compared to 11.5% for the prior year. The
decline in gross margin percentage is attributable to (1) the acquisition during
the first quarter of fiscal 2002 of certain assets and liabilities of Digital
Storage, which typically operates at lower gross margins than the remainder of
our business; (2) the reduction in revenue in the professional tape products
segment, which typically operates at higher gross margin percentages; (3) our
restructuring activities; and (4) overall product mix. These factors were
partially offset by a higher gross margin for ISA.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") for the quarter ended June 30, 2002 was $30.0
million, or 7.4% of net revenues, compared to $21.4 million, or 7.8% of net
revenues, for the prior year. The decrease in SG&A as a percentage of revenues
is due to (1) improvements resulting from our restructuring activities; (2) the
acquisition of our Memphis distribution assets and termination of the
transaction services agreement with our former subsidiary PFSweb, Inc.
("PFSweb") in May 2001, which has allowed us to operate the facility rather than
pay an outsourcing service fee; and (3) the acquisition of Digital Storage
during the first quarter of fiscal 2002, which operates at lower SG&A
percentages than our other businesses. These factors were partially offset by a
higher SG&A margin for ISA.
-11-
Depreciation and Amortization. Depreciation and amortization for the
quarter ended June 30, 2002 was $2.0 million compared to $1.3 million for the
prior year quarter. The increase is due to the acquisition of ISA and to new
capital expenditures and business acquisitions since June 30, 2001.
Restructuring and Nonrecurring costs. During the quarter ended June 30,
2002, we recognized pre-tax charges of (1) $2.0 million related to restructuring
activities, including $1.0 million related to warehouse and distribution
initiatives (including the integration of office products at our central
distribution center in Memphis), $0.2 million related to the termination of
employees and $0.8 million related to other back-office improvements, and (2)
$0.2 million related to the write-off of unamortized debt acquisition costs.
During the quarter ended June 30, 2001, we recognized charges of $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.
Interest Expense, net. Interest expense increased to $2.9 million for
the quarter ended June 30, 2002 compared to $1.6 million for the prior year. The
increase in interest expense is primarily attributable to increases in our debt
levels due to: (1) the impact of the investment in and working capital advances
to ISA during fiscal year 2002 and the subsequent acquisition of ISA during
fiscal year 2003; (2) the acquisitions of Digital Storage and General Stationery
Supplies during fiscal year 2002; (3) the acquisition of our Memphis
distribution assets during May 2001; and (4) volume growth requiring higher
working capital. These increases in debt levels were partially offset by 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.
Income Taxes. Our effective income tax rate was 16.0% and 38.4% for the
three months ended June 30, 2002 and 2001, respectively. First quarter 2003
taxes were affected by a recovery of approximately $0.3 million of previously
paid state income taxes. The income tax rate is expected to be approximately 36%
for the remainder of the fiscal year, down from the prior year due to the effect
of the acquisition of ISA.
Equity in Net Income of Affiliate and Minority Interest. Equity in net
income of affiliate and minority interest was $0.8 million for the quarter ended
June 30, 2002. This includes equity method income of $1.0 million related to
ISA's investment in Kingfield Heath, offset by $0.2 million related to
operations of ISA owned by third parties during the quarter.
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 June 30, 2002 of 18,178,933.
<Table>
<Caption>
DILUTED SHARES
AVERAGE SHARE PRICE OUTSTANDING
--------------------------- -----------
$12.00........................ 19,195,265
$13.00........................ 19,333,327
$14.00........................ 19,475,425
$15.00........................ 19,605,783
$16.00........................ 19,723,768
$17.00........................ 19,827,883
$18.00........................ 19,920,429
</Table>
-12-
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities from continuing operations for the
three months ended June 30, 2002 was $19.4 million, compared with $11.5 million
for the same period in the prior year. Working capital, excluding the current
portion of long-term debt and cash balances, increased to $282.2 million at June
30, 2002 from $206.3 million at March 31, 2002, attributable primarily to our
acquisition of ISA, revenue growth and stocking at the two new regional
distribution centers in Bakersfield, California and Albany, New York. The
working capital requirements were funded primarily with proceeds from our credit
facilities.
