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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
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Commission File Number 0-25400
DAISYTEK INTERNATIONAL CORPORATION
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(exact name of registrant as specified in its charter)
DELAWARE 75-2421746
- ----------------------------------- --------------------------
(State of Incorporation) (I.R.S. Employer I.D. No.)
500 NORTH CENTRAL EXPRESSWAY, PLANO, TEXAS 75074
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 881-4700
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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
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At October 31, 1996 there were 6,465,751 shares of registrant's common stock
outstanding.
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 1996
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
-----------
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 1996 (Unaudited) and
March 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . 3
Unaudited Interim Consolidated Statements of Operations for the
Three and Six Months Ended September 30, 1996 and 1995 . . . . 5
Unaudited Interim Consolidated Statements of Cash Flows for the Six
Months Ended September 30, 1996 and 1995 . . . . . . . . . . . 6
Notes to Unaudited Interim Consolidated Financial Statements . . . 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . 11
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . 16
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
September 30, March 31,
1996 1996
--------------- --------------
(Unaudited)
CURRENT ASSETS
Cash $ 351 $ 204
Trade accounts receivable, net of allowance for doubtful
accounts of $1,259 and $1,283 at September 30, 1996 and
March 31, 1996, respectively 71,385 69,169
Receivables from employees and related parties, net of allowance
for doubtful accounts of $475 at September 30, 1996 and
March 31, 1996 551 571
Inventories, net:
Inventories, excluding Priority Fulfillment Services Division 39,398 44,358
Inventories, Priority Fulfillment Services Division 5,293 --
Prepaid expenses and other current assets 864 2,120
Deferred income tax asset 515 762
--------- ---------
Total current assets 118,357 117,184
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PROPERTY AND EQUIPMENT, at cost:
Furniture, fixtures and equipment 18,495 15,325
Leasehold improvements 340 306
--------- ---------
18,835 15,631
Less - Accumulated depreciation and amortization (7,755) (6,136)
--------- ---------
Net property and equipment 11,080 9,495
EMPLOYEE RECEIVABLES 408 395
EXCESS OF COST OVER NET ASSETS ACQUIRED,
net of accumulated amortization of $492 and $468 at
September 30, 1996 and March 31, 1996, respectively 1,503 1,527
--------- ---------
Total assets $ 131,348 $ 128,601
========= =========
The accompanying notes are an integral part of these consolidated balance
sheets.
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, March 31,
1996 1996
------------- --------------
(Unaudited)
CURRENT LIABILITIES
Current portion of long-term debt $ 670 $ 650
Trade accounts payable 44,305 44,736
Accrued expenses 5,549 4,230
Income taxes payable 520 419
Other current liabilities 652 10,486
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Total current liabilities 51,696 60,521
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LONG-TERM DEBT, less current portion 20,644 16,419
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, $1.00 par value; 1,000,000 shares authorized
at September 30, 1996 and March 31, 1996, none issued
and outstanding -- --
Common stock, $0.01 par value; 20,000,000 and 10,000,000
shares authorized at September 30, 1996 and March 31, 1996,
respectively; 6,460,564 and 6,342,753 shares issued and
outstanding at September 30, 1996 and March 31, 1996,
respectively 65 63
Additional paid-in capital 32,189 30,874
Retained earnings 27,732 21,736
Cumulative foreign currency translation adjustment (978) (1,012)
--------- ---------
Total shareholders' equity 59,008 51,661
--------- ---------
Total liabilities and shareholders' equity $ 131,348 $ 128,601
========= =========
The accompanying notes are an integral part of these
consolidated balance sheets.
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended
September 30, September 30,
------------------- ------------------
1996 1995 1996 1995
-------- -------- -------- --------
NET SALES $138,148 $105,421 $275,042 $210,387
COST OF SALES 124,559 94,086 247,783 188,418
-------- -------- -------- --------
Gross Profit 13,589 11,335 27,259 21,969
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 8,397 6,685 16,703 13,280
-------- -------- -------- --------
Income from operations 5,192 4,650 10,556 8,689
INTEREST EXPENSE 413 417 845 766
-------- -------- -------- --------
Income before income taxes 4,779 4,233 9,711 7,923
PROVISION FOR INCOME TAXES 1,824 1,617 3,715 3,039
-------- -------- -------- --------
NET INCOME $ 2,955 $ 2,616 $ 5,996 $ 4,884
======== ======== ======== ========
NET INCOME PER COMMON SHARE $ 0.43 $ 0.39(a) $ 0.87 $ 0.73(a)
======== ======== ======== ========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 6,921 6,733 6,915 6,731
======== ======== ======== ========
- ----------------------
(a) Includes approximately $0.05 per share related to certain one-time
inventory purchase actions prior to manufacturer price increases.
