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, 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 February 11, 2003 there were 18,551,286 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 .................................................... 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................... 23
Item 4. Controls and Procedures.......................................................... 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................ 23
Item 6. Exhibits and Reports on Form 8-K ................................................ 24
SIGNATURES ............................................................................. 25
CERTIFICATIONS ............................................................................. 25
</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,
2002 2002
--------- ---------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ....................................................... $ 11,738 $ 4,147
Accounts receivable, net of allowance for doubtful accounts of
$5,845 and $4,038 at December 31, 2002 and March 31, 2002, respectively ..... 241,617 175,921
Inventories, net ................................................................ 190,698 115,377
Prepaid expenses and other current assets ....................................... 36,440 13,259
--------- ---------
Total current assets ..................................................... 480,493 308,704
--------- ---------
Property and equipment, at cost:
Furniture, fixtures and equipment ............................................... 62,463 38,176
Leasehold improvements .......................................................... 5,407 3,875
--------- ---------
67,870 42,051
Less accumulated depreciation and amortization .................................. (26,772) (21,245)
--------- ---------
Net property and equipment ............................................... 41,098 20,806
Investment in ISA ................................................................. -- 28,082
Other assets ...................................................................... 15,605 1,928
Goodwill and other intangible assets, net ......................................... 73,078 54,870
--------- ---------
Total assets ............................................................. $ 610,274 $ 414,390
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ............................................... $ 26,225 $ 7,069
Trade accounts payable .......................................................... 191,223 84,718
Accrued expenses and other current liabilities .................................. 16,801 13,575
--------- ---------
Total current liabilities ................................................ 234,249 105,362
--------- ---------
Long-term debt, less current portion .............................................. 198,571 111,343
Other liabilities ................................................................. -- 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; 50,000,000 shares authorized and 20,315,439 shares
issued at December 31, 2002; and 30,000,000 shares authorized and 19,684,711
shares issued at March 31, 2002 ................................................ 203 197
Additional paid-in capital ...................................................... 123,676 117,946
Retained earnings ............................................................... 79,115 103,268
Accumulated other comprehensive loss ............................................ (13,848) (13,699)
Treasury stock at cost, 1,773,905 at December 31, 2002 and March 31, 2002 ....... (11,692) (11,692)
--------- ---------
Total shareholders' equity ............................................... 177,454 196,020
--------- ---------
Total liabilities and shareholders' equity ............................... $ 610,274 $ 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 NINE MONTHS ENDED
DECEMBER 31, DECEMBER,
------------- ----------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net revenues .................................................... $ 478,617 $ 309,338 $ 1,334,020 $ 861,059
Cost of revenues ................................................ 429,525 278,400 1,215,865 769,052
----------- ----------- ----------- -----------
Gross profit .............................................. 49,092 30,938 118,155 92,007
Selling, general and administrative expenses .................... 39,365 20,639 111,341 63,666
Goodwill impairment charges ..................................... -- -- 13,864 --
Depreciation and amortization ................................... 2,090 1,537 6,176 3,901
Restructuring and nonrecurring costs ............................ 2,701 2,044 7,754 6,469
----------- ----------- ----------- -----------
Income (loss) from operations ............................. 4,936 6,718 (20,980) 17,971
Interest expense, net ........................................... 4,401 1,850 11,397 5,190
----------- ----------- ----------- -----------
Income (loss) from continuing operations before
income taxes .............................................. 535 4,868 (32,377) 12,781
Provision (benefit) for income taxes ............................ 188 1,752 (7,004) 4,720
----------- ----------- ----------- -----------
Income (loss) from continuing operations before
equity in net income of affiliate and minority
interest .................................................. 347 3,116 (25,373) 8,061
Equity in net income (loss) of affiliate and minority
interest .................................................. 600 -- 1,220 --
----------- ----------- ----------- -----------
Income (loss) from continuing operations .................. 947 3,116 (24,153) 8,061
Discontinued operations
Loss from operations of discontinued subsidiary,
net of tax ............................................... -- -- -- (1,085)
----------- ----------- ----------- -----------
Net income (loss) ......................................... $ 947 $ 3,116 $ (24,153) $ 6,976
=========== =========== =========== ===========
Net income (loss) per common share:
Basic
Income (loss) from continuing operations .................. $ 0.05 $ 0.20 $ (1.32) $ 0.52
Loss from operations of discontinued subsidiary,
net of tax ............................................... -- -- -- (0.07)
----------- ----------- ----------- -----------
Net income (loss) ......................................... $ 0.05 $ 0.20 $ (1.32) $ 0.45
=========== =========== =========== ===========
Diluted
Income (loss) from continuing operations .................. $ 0.05 $ 0.18 $ (1.32) $ 0.48
Loss from operations of discontinued subsidiary,
net of tax ............................................... -- -- -- (0.07)
----------- ----------- ----------- -----------
Net income (loss) ......................................... $ 0.05 $ 0.18 $ (1.32) $ 0.41
=========== =========== =========== ===========
Weighted average common and common share equivalents outstanding:
Basic ..................................................... 18,497 15,899 18,282 15,378
Diluted ................................................... 18,978 17,315 18,282 16,811
</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,
--------------------
2002 2001
-------- --------
Net cash provided by (used in) operating activities from continuing
operations ..................................................... $(13,382) $ 11,562
Cash flows from investing activities:
Purchases of property and equipment ........................... (7,273) (9,158)
Proceeds from the sale and leaseback of equipment ............. -- 8,000
Payment for acquisition of and investment in ISA, net of cash
acquired ..................................................... (7,793) (18,553)
Other acquisitions of businesses, net of cash acquired ........ (2,119) (16,249)
Acquisition of Memphis distribution assets .................... -- (10,700)
Disposition of subsidiary ..................................... -- 923
Increase in note receivable and other assets .................. (69) (525)
-------- --------
Net cash used in investing activities ............. (17,254) (46,262)
-------- --------
Cash flows from financing activities:
Proceeds from lines of credit, net ............................ 31,578 8,095
Net proceeds from private placement of common stock ........... -- 16,430
Net proceeds from exercise of stock options and issuance
of common stock ............................................. 3,836 13,338
Other ......................................................... -- (334)
-------- --------
Net cash provided by financing activities ......... 35,414 37,529
Effect of exchange rates on cash and cash equivalents ............. 2,813 528
-------- --------
Net increase in cash and cash equivalents ......................... 7,591 3,357
Cash and cash equivalents, beginning of period .................... 4,147 1,971
-------- --------
Cash and cash equivalents, end of period .......................... $ 11,738 $ 5,328
======== ========
Net cash used in operating activities from discontinued operations $ -- $ (685)
Activities not affecting cash:
Property and equipment acquired under capital leases ............ $ 12,445 $ 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 a normal recurring nature) 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.