Net cash used in investing activities during the three months ended June 30,
2002 was $9.0 million. Payments included cash paid for the acquisition of ISA,
which was funded with proceeds from our credit facilities. Capital expenditures
for the three months ended June 30, 2002 were $4.2 million, including $3.4
million acquired under a capital lease and $0.8 million funded with proceeds
from our credit facilities. Proceeds from the exercise of stock options and the
issuance of common shares were $1.0 million for the three months ended June 30,
2002, which were used to reduce outstanding balances under our credit
facilities.
Financing Activities
Domestic Credit Facility. During April 2002, Daisytek signed a $200 million
senior secured debt facility expiring on April 24, 2005, which was amended and
increased to $250 million during June 2002. This credit facility replaced the
existing $150 million credit facility expiring on December 19, 2003.
Availability under the credit facility is subject to certain borrowing base
limitations, including eligible accounts receivable and inventory, as defined.
Borrowings under the credit facility accrue interest, at our option, at the
prime rate of the lead bank plus an adjustment ranging from 0.0% to 0.75% or the
LIBOR rate plus an adjustment ranging from 2.0% to 2.75%, both of which are
limited by a maximum rate, as defined. We pay fees of 0.375% per annum on the
unused portion of the 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 tangible net worth, and restrictions on certain activities, including
loans and payments to related parties, payment of dividends, capital
expenditures, acquisitions, investments and asset sales. As of June 30, 2002,
the outstanding balance under this credit facility was $125.4 million and, based
on our borrowing base limit at June 30, 2002, $5.4 million was available for
future borrowings.
Foreign Credit Facilities. During March 2001, we entered into a revolving
credit facility with a Canadian bank with maximum credit availability of 40.0
million Canadian dollars, or approximately $26.4 million, expiring during March
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 75 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 75 basis points. As of June 30,
2002, the outstanding balance under the Canadian credit facility was 29.8
million Canadian dollars, or approximately $19.7 million. We had 10.2 million
Canadian dollars, or approximately $6.7 million, available for future
borrowings.
In December 2000, we 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 20.0 million Australian dollars, or approximately
$11.3 million, as amended. The Australian credit facility, as amended, expires
on January 1, 2003. The Australian credit facility accrues interest at the
Australian Bill Rate plus an adjustment ranging from 142.5 basis points to 212.5
basis points depending on our financial performance. As of June 30, 2002, the
outstanding balance under the Australian credit facility was 13.5 million
Australian dollars, or approximately $7.6 million. We had 6.5 million Australian
dollars, or approximately $3.7 million, available for future borrowings.
Upon acquisition of ISA, we assumed debt of 36.5 million British pounds, or
approximately $53.2 million. ISA debt balances in the U.K. at June 30, 2002
include revolving credit facilities of 19.8 million British pounds, or
approximately $30.3 million. ISA also has revolving credit facilities with
various European banks of 15.5 million British pounds, or approximately $23.7
million, and a term loan with a bank in Norway for 0.4 million British pounds,
or approximately $0.6 million. At June 30, 2002, ISA had 5.2 million British
pounds, or approximately $7.9 million, available for future borrowings under its
current financing arrangements. We are planning to refinance ISA's revolving
credit facilities in the UK, Norway and Sweden with three-year secured credit
facilities.
-13-
During July 2002, our Mexican subsidiary entered into a secured revolving
line of credit facility with a Mexican bank with maximum credit availability of
90.0 million Mexican pesos, or approximately $9.0 million, expiring during July
2005. Availability under the credit facility is subject to certain borrowing
base limitations, as defined. The facility accrues interest at the Interbank
Equilibrium Interest Rate in Mexico City plus 325 basis points.