The accompanying notes are an integral part of these interim
consolidated statements.
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Six Months Ended
September 30,
------------------------------------
1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,996 $ 4,884
Adjustments to reconcile net income to net cash used in
operating activities --
Depreciation and amortization 1,682 960
Provision for doubtful accounts 566 476
Deferred income tax provision (benefit) 247 (123)
Changes in operating assets and liabilities --
Trade accounts receivable (2,775) (4,012)
Receivables from related parties 52 27
Inventories, net (326) (6,383)
Trade accounts payable and accrued expenses 869 3,557
Income taxes payable 107 (575)
Prepaid expenses and other current assets 1,257 (742)
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Net cash provided by (used in) operating activities 7,675 (1,931)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (3,240) (1,724)
Advances to employees, net (44) (66)
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Net cash used in investing activities (3,284) (1,790)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit, net 4,560 5,993
Payments of other current liabilities, net (9,834) (2,543)
Payments on capital leases and notes payable (315) (278)
Net proceeds from exercise of stock options 1,317 308
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Net cash provided by (used in) financing activities (4,272) 3,480
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EFFECT OF EXCHANGE RATE ON CASH 28 (16)
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NET INCREASE (DECREASE) IN CASH 147 (257)
CASH, beginning of period 204 448
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CASH, end of period $ 351 $ 191
======= =======
The accompanying notes are an integral part of these interim
consolidated statements.
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATED TO THE THREE AND SIX MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED.)
1. ORGANIZATION AND NATURE OF BUSINESS:
Daisytek International Corporation (a Delaware corporation) and
subsidiaries (the "Company") is a wholesale distributor of computer and office
automation supplies and accessories, whose primary products are laser toner,
copier toner, inkjet cartridges, optical storage products, printer ribbons,
diskettes, computer tape cartridges and accessories such as cleaning kits and
media storage files. The Company, through its wholly owned subsidiaries in the
U.S., Canada, and Mexico, sells products primarily in North America, as well as
in Latin America, Europe, the Far East, Africa and Australia. The Company's
customers include value added resellers, computer supplies dealers, office
product dealers, computer and office product superstores and other retailers
who resell the products to end-users.
2. INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS:
In the opinion of management, the Interim Unaudited Consolidated Financial
Statements of the Company include all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of the Company's
financial position as of September 30, 1996, its results of operations for the
three and six months ended September 30, 1996 and 1995, and its results of cash
flows for the six months ended September 30, 1996 and 1995. Results of the
Company's operations for interim periods may not be indicative of results for
the full fiscal year. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations promulgated by the Securities and Exchange Commission (the "SEC").
The Interim Unaudited Consolidated Financial Statements should be read in
conjunction with the audited Consolidated Financial Statements and accompanying
notes of the Company for the fiscal years ended March 31, 1996 and 1995, and
the three years ended March 31, 1996, included in the Company's Form 10-K (File
Number 0-25400) as filed with the SEC on June 26, 1996 (the "Company's Form
10-K"). Accounting policies used in the preparation of the Interim Unaudited
Consolidated Financial Statements are consistent in all material respects with
the accounting policies described in the Notes to Consolidated Financial
Statements in the Company's Form 10-K.
3. INVENTORIES:
Inventories (merchandise held for resale, all of which is finished goods)
are stated at the lower of weighted average cost or market.
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4. DEBT:
Debt as of September 30, 1996 and March 31, 1996, is as follows (dollars in
thousands):
September 30, March 31,
1996 1996
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Revolving line of credit with commercial banks, interest
(weighted average rate of 6.4% at September 30, 1996) at
the Company's option at the prime rate of a bank (8.25% at
September 30, 1996) or the Eurodollar rate plus 0.625% to
1.125% (6.301% at September 30, 1996), due May 22, 1998 $ 20,000 $ 15,440
Notes payable and obligations under capital leases for
warehouse equipment, computer equipment, office furniture
and fixtures, interest at varying rates ranging from 8% to
17%, with lease terms varying from five to seven years 1,314 1,629
-------- --------
21,314 17,069
Less: Current portion of long-term debt (670) (650)
-------- --------
$ 20,644 $ 16,419
======== ========
In May 1995, the Company entered into an agreement with certain banks for a
three-year unsecured revolving line of credit facility (the "facility"). Under
the facility, the Company may borrow initially up to $25.0 million through
April 1996 and up to $30.0 million thereafter until maturity. Availability
under the facility is based upon amounts of eligible accounts receivable, as
defined. Subsequent to September 30, 1996, the Company reached an agreement in
principle with its lenders which will increase the borrowing availability under
its facility to $50.0 million.