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 nine
months ended December 31, 2002.
The Company will adopt Emerging Issues Task Force ("EITF") Issue No. 02-16,
Accounting by a Customer (Including a Reseller) for Cash Consideration Received
from a Vendor, effective January 1, 2003. The EITF consensus standardizes the
accounting treatment and classification of monies received from vendors and
generally requires, unless certain criteria are met, that such cash
consideration be treated as a reduction of the cost of inventory acquired from
the vendor. The EITF also concluded that rebates or refunds that are earned
based upon a specified level of purchases, or continued purchases over a
specified period of time, should be accrued if it is probable they will be
earned and can be estimated. Because Daisytek receives a significant amount of
vendor consideration in the form of rebates, cooperative advertising and
marketing development funds, the effect on the Company's financial statements
could be material. Management is in the process of evaluating the effect of this
new standard on the Company's financial statements.
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others. The
Interpretation requires certain guarantees to be recorded at fair value and also
requires a guarantor to make certain disclosures regarding guarantees. The
Interpretation's initial recognition and initial measurement provisions are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements are effective this quarter (see
Note 13). Management does not expect that the adoption of this Interpretation
will have a material impact on the Company's consolidated financial statements
or disclosures.
-6-
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. SFAS No. 148 gives entities that elect
to adopt the fair market value method of accounting for stock options granted to
employees provided for in SFAS No. 123, Accounting for Stock-Based Compensation,
three alternative transitional accounting methods. SFAS No. 148 also provides
that certain pro forma and other information regarding stock options which is
currently required only in an entity's annual financial statements will now be
required in interim reports as well. SFAS No. 148 is effective for fiscal years
ending after December 15, 2002 and for interim periods beginning after December
15, 2002. Management is in the process of evaluating the implications of this
new standard on the Company's consolidated financial statements.
NOTE 3 - ACQUISITION OF ISA
During September 2001, Daisytek invested 8.0 million British pounds, or
approximately $11.4 million, in preference shares 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. The preference shares were 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 constituted 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.
On May 23, 2002, the Company mailed a recommended offer to shareholders of
ISA. During the first quarter of fiscal 2003, Daisytek received acceptances from
ISA shareholders totaling more than 90% of ISA ordinary shares. During August
2002, the Company exercised its rights under U.K. law to pursue compulsory
acquisition and completed the acquisition of the remainder of the ISA ordinary
shares.
The aggregate purchase price of and investment in ISA is approximately
$37.8 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 $3.1 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 $27.0 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 final completion of appraisals and other fair
value analysis of assets and liabilities.
<Table>
<Caption>
(in thousands)
Current assets......................................... $ 120,412
Property and equipment................................. 6,379
Deferred tax asset..................................... 8,805
Goodwill............................................... 26,987
Other assets........................................... 30
Current liabilities.................................... (71,622)
Long-term debt......................................... (53,151)
-----------
Total net assets acquired............................ $ 37,840
===========
</Table>
-7-
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The results of operations for the three months and nine months ended
December 31, 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 NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------------- -----------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net revenues ............................ $ 478,617 $ 445,876 $ 1,390,105 $ 1,234,886
Net income (loss) ....................... $ 947 $ 2,560 $ (24,190) $ 2,596
Net income (loss) per common share -
Basic ............................... $ 0.05 $ 0.16 $ (1.32) $ 0.17
Net income (loss) per common share -
Diluted ............................. $ 0.05 $ 0.15 $ (1.32) $ 0.15
</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 - GOODWILL AND OTHER INTANGIBLE ASSETS
The Company's purchase agreement for the acquisition of Digital Storage, LLC
("Digital Storage"), completed during the first quarter of fiscal year 2002,
provided for an adjustment to the purchase price based on certain performance
criteria for each of the two years following the acquisition. Based on Digital
Storage's performance during the first year following the acquisition, the
Company has increased the original purchase price and goodwill by approximately
$2.1 million.
Goodwill and Other Intangible Assets includes a non-compete covenant
acquired during the quarter ending December 31, 2002. The fair value of the
non-compete covenant is approximately $0.4 million and will be amortized using
the straight-line method over the one-year life of the asset.
During the quarter ended September 30, 2002, the Company recognized total
goodwill impairment charges of approximately $13.8 million. No tax benefit was
recognized. The total charge related to impairment of goodwill at the
professional tape products unit was $12.0 million, representing approximately
half of the total goodwill balance at this unit. The Company performed the
two-step impairment test required by SFAS No. 142, Goodwill and Other Intangible
Assets, on its professional tape products unit due to persisting negative
business and industry trends, including industry wide price degradation, which
resulted in worse than expected performance and lower earnings forecasts during
the second quarter. The total charge related to the impairment of goodwill at
the Argentinean computer and office supplies unit was $1.8 million, representing
the entire goodwill balance of this unit. The Company performed the SFAS No. 142
impairment test on its Argentinean computer and office supplies unit due to
economic and political issues in Argentina, which significantly reduced the
Company's operations there during the second quarter and resulted in reduced
earnings forecasts. Fair values for both the professional tape products and
Argentinean computer and office supplies units were determined using discounted
fair value of expected future cash flows.