Contractual Obligations and Guarantees. Obligations under long-term debt,
capital leases and non-cancelable operating leases at June 30, 2002 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 ............... $207.3 $ 61.8 $145.3 $ 0.2 $ --
Capital lease obligations .... 6.2 2.0 2.1 1.0 1.1
Operating leases ............. 44.5 10.2 15.2 9.3 9.8
------ ------ ------ ------ ------
Total ........................ $258.0 $ 74.0 $162.6 $ 10.5 $ 10.9
</Table>
In connection with the initial public offering of PFSweb, we have guaranteed
or subleased to PFSweb certain operating lease obligations. Total minimum
payments for these agreements are $20.6 million, including $5.7 million due in
less than one year, $8.1 million due in one to three years, $5.1 million due in
four to five years and $1.7 million due after five years. We do not expect to
make payments under these guarantees or sublease agreements; 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.
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, 2002.
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
We have experienced no material changes in interest rate risk or foreign
exchange risk during the three months ended June 30, 2002. Our market risk is
described in more detail in our Annual Report on Form 10-K for the year ended
March 31, 2002. During the three months ended June 30, 2002, 46.8% of our
revenues were derived from customers located outside the United States.
-14-
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.
10.1* Current Account Credit Opening Agreement Formalized by Scotiabank
Inverlat, Sociedad Anonima, a Multiple Banking Institution, Grupo
Financiero Scotiabank Inverlat and Daisytek de Mexico.
10.2* Promissory Note dated May 6, 2002, made by James R. Powell in
favor of Daisytek, Incorporated.
* Filed herewith.
(b) Reports on Form 8-K.
Current Report on Form 8-K (Items 5 and 7), dated and filed on April 16,
2002, to announce that Daisytek was in ongoing discussions with ISA regarding a
potential tender offer for shares of ISA.
Current Report on Form 8-K (Items 5 and 7), dated April 25, 2002 and filed
on April 26, 2002, to announce that Daisytek had signed a $200 million senior
secured debt facility with Bank of America, N.A.
Current Report on Form 8-K (Items 5 and 7), dated and filed on May 7, 2002,
regarding earnings for the quarter ended March 31, 2002.
Current Report on Form 8-K (Items 2 and 7), dated May 7, 2002 and filed on
May 22, 2002, to report that Daisytek would be consolidating the results of
operations of ISA effective May 7, 2002.
Current Report on Form 8-K (Items 5 and 7), dated May 24, 2002 and filed on
May 31, 2002, to announce that Daisytek had mailed a recommended offer to ISA
shareholders on May 23, 2002
Current Report on Form 8-K (Items 5 and 7), dated June 14, 2002 and filed on
June 19, 2002, to announce that Daisytek had received acceptances from
shareholders or acquired shares in open-market purchases representing 85.3% of
the ordinary share capital of ISA and that all conditions to the offer for all
of the ordinary shares of ISA had either been satisfied or waived and to
announce that three Daisytek executives had been appointed as directors of ISA.
Current Report on Form 8-K (Items 5 and 7), dated June 24, 2002 and filed on
June 25, 2002, to provide initial guidance on future earnings following the
successful takeover of ISA and to announce that Daisytek had closed syndication
of its $200 million senior secured credit facility and increased the size of the
facility to $250 million.
-15-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 2002
DAISYTEK INTERNATIONAL CORPORATION
By: /s/ Ralph Mitchell
---------------------------------------
Ralph Mitchell
Chief Financial Officer,
Chief Accounting Officer,
Executive Vice President -- Finance
-16-
EXHIBIT INDEX
<Table>
<Caption>
Exhibit
No. Description
- ------ -----------
10.1* Current Account Credit Opening Agreement Formalized by Scotiabank
Inverlat, Sociedad Anonima, a Multiple Banking Institution, Grupo
Financiero Scotiabank Inverlat and Daisytek de Mexico.
10.2* Promissory Note dated May 6, 2002, made by James R. Powell in favor
of Daisytek, Incorporated.
</Table>
* Filed herewith.