The facility accrues interest, at the Company's option, at the prime rate
of a bank or the eurodollar rate plus an adjustment ranging from 0.625% to
1.125% depending on the Company's financial performance. A commitment fee of
0.20% to 0.25% is charged on the unused portion of the facility. The facility
contains various covenants including, among other things, the maintenance of
certain financial ratios (minimum fixed charge ratio and minimum level of
tangible net worth) and restrictions on certain activities of the Company,
including loans and payments to related parties, incurring additional debt,
acquisitions, investments and asset sales. As of September 30, 1996, $10.0
million was available under the facility for additional borrowings. This
facility is part of the Company's integrated cash management system in which
accounts receivable collections are used to pay down the facility and
disbursements are paid from the facility. This system allows the Company to
optimize its cash flow. At September 30, 1996 and March 31, 1996, the Company
had checks and other items outstanding in excess of its cash balance of
approximately $0.7 million and $10.5 million, respectively, which are included
in other current liabilities.
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5. SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS):
Six Months Ended
September 30,
------------------------
1996 1995
------ ------
Cash paid during the period for:
Interest $ 838 $ 637
Income taxes $2,567 $3,777
6. STOCK OPTIONS:
During the six month period ended September 30, 1996, the Company granted
options to certain employees under its employee stock option plans (the
"Plans"). These options were granted at the fair market value at the date of
the grant. In addition to the options under the Plans, during the first quarter
of fiscal year 1997 the Company granted options to a key executive to purchase
15,000 shares of common stock. These options were granted at the fair market
value at the date of the grant. Such options become exercisable over a three
year period starting with the date of grant, based on vesting percentages. The
following table summarizes stock option activity for the six months ended
September 30, 1996.
Shares Price per Share
-------- -----------------
Outstanding, March 31, 1996 718,994 $ 1.28 - $19.50
Granted 299,114 $32.50 - $39.75
Exercised (117,811) $ 1.28 - $19.50
Canceled (5,902) $19.50 - $32.50
---------
Outstanding, September 30, 1996 894,395 $ 1.28 - $39.75
=========
During the second quarter of fiscal year 1997, shareholders approved the
Company's Non-Employee Director Stock Option and Retainer Plan (the
"Non-Employee Director Plan"). The Non-Employee Director Plan authorizes the
Company to grant non-qualified common stock options to non-employee directors
at the fair market value of the Company's common stock on the date of grant.
The options vest over a three year period starting on the date of grant. The
maximum number of shares which may be granted under the Non-Employee Director
Plan is 50,000 shares, subject to adjustments for certain changes in the shares
issued and outstanding as described in the plan. As of September 30, 1996,
there were 3,000 options granted under the Non-Employee Director Plan.
As of September 30, 1996, 381,759 options outstanding were exercisable.
The remaining options will become exercisable over the next three years based
on vesting percentages. In addition, 270,167 options remain available to be
granted in the future under the Plans.
7. RECENTLY ISSUED ACCOUNTING STANDARD:
The Company must adopt Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" in fiscal year 1997. SFAS No. 121 requires
companies to periodically evaluate long-lived assets and to record an
impairment loss if the expected undiscounted future cash flows is less than the
carrying value of those assets. Impairment losses resulting from the initial
application of this statement shall be reported in the period in which the
recognition criteria are first applied. The Company is currently evaluating
the implementation of SFAS No. 121, the effects of which are unknown at this
time.
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8. SUBSEQUENT EVENT:
Effective October 1, 1996, the Company acquired, with cash and common
stock, substantially all of the assets and liabilities of Lasercharge Pty. Ltd.