-8-
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - 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>
<Caption>
THREE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
2002 2002
------------ ------------
Net revenues ................................... $ 80,073 $ 205,125
Gross profit ................................... 18,665 45,547
Net income ..................................... 1,276 2,825
</Table>
NOTE 6 - 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 NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- ----------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net income (loss) ........................... $ 947 $ 3,116 $(24,153) $ 6,976
Comprehensive income adjustments:
Foreign currency translation
adjustment ........................... 2,544 (3,142) 326 (3,073)
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
$(102) and $81 for the three months
ended December 31, 2002 and 2001,
respectively, and $256 and $512 for
the nine months ended December 31,
2002 and 2001, respectively .......... 189 151 (475) (951)
-------- -------- -------- --------
Comprehensive income (loss) ................. $ 3,680 $ 125 $(24,302) $ 2,507
======== ======== ======== ========
</Table>
-9-
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - 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,
----------------------- ------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
NUMERATOR:
Income (loss) from continuing operations ........ $ 947 $ 3,116 $ (24,153) $ 8,061
Loss from operations of discontinued
subsidiary, net of tax ....................... -- -- -- (1,085)
---------- ---------- ---------- ----------
Net income (loss) ............................. $ 947 $ 3,116 $ (24,153) $ 6,976
========== ========== ========== ==========
DENOMINATOR:
Denominator for basic earnings per share -
Weighted average shares ....................... 18,497 15,899 18,282 15,378
Effect of dilutive securities:
Stock options ................................. 481 1,416 -- 1,433
---------- ---------- ---------- ----------
Denominator for diluted earnings per share -
Adjusted weighted average shares .............. 18,978 17,315 18,282 16,811
========== ========== ========== ==========
Basic earnings per common share:
Income (loss) from continuing operations ...... $ 0.05 $ 0.20 $ (1.32) $ 0.52
Loss from operations of discontinued
subsidiary, net of tax ....................... -- -- -- (0.07)
---------- ---------- ---------- ----------
Net income (loss) ............................. $ 0.05 $ 0.20 $ (1.32) $ 0.45
========== ========== ========== ==========
Diluted earnings per common share:
Income (loss) from continuing operations ...... $ 0.05 $ 0.18 $ (1.32) $ 0.48
Loss from operations of discontinued
subsidiary, net of tax ....................... -- -- -- (0.07)
---------- ---------- ---------- ----------
Net income (loss) ............................. $ 0.05 $ 0.18 $ (1.32) $ 0.41
========== ========== ========== ==========
</Table>
Employees and former employees exercised stock options to acquire 51,022
shares for proceeds of approximately $0.6 million during the three months ended
December 31, 2002 and 421,315 shares for proceeds of approximately $3.5 million
during the nine months ended December 31, 2002.
NOTE 8 - DEBT
UNITED STATES CREDIT FACILITY
During April 2002, Daisytek signed a $200 million senior secured debt
facility expiring on April 24, 2005, which was amended, syndicated 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.
-10-
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During November 2002, the Company amended certain terms of its domestic
credit facility and received a waiver of compliance for its fixed charge ratio
and tangible net worth covenants for the quarter ended September 30, 2002. As
amended, borrowings under the domestic credit facility through September 30,
2003 accrue interest, at the Company's option, at the prime rate of the lead
bank plus an adjustment of 1.0% or the LIBOR rate plus an adjustment of 3.0%.
Subsequent to September 30, 2003, 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.
Daisytek also amended various covenants, including a revision of the
calculation of minimum fixed charge ratios and tangible net worth requirements.
A new covenant was added which requires the Company to use its best efforts to
raise additional capital having net proceeds of not less than $20 million by
March 31, 2003 and to raise such additional capital, in any event, on or before
September 30, 2003. Provided, however, in certain circumstances such as if the
average availability under the facility for any trailing 30-day period first
calculated on February 14, 2003 is less than $15 million, then $20 million (net)
of additional capital must be raised within 90 days of such event.
Upon the first calculation on February 14, 2003, the Company's trailing
30-day average availability under this facility is less than $15 million.
Therefore, in addition to the requirement that the Company will use its best
efforts to raise the additional capital by March 31, 2003, the Company will be
required, in any event, to raise such capital within 90 days of February 14,
2003 (by May 15, 2003). The Company anticipates being able to raise the
additional capital by the required deadline.
INTERNATIONAL CREDIT FACILITIES
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 $8.6 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.
During February 2003, ISA signed a 33.5 million British pounds
(approximately $53.9 million) secured debt facility with an initial period
expiring during February 2006. This facility replaced existing facilities of
approximately 22.8 million British pounds (approximately $36.7 million) which
were payable on demand. 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 LIBOR rate plus an adjustment ranging from 1.35% to 2.35%. The credit
facility contains various covenants including, among other things, the
maintenance of certain financial ratios including the achievement of a minimum
interest cover ratio and minimum level of tangible net worth as well as
maintaining accounts receivable and accounts payable days outstanding below
defined maximum levels, and restrictions on certain activities, including loans
and payments to related parties, payment of dividends and asset sales.
In November 2002, Daisytek Australia Pty. Ltd. signed a 35 million
Australian dollar (approximately $19.6 million) revolving credit facility,
expiring on November 18, 2005. This credit facility replaced the existing 20
million Australian dollar (approximately $11.2 million) unsecured credit
facility. Availability under the credit facility is subject to certain borrowing
base limitations, including eligible accounts receivable and inventory, as
defined. Borrowing under the credit facility accrues interest at the index rate
plus 2.7%. Fees are 0.5% 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, a minimum level of tangible net worth, restriction
on certain activities, loans, payments to related parties, capital expenditures,
acquisitions, investments, assets sales and sale-leaseback transactions.
-11-
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - RESTRUCTURING AND NONRECURRING COSTS
Restructuring and nonrecurring costs consist of the following for the three
months and nine months ended December 31, 2002 and 2001 (in thousands):
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------ -----------------
2002 2001 2002 2001
------ ------ ------ ------
Restructuring charges (a) .............. $2,701 $2,044 $7,599 $2,044
Final PFSweb separation charges (b) .... -- -- -- 4,425
Other .................................. -- -- 155 --
------ ------ ------ ------
$2,701 $2,044 $7,754 $6,469
====== ====== ====== ======
</Table>
(a) During the third quarter of fiscal year 2002, the Company commenced a United
States restructuring plan that includes (1) information technology
enhancements; (2) distribution improvements and consolidation of subsidiary
warehouses into new regional hub facilities in order to leverage
distribution costs; and (3) centralization of certain back-office resources.
During the three months ended December 31, 2002, the Company incurred
pre-tax charges of approximately $2.7 million, including $2.5 million
related to warehouse and distribution initiatives (including costs
associated with the opening and testing of the new distribution facilities
in Bakersfield, California, and Albany, New York, and the integration of
office products at the Company's central distribution center in Memphis) and
$0.2 million related to other back-office improvements. During the nine
months ended December 31, 2002, the Company incurred pre-tax charges of
approximately $7.6 million, including $5.9 million related to warehouse and
distribution initiatives; $0.4 million related to the termination of
employees; and $1.3 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.
NOTE 10 - INCOME TAXES
The provision for income taxes for the quarter ended September 30, 2002 was
affected by goodwill impairment charges of $13.8 million, which were not tax
deductible in the same period as this charge. 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 35% for the remainder of the fiscal year, down from the
prior year due to the acquisition of ISA.
-12-
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - 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 NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net revenues:
Computer and office supplies, excluding
discontinued operations ................... $ 463,067 $ 291,984 $ 1,286,008 $ 807,195
Professional tape products ................. 15,550 17,354 48,012 53,864
------------ ------------ ------------ ------------
Consolidated ............................... $ 478,617 $ 309,338 $ 1,334,020 $ 861,059
============ ============ ============ ============
Operating contribution:
Computer and office supplies, excluding
discontinued operations .................. 6,804 8,776 (2,498) 21,967
Professional tape products ............... 833 886 (10,728) 3,373
------------ ------------ ------------ ------------
Consolidated ............................. $ 7,637 $ 9,662 $ (13,226) $ 25,340
============ ============ ============ ============
</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 $2.7 million and $2.9 million for the
three months ended December 31, 2002 and 2001 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. Restructuring and nonrecurring costs of $7.8 million and $7.4
million for the nine months ended December 31, 2002 and 2001, 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.
NOTE 12 - RESERVE ESTIMATES AND ADJUSTMENTS
During the second quarter of fiscal year 2003, the Company recorded
increases in reserve estimates and other adjustments totaling $20.2 million
($12.9 million after tax). These charges are summarized below (in millions):
<Table>
<Caption>
Pre-Tax Post-Tax
Charge Charge
------ --------
Items affecting gross profit:
Costs related to U.S. business, including the office products initiative,
distribution center and logistics costs and vendor programs (office products
and computer supplies) .......................................................... $ 10.6 $ 6.8
Costs related to The Tape Company ................................................. 1.2 0.7
Costs related to Latin American operations ........................................ 3.7 2.4
Other ............................................................................. 0.5 0.3
------ ------
$ 16.0 $ 10.2
Items affecting selling, general and administrative expenses:
Costs related to The Tape Company ................................................. 0.2 $ 0.2
Costs related to Latin American operations ........................................ 1.5 0.9
Professional costs, acquisition costs and other ................................... 2.5 1.6
------ ------
$ 4.2 $ 2.7
Total .............................................................................. $ 20.2 $ 12.9
====== ======
</Table>
-13-
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Daisytek's professional tape products unit continues to experience negative
industry trends. Recent price changes have diminished management's long-term
outlook for this industry. In light of the industry-wide issues and current
management forecasts, the Company recorded increases in reserve estimates for
customer and vendor accounts receivable, inventory and other assets totaling
approximately $1.4 million ($0.9 million after tax). The professional tape
products unit represented approximately 3% of the Company's total third quarter
revenues.
The Argentinean computer and office supplies unit was further impacted by
countrywide economic and political issues. Argentina currently represents less
than 1% of total revenues. In addition to Argentina, other Latin American export
markets are experiencing economic uncertainty at present. The Company conducted
a review of major asset accounts such as customer and vendor accounts
receivable, inventory and other assets related to all of the Latin American
businesses, including Argentina, Mexico and the U.S.-based export business. In
light of operating decisions related to the amount and type of business the
Company conducts in Latin America and due to this review of the net realizable
value of assets, reserve estimates were increased by approximately $5.2 million
($3.3 million after tax). The Company's Mexican operations are performing in
line with expectations, however the Company is currently reviewing all levels of
business into its export markets.
Costs related to the U.S. business, including Daisytek's expansion into
office products and the distribution center reorganization impacted the
Company's performance for the quarters ended September 30, 2002 and December 31,
2002. During the second quarter, the Company made three decisions that
negatively impacted short-term earnings but that were believed to be important
for the long-term success of the overall business. (1) Management decided to
reset the Memphis Superhub to the new management warehouse system over a longer
time period, in order to maintain the highest-possible customer service and
minimize risks. (2) The Company gave away the new full-line computer and office
supplies catalogs to many customers, instead of selling them, in order to get
the catalog in as many hands as possible, as quickly as possible, to accelerate
revenue growth. (3) The Company reduced its short-term cooperative marketing
efforts with office products and computer supplies vendors to ensure promotion
of long-term channel development. As a result of these decisions and a review of
asset net realizable values, the Company increased certain reserve estimates for
balance sheet items including customer and vendor accounts receivable, deferred
costs, inventory and other by $10.6 million ($6.8 million after tax).
NOTE 13- GUARANTEES
In connection with the initial public offering of PFSweb, the Company has
guaranteed or subleased to PFSweb certain operating lease obligations. Total
minimum payments for these agreements are $17.2 million, including $5.6 million
due in less than one year, $6.5 million due in one to three years, $4.2 million
due in four to five years and $0.9 million due after five years. The Company
does not expect to make payments under these guarantees or sublease agreements.
If performance were required, the Company would seek to mitigate our exposure
with lease terminations and/or subleases, although no assurance can be provided
that the Company would be successful in mitigation. The Company's financial
statements do not include any liability for these guarantees.
NOTE 14 -- RELATED PARTY TRANSACTIONS AND RELATIONSHIPS
In the past, the Company has made available one-year and three-year loans to
its executive officers and non-employee directors. The one-year loans accrue
interest at the Company's effective borrowing rate (6.47% at December 31, 2002
and 3.8% at March 31, 2002) and the three-year loans accrue interest at the
prime rate plus one percent. Loan amounts classified as short-term under these
contracts are included in other current assets on the Company's consolidated
balance sheets and totaled $1.9 million at December 31, 2002 and $0.2 million at
March 31, 2002. Loan amounts classified as long-term under these contracts are
included in other assets on the Company's consolidated balance sheets and
totaled $0.2 million at December 31, 2002 and $1.0 million at March 31, 2002.
James R. Powell, the Company's President and Chief Executive Officer, had
outstanding loans totaling $0.8 million at December 31, 2002. Of this amount,
$0.2 million, plus interest, is past due and in default. The Board of Directors
and Audit Committee has demanded payment from Mr. Powell and believes that it
will receive payment. In the event the payment is not received, the Board of
Directors will pursue appropriate action.
-14-
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
Recent Accounting Pronouncements
We 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 our 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 nine months ended
December 31, 2002.
We will adopt Emerging Issues Task Force ("EITF") Issue No. 02-16, Accounting
by a Customer (Including a Reseller) for Cash Consideration Received from a
Vendor, effective January 1, 2003. The EITF consensus standardizes the
accounting treatment and classification of monies received from vendors and
generally requires, unless certain criteria are met, that such cash
consideration be treated as a reduction of the cost of inventory acquired from
the vendor. The EITF also concluded that rebates or refunds that are earned
based upon a specified level of purchases, or continued purchases over a
specified period of time, should be accrued if it is probable they will be
earned and can be estimated. Because Daisytek receives a significant amount of
vendor consideration in the form of rebates, cooperative advertising and
marketing development funds, the effect on our financial statements could be
material. We are in the process of evaluating the effect of this new standard on
our financial statements.
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others. The
Interpretation requires certain guarantees to be recorded at fair value and also
requires a guarantor to make certain disclosures regarding guarantees. The
Interpretation's initial recognition and initial measurement provisions are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements are effective this quarter (see
Note 13). We do not expect that the adoption of this Interpretation will have a
material impact on our consolidated financial statements or disclosures.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. SFAS No. 148 gives entities that elect
to adopt the fair market value method of accounting for stock options granted to
employees provided for in SFAS No. 123, Accounting for Stock-Based Compensation,
three alternative transitional accounting methods. SFAS No. 148 also provides
that certain pro forma and other information regarding stock options which is
currently required only in an entity's annual financial statements will now be
required in interim reports as well. SFAS No. 148 is effective for fiscal years
ending after December 15, 2002 and for interim periods beginning after December
15, 2002. We are in the process of evaluating the implications of this new
standard on our consolidated financial statements.
-15-
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. During August 2002, we exercised our rights under U.K. law
to pursue compulsory acquisition and completed the acquisition of the remainder
of the ISA ordinary shares. We began using consolidation accounting for our
investment in ISA and equity method accounting for the 47% investment in
Kingfield Heath effective May 7, 2002.
Three Months Ended December 31, 2002 Compared to Three Months Ended
December 31, 2001
Net Revenues. Net revenues for the quarter ended December 31, 2002
increased 54.7% to $478.6 million compared to $309.3 million for the prior year
quarter. Computer and office supplies net revenues increased 58.6% for the
quarter ended December 31, 2002 compared to the prior year. The increase in
revenue over the prior year is attributable to (1) the acquisition of ISA; (2)
growth in sales of computer media, accessories and supplies at the Digital
Storage division; and (3) growth in sales of copier and fax supplies at the
Arlington division. Increases at Digital Storage and Arlington were primarily
volume-related. Excluding ISA, computer and office supplies net revenues
increased 2.5%. Within the computer and office supplies segment, domestic
operations increased approximately 5.5% and international operations, in U.S.
dollars and excluding ISA, decreased approximately 2.5% 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 1.6%
compared to the prior year quarter.
The computer and office supplies revenue increase for the quarter ended
December 31, 2002 was partially offset by a 10.4% revenue decrease in our
professional tape products segment, due to increased competition, decreases in
volume and industry price decreases.
Gross Profit. Gross profit as a percentage of net revenues was 10.3%
for the quarter ended December 31, 2002 compared to 10.0% for the prior year.
Gross profit was favorably impacted by the acquisition of ISA in Europe, which
typically operates at higher margin percentages than our traditional US computer
supplies business. This higher European margin results from operation of a
"hybrid" distributor model that includes both direct and indirect sales
channels, which is not generally supported in the U.S. market. This favorable
impact was partially offset by comparatively lower vendor program money
recognized during the quarter and a reduction in revenue at the Tape Company,
which typically operates at higher gross margins. Our adoption on January 1,
2003 of EITF Issue No. 02-16 (see "Recent Accounting Pronouncements") could
negatively affect our gross profit in the fourth fiscal quarter.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") for the quarter ended December 31, 2002 was
$39.4 million, or 8.2% of net revenues, compared to $20.6 million, or 6.7% of
net revenues, for the prior year. The increase in SG&A (both in dollars and as a
percentage of sales) is primarily due to the acquisition of ISA which operates
with higher SG&A percentages. SG&A also increased compared to the prior year due
to investments we have made to build an infrastructure to support the launch of
our expansion into office products in January 2003. This included the addition
of new warehouse facilities near Bakersfield, California and Albany, New York,
combined with investments in a dedicated sales and management team to support
this expansion. SG&A improvements resulting from our restructuring activities
have partially offset these factors.
Depreciation and Amortization. Depreciation and amortization for the
quarter ended December 31, 2002 was $2.1 million compared to $1.5 million for
the prior year quarter. The increase is due to the acquisition of ISA and to new
capital expenditures related to the new warehouse facilities and the
reconfiguration of our Memphis warehouse.
-16-
Restructuring and Nonrecurring costs. During the quarter ended December
31, 2002, we recognized pre-tax charges of $2.7 million related to restructuring
activities, including $2.5 million related to warehouse and distribution
initiatives (including costs associated with the opening and testing of the new
distribution facilities in Bakersfield, California, and Albany, New York, and
the integration of office products at our central distribution center in
Memphis) and $0.2 million related to other back-office improvements.
Interest Expense, net. Interest expense increased to $4.4 million for
the quarter ended December 31, 2002 compared to $1.9 million for the prior year
quarter. The increase in interest expense is primarily attributable to higher
interest rates compared to the prior year and 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 and (2) higher working capital related to investments in infrastructure and
inventory to support the office products rollout. 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 35.1% and 36.0% for the
three months ended December 31, 2002 and 2001, respectively. We expect our
effective tax rate for the remainder of fiscal year 2003 to be approximately
35%.
Equity in Net Income of Affiliate and Minority Interest. Equity in net
income of affiliate and minority interest was $0.6 million for the quarter ended
December 31, 2002, representing equity method net income related to ISA's
investment in Kingfield Heath.
Nine Months Ended December 31, 2002 Compared to Nine Months Ended
December 31, 2001
Goodwill Impairment Charges, Reserve Estimates and Adjustments. During
the second quarter of fiscal year 2003, we recorded goodwill impairment charges
of $13.8 million (no tax benefit) and increases in reserve estimates and other
adjustments totaling $20.2 million ($12.9 million after tax). These charges are
summarized below (in millions):
<Table>
<Caption>
Pre-Tax Post-Tax
Charge Charge
------ -------
Items affecting gross profit:
Costs related to U.S. business, including the office products initiative,
distribution center and logistics costs and vendor programs (office products
and computer supplies) .......................................................... $ 10.6 $ 6.8
Costs related to The Tape Company ................................................. 1.2 0.7
Costs related to Latin American operations ........................................ 3.7 2.4
Other ............................................................................. 0.5 0.3
------ ------
$ 16.0 $ 10.2
Items affecting selling, general and administrative expenses:
Costs related to The Tape Company ................................................. 0.2 $ 0.2
Costs related to Latin American operations ........................................ 1.5 0.9
Professional costs, acquisition costs and other ................................... 2.5 1.6
------ ------
$ 4.2 $ 2.7
Goodwill impairment charges:
Tape (no tax effect) .............................................................. $ 12.0 $ 12.0
Argentina (no tax effect) ......................................................... 1.8 1.8
------ ------
$ 13.8 $ 13.8
Total .............................................................................. $ 34.0 $ 26.7
====== ======
</Table>
-17-
Daisytek's professional tape products unit continues to experience negative
industry trends. Recent price changes have diminished management's long-term
outlook for this industry. As a result, we reviewed our impairment calculation
in light of new operating assumptions and we recorded a goodwill impairment
charge during the quarter ended September 30, 2002 of $12.0 million,
representing approximately half of the total goodwill balance at the
professional tape products unit. Also in light of the industry-wide issues and
management forecasts, we recorded increases in reserve estimates for customer
and vendor accounts receivable, inventory and other assets totaling
approximately $1.4 million ($0.9 million after tax). The professional tape
products unit represents 3% of our total third quarter revenues.
The Argentinean computer and office supplies unit was further impacted by
countrywide economic and political issues. In light of the deteriorating
environment and revised operating assumptions of zero profitability, we recorded
a goodwill impairment charge during the quarter ended September 30, 2002 of $1.8
million, representing all of the goodwill balance originating from the October
2000 acquisition of Etertin y CIA, S.A. in Argentina. Argentina currently
represents less than 1% of total revenues. We currently intend to continue our
Argentinean operations for the immediate future.
In addition to Argentina, other Latin American export markets are
experiencing economic uncertainty at present. We conducted a review of major
asset accounts such as customer and vendor accounts receivable, inventory and
other assets related to all our Latin American businesses, including Argentina,
Mexico and our U.S.-based export business. In light of operating decisions
related to the amount and type of business we are conducting in Latin America
and due to this review of the net realizable value of assets, we have increased
reserve estimates by approximately $5.2 million ($3.3 million after tax). Our
Mexican operations are performing in line with expectations, however we are
currently reviewing all levels of business into these markets.
Costs related to our U.S. business, including our expansion into office
products and the distribution center reorganization, impacted our performance
for the quarter ended September 30, 2002. During this quarter, we made three
decisions that negatively impacted short-term earnings but that we believe were
important for the long-term success of our overall business. (1) We decided to
reset our Memphis Superhub to the new management warehouse system over a longer
time period, in order to maintain the highest-possible customer service and
minimize risks. (2) We gave away the new full-line computer and office supplies
catalogs to many customers, instead of selling them, in order to get the catalog
in as many hands as possible, as quickly as possible, to accelerate revenue
growth. (3) We reduced our short-term cooperative marketing efforts with office
products and computer supplies vendors to ensure we are promoting long-term
channel development. As a result of these decisions and a review of asset net
realizable values, we increased certain reserve estimates for balance sheet
items including customer and vendor accounts receivable, deferred costs,
inventory and other by $10.6 million ($6.8 million after tax).
Net Revenues. Net revenues for the nine months ended December 31, 2002
increased 54.9% to $1,334.0 million compared to $861.1 million for the
comparable prior year period. Computer and office supplies net revenues
increased 59.3% for the quarter ended December 31, 2002 compared to the prior
year. The increase in revenue over the prior year is attributable primarily 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 sales of copier and fax supplies at the Arlington
division; and (4) the acquisitions of Digital Storage during the first quarter
of fiscal year 2002 and General Stationery Supplies during the second quarter of
fiscal year 2002. Increases were primarily volume-related. Excluding ISA,
computer and office supplies net revenues for the nine months ended December 31,
2002 increased 11.7%. Within the computer and office supplies segment, domestic
operations increased approximately 16.1% and international operations, in U.S.
dollars and excluding ISA, increased approximately 4.8% compared to the prior
year. Excluding revenue from Argentina, which has been negatively impacted by a
currency devaluation and general economic slowdown, international operations for
the nine months ended December 31, 2002, in U.S. dollars and excluding ISA,
increased approximately 11.5% compared to the prior year.
-18-
The computer and office supplies revenue increase for the nine months
ended December 31, 2002 was partially offset by an 10.9% revenue decrease in our
professional tape products segment, due to increased competition, decreases in
volume and industry price decreases.
Gross Profit. Gross profit as a percentage of net revenues was 8.9% for
the nine months ended December 31, 2002 compared to 10.7% for the prior year.
The decline in gross margin percentage is attributable primarily to certain
reserves and adjustments recorded during the quarter ended September 30, 2002,
as described in "Goodwill Impairment Charges, Reserve Estimates and
Adjustments." Additionally, gross margin was negatively impacted by (1) factors
related to our U.S. business, including our expansion into office products and
the distribution center reorganization, including the production of the new
900-page full-line computer and office supplies catalog; higher-than-expected
costs in the build-out of new warehouses near Bakersfield, California, and
Albany, New York; and certain delays in converting from more expensive air
delivery to lower-cost ground; (2) the decline in revenue in the professional
tape products segment, which typically operates at higher gross margin
percentages; and (3) 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. The decline in gross
margin percentage was partially offset by a higher gross margin for ISA.
Selling, General and Administrative Expenses. SG&A for the nine months
ended December 31, 2002 was $111.3 million, or 8.3% of net revenues, compared to
$63.7 million, or 7.4% of net revenues, for the prior year. The increase in SG&A
is primarily due to the acquisition of ISA. The increase in SG&A as a percentage
of net revenues is attributable primarily to certain reserves and adjustments
totaling $4.2 million recorded during the quarter ended September 30, 2002, as
described in "Goodwill Impairment Charges, Reserve Estimates and Adjustments."
Additionally, SG&A was negatively impacted by factors related to our U.S.
business, including our expansion into office products and the distribution
center reorganization, including the production of the new 900-page full-line
computer and office supplies catalog; higher-than-expected costs in the
build-out of new warehouses near Bakersfield, California, and Albany, New York;
and certain delays in converting from more expensive air delivery to lower-cost
ground. Offsetting these factors, SG&A as a percentage of revenues improved due
to (1) our restructuring activities; (2) the acquisition of Digital Storage
during the first quarter of fiscal 2002, which typically operates at a lower
SG&A percentage than our other businesses; and (3) 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.
Goodwill Impairment Charges. Goodwill impairment charges of $13.8
million for the nine months ended December 31, 2002 included a $12.0 million
charge related to our professional tape products business and a $1.8 million
charge related to our Argentinean business. See "Goodwill Impairment Charges,
Reserve Estimates and Adjustments" for further details.
Depreciation and Amortization. Depreciation and amortization for the
nine months ended December 31, 2002 was $6.2 million compared to $3.9 million
for the comparable prior year period. The increase is due to the acquisition of
ISA and to new capital expenditures and business acquisitions.
Restructuring and Nonrecurring costs. During the nine months ended
December 31, 2002, we recognized pre-tax charges of (1) $7.6 million related to
restructuring activities, including $5.9 million related to warehouse and
distribution initiatives (including costs associated with the opening and
testing of the new distribution facilities in Bakersfield, California, and
Albany, New York, and the integration of office products at our central
distribution center in Memphis), $0.4 million related to the termination of
employees and $1.3 million related to other back-office improvements, and (2)
$0.2 million related to the write-off of unamortized debt acquisition 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 the termination of employees 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 transactions management service agreements between PFSweb and Daisytek,
including transactions costs, a separation payment and finalization of other
balances with PFSweb.
-19-
Interest Expense, net. Interest expense increased to $11.4 million for the
nine months ended December 31, 2002 compared to $5.2 million for the prior year
comparable period. The increase in interest expense is primarily attributable to
higher interest rates compared to the prior year and 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) volume growth requiring higher working capital; (3) higher
working capital related to the office products rollout; (4) the acquisitions of
Digital Storage and General Stationery Supplies during fiscal year 2002; and (5)
the acquisition of our Memphis distribution assets during May 2001. 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 21.6% and 36.9% for the
nine months ended December 31, 2002 and 2001, respectively. Fiscal year 2003
taxes were affected negatively by goodwill impairment charges of $13.8 million,
which were not tax deductible, and positively affected by a recovery of
approximately $0.3 million of previously paid state income taxes.
Equity in Net Income of Affiliate and Minority Interest. Equity in net
income of affiliate and minority interest was $1.2 million for the nine months
ended December 31, 2002. This includes equity method income of $1.3 million
related to ISA's investment in Kingfield Heath, offset by $0.1 million related
to operations of ISA owned by third parties during the period.
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, 2002 of 18,541,534.
<Table>
<Caption>
DILUTED SHARES
AVERAGE SHARE PRICE OUTSTANDING
-------------------- --------------
$5.00......................... 18,541,566
$6.00......................... 18,553,191
$7.00......................... 18,667,814
$8.00......................... 18,821,958
$9.00......................... 19,023,352
$10.00........................ 19,189,395
$11.00........................ 19,355,132
$12.00........................ 19,493,733
$13.00........................ 19,622,576
</Table>
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities from continuing operations for the
nine months ended December 31, 2002 was $13.4 million, compared with net cash
provided by operating activities of $11.6 million for the same period in the
prior year. Working capital, excluding the current portion of long-term debt and
cash balances, increased to $260.7 million at December 31, 2002 from $206.3
million at March 31, 2002, attributable primarily to our acquisition of ISA,
revenue growth and inventory stocking at the two new regional distribution
centers in Bakersfield, California and Albany, New York and at the Memphis,
Tennessee superhub. The working capital requirements were funded primarily with
proceeds from our credit facilities.
-20-
Net cash used in investing activities during the nine months ended December
31, 2002 was $17.3 million. Payments included cash paid for the acquisition of
ISA, which was funded with proceeds from our credit facilities. Capital
expenditures for the nine months ended December 31, 2002 were $19.7 million,
including $12.4 million acquired under a capital lease and $7.3 million funded
with proceeds from our credit facilities. Proceeds from the exercise of stock
options and the issuance of common shares were $3.8 million for the nine months
ended December 31, 2002, which were used to reduce outstanding balances under
our credit facilities.
Our purchase agreement for the acquisition of Digital Storage, LLC
("Digital Storage"), completed during the first quarter of fiscal year 2002,
provided for an adjustment to the purchase price based on certain performance
criteria for each of the two years following the acquisition. An amount of $2.1
million was paid during fiscal year 2003 based on the first year performance.
The second year performance period will end during the first quarter of fiscal
year 2004.
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,
syndicated 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 December 31,
2002, the outstanding balance under this credit facility was $122.2 million and,
based on our borrowing base limit at December 31, 2002, $9.4 million was
available for future borrowings.
During November 2002, we amended certain terms of the domestic credit
facility and received a waiver of compliance with its fixed charge ratio and
tangible net worth covenants for the quarter ended September 30, 2002. As
amended, borrowings under the domestic credit facility through September 30,
2003 accrue interest, at our option, at the prime rate of the lead bank plus an
adjustment of 1.0% or the LIBOR rate plus an adjustment of 3.0%. Subsequent to
September 30, 2003, 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 also amended various
covenants, including a revision of the calculation of minimum fixed charge
ratios and tangible net worth requirements. A new covenant was added which
requires us to use our best efforts to raise additional capital having net
proceeds of not less than $20 million by March 31, 2003 and to raise such
additional capital, in any event, on or before September 30, 2003. Provided,
however, in certain circumstances such as if the average availability under the
facility for any trailing 30-day period first calculated on February 14, 2003 is
less than $15 million, then $20 million (net) of additional capital must be
raised within 90 days of such event.
Upon the first calculation on February 14, 2003, our trailing 30-day average
availability under this facility is less than $15 million. Therefore, in
addition to the requirement that we will use our best efforts to raise the
additional capital by March 31, 2003, we will be required, in any event, to
raise such capital within 90 days of February 14, 2003 (by May 15, 2003). We
anticipate being able to raise the additional capital by the required deadline.
In addition, we are currently pursuing operational improvements that are
expected to generate a higher level of cash flow, including improvements in
working capital, such as elimination of redundant costs carried in connection
with the office products launch, and a focus on profitability, including product
mix and a review of all customer relationships. Near-term growth will be
controlled as we gradually eliminate unprofitability or non-strategic activities
and focus on the channels, products and customers that are most accretive to our
business.
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 $25.4 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 December
31, 2002, the outstanding balance under the Canadian credit
-21-
facility was 23.0 million Canadian dollars, or approximately $14.6 million.
Based on our borrowing base limit at December 31, 2002, we had 5.6 million
Canadian dollars, or approximately $3.5 million, available for future
borrowings.
In November 2002, Daisytek Australia Pty. Ltd. signed a 35 million
Australian dollar (approximately $19.6 million) revolving credit facility,
expiring on November 18, 2005. This credit facility replaced the existing 20
million Australian dollar (approximately $11.2 million) unsecured credit
facility. Availability under the credit facility is subject to certain borrowing
base limitations, including eligible accounts receivable and inventory, as
defined. Borrowing under the credit facility accrues interest at the index rate
plus 2.7%. Fees are 0.5% 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, a minimum level of tangible net worth, restriction
on certain activities, loans, payments to related parties, capital expenditures,
acquisitions, investments, assets sales and sale-leaseback transactions. As of
December 31, 2002, the outstanding balance under the Australian credit facility
was 20.8 million Australian dollars, or approximately $11.7 million. We had $0.1
million Australian dollars, or approximately $0.07 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 December 31, 2002
include revolving credit facilities of 18.3 million British pounds, or
approximately $29.5 million, which were payable upon demand. ISA also has
revolving credit facilities with various European banks of 14.6 million British
pounds, or approximately $23.6 million, which are payable upon demand, and a
term loan with a bank in Norway for 0.4 million British pounds, or approximately
$0.6 million.
During February 2003, ISA signed a 33.5 million British pounds
(approximately $53.9 million) secured debt facility with an initial period
expiring during February 2006. This facility replaced existing facilities of
approximately 22.8 million British pounds (approximately $36.7 million) which
were payable on demand. 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 LIBOR rate plus an adjustment ranging from 1.35% to 2.35%. The credit
facility contains various covenants including, among other things, the
maintenance of certain financial ratios including the achievement of a minimum
interest cover ratio and minimum level of tangible net worth as well as
maintaining accounts receivable and accounts payable days outstanding below
defined maximum levels, and restrictions on certain activities, including loans
and payments to related parties, payment of dividends and asset sales.
Approximately 0.9 million British pounds, or approximately $1.4 million was
available for future borrowings upon signing of the new credit facility in
February 2003.
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 $8.6 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. As of December
31, 2002, the outstanding balance under the Mexican credit facility was 90.0
million Mexican pesos, or approximately $8.6 million, with no additional funds
available for future borrowings.
Contractual Obligations and Guarantees. Obligations under long-term debt,
capital leases, non-cancelable operating leases and other agreements at December
31, 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 ............... $210.8 $ 23.1 $187.5 $ 0.2 $ --
Capital lease obligations .... 14.0 3.2 4.0 3.6 3.2
Operating leases ............. 37.3 8.6 12.3 8.4 8.0
Other ........................ 0.7 0.7 -- -- --
------ --------- --------- --------- -------
Total ........................ $262.8 $ 35.6 $203.8 $ 12.2 $ 11.2
</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 $17.2 million, including $5.6 million due in
less than one year, $6.5 million due in one to three years, $4.2 million due in
four to five years and $0.9 million due after five years. We do not expect to
make payments under these guarantees or sublease agreements. If performance were
required, we would seek to mitigate our exposure with lease terminations and/or
subleases, although no assurance can be provided that we would be successful in
mitigation. Our financial statements do not include any liability for these
guarantees.
-22-
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; economic and political uncertainties in international markets;
potential obligations under operating lease commitments of our former subsidiary
PFSweb 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 nine months ended December 31, 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 nine months ended December 31, 2002, 52.6% of our
revenues were derived from customers located outside the United States.
ITEM 4. CONTROLS AND PROCEDURES
Based on an evaluation completed within 90 days of the filing of this Form
10-Q, our Chief Executive Officer and Acting Chief Financial Officer have
concluded that our disclosure controls and procedures (as defined in Rules
13a-14 and 15d-14 of the Securities Exchange Act of 1934) are effective to
ensure that information required to be disclosed in this report is accumulated
and communicated to management, including our Chief Executive Officer and Acting
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. There were no significant changes in our internal controls
or other factors that could significantly affect these controls subsequent to
the date of their evaluation.
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.
-23-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1* A$ Facility Agreement between GE Capital Finance PTY LTD and
Daisytek Australia PTY LTD (The Company) and Daisytek
Australia (QLD) PTY LTD (The Guarantor)
10.2* Facilities Agreement between Daisytek - ISA Limited (as
borrower) and GMAC Commercial Credit Limited
10.3* Separation Agreement (Daisytek has requested confidential
treatment for certain portions of this Exhibit pursuant to
Rule 24b-2 promulgated under the Securities Exchange Act of
1934, as amended. The portions of this Exhibit that are
subject to this confidential treatment request have been
omitted and have been filed separately with the Securities and
Exchange Commission.)
99.1* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
signed by James R. Powell, President and Chief Executive
Officer.
99.2* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
signed by John D. Kearney, Sr., Executive Vice President -
Corporate Development and Acting Chief Financial Officer.
* Filed herewith
(b) Reports on Form 8-K.
Current report on form 8-K (Items 5 and 7), dated October 24, 2002 and
filed on October 25, 2002, regarding earnings for the quarter ended
September 30, 2002.
Current report on form 8-K (Items 5 and 7), dated November 7, 2002 and
filed on November 8, 2002, regarding earnings for the quarter ended
September 30, 2002.
Current report on form 8-K (Items 5 and 7), dated November 14, 2002 and
filed on November 15, 2002, to announce the amendment of certain terms of
Daisytek's $250 million credit facility and the receipt of waivers of
compliance with certain covenants for the quarter ended September 30, 2002.
Current report on form 8-K (Item 9), dated November 14, 2002 and filed
on November 15, 2002, to provide the signed certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, by each of James R. Powell, President and Chief
Executive Officer, and Ralph Mitchell, Executive Vice President - Finance
and Chief Financial Officer.
-24-
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, 2003
DAISYTEK INTERNATIONAL CORPORATION
By: /s/ John D. Kearney, Sr.
------------------------------------------------
John D. Kearney, Sr.
Acting Chief Financial Officer,
Acting Chief Accounting Officer,
Executive Vice President - Corporate Development
(duly authorized officer and Principal Financial
Officer)
CERTIFICATIONS
I, James R. Powell, President and Chief Executive Officer of Daisytek
International Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Daisytek International
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure control and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
-25-
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 14, 2003 DAISYTEK INTERNATIONAL CORPORATION
By: /s/ James R. Powell
-------------------------------------
James R. Powell
President and Chief Executive Officer
I, John D. Kearney, Sr., Acting Chief Financial Officer of Daisytek
International Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Daisytek International
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure control and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 14, 2003 DAISYTEK INTERNATIONAL CORPORATION
By: /s/ John D. Kearney, Sr.
-------------------------------------
John D. Kearney, Sr.
Acting Chief Financial Officer
-26-
EXHIBIT INDEX
<Table>
10.1* A$ Facility Agreement between GE Capital Finance PTY LTD and
Daisytek Australia PTY LTD (The Company) and Daisytek
Australia (QLD) PTY LTD (The Guarantor)
10.2* Facilities Agreement between Daisytek - ISA Limited (as
borrower) and GMAC Commercial Credit Limited
10.3* Separation Agreement (Daisytek has requested confidential
treatment for certain portions of this Exhibit pursuant to
Rule 24b-2 promulgated under the Securities Exchange Act of
1934, as amended. The portions of this Exhibit that are
subject to this confidential treatment request have been
omitted and have been filed separately with the Securities and
Exchange Commission.)
99.1* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
signed by James R. Powell, President and Chief Executive
Officer.
99.2* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
signed by John D. Kearney, Sr., Executive Vice President -
Corporate Development and Acting Chief Financial Officer.
</Table>
* Filed herewith