(Lasercharge). Lasercharge is an Australian wholesale distributor of computer
and office automation supplies and accessories. The acquisition of Lasercharge
will be accounted for using the purchase method of accounting, and,
accordingly, the purchase price will be allocated to the assets and liabilities
assumed based on the fair values at the date of acquisition. Pro forma results
of operations have not been presented because the effects of the acquisition
were not significant.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
Net Sales. Net sales for the three months ended September 30, 1996 were
$138.1 million as compared to $105.4 million for the three months ended
September 30, 1995, an increase of $32.7 million, or 31.0%, as the result of an
increase in U.S. net sales of $27.4 million, or 30.7%, and an increase in
international net sales of $5.3 million, or 33.0%. Net sales for the six months
ended September 30, 1996 were $275.0 million as compared to $210.4 million for
the six months ended September 30, 1995, an increase of $64.6 million, or
30.7%, as the result of an increase in U.S. net sales of $55.2 million, or
31.4%, and an increase in international net sales of $9.4 million, or 27.3%.
The growth in U.S. and international net sales was primarily due to increased
sales volume to large national accounts, computer and office product
superstores, new customers and the Company's continued introduction of new
products. Net sales to new customers for the six months ended September 30,
1996 were approximately $13 million, while net sales to existing customers
increased by approximately $52 million during this period.
Gross Profit. Gross profit for the three months ended September 30, 1996 was
$13.6 million as compared to $11.3 million in the same period in 1995, an
increase of $2.3 million, or 19.9%, primarily as the result of increased sales
volume in fiscal year 1997. Gross profit for the six months ended September
30, 1996 was $27.3 million as compared to $22.0 million in the same period in
1995, an increase of $5.3 million, or 24.1%, primarily as the result of
increased sales volume in fiscal year 1997. The Company's gross profit margin
as a percent of net sales was 9.8% for the three months ended September 30,
1996 as compared to 10.8% for the corresponding period of the prior year. The
Company's gross profit margin percentage was 9.9% for the six months ended
September 30, 1996 as compared to 10.4% for the corresponding period of the
prior year. Gross profit margin percentage declined during both the three and
six months ended September 30, 1996 primarily because the prior year's results
include the benefit of incremental margins earned on the sale of certain
one-time inventory purchases by the Company prior to manufacturer price
increases. Increased sales at lower gross profit margins to large national
accounts and computer and office product superstores also contributed to the
decline in gross profit margin percentages during both the three and six months
ended September 30, 1996. The Company believes that the trend in sales to
large national accounts and computer and office product superstores and the
corresponding decline in gross profit margin percentage will continue during
fiscal year 1997.
SG&A Expenses. SG&A expenses for the three months ended September 30, 1996
were $8.4 million, or 6.1% of net sales, as compared to $6.7 million, or 6.3%
of net sales, for the three months ended September 30, 1995. SG&A expenses for
the six months ended September 30, 1996 were $16.7 million, or 6.1% of net
sales, as compared to $13.3 million, or 6.3% of net sales, for the six months
ended September 30, 1995. The increase in SG&A expenses was primarily a result
of the increase in costs associated with the Company's increased sales volume.
The decrease in SG&A expenses as a percentage of net sales was primarily due to
improved operating efficiencies and staff productivity as a result of increased
sales volume and continued technological enhancements implemented by the
Company.
Income from Operations. Income from operations for the three months ended
September 30, 1996 was $5.2 million as compared to $4.7 million for the same
period during 1995, an increase of $0.5 million, or 11.7%. Income from
operations for the six months ended September 30, 1996 was $10.6 million as
compared to $8.7 million for the same period during 1995, an increase of $1.9
million, or 21.5%. This increase was primarily due to increased sales volume,
increased gross profit and improved operating efficiencies. Income from
operations as a percentage of net sales was 3.8% for the three months ended
September 30, 1996 as compared to 4.4% for the same period in fiscal year 1995,
primarily as the result of a decrease in gross profit margin as a percentage of
net sales which was somewhat offset by a decline in SG&A expenses as a
percentage of net sales. Income from operations as a percentage of net sales
was 3.8% for the six months ended September 30, 1996 as compared to 4.1% for
the same period in fiscal year 1995, primarily as the result of a decrease in
gross profit margin as a percentage of net sales which was somewhat offset by a
decline in SG&A expenses as a percentage of net sales. Income from operations
as a percentage of net sales for the three and six months ended September 30,
1996 remained relatively unchanged as compared to last year when the benefits
of the one time inventory purchase actions are excluded from last year's
results.
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Interest Expense. Interest expense was $0.4 million during both the three
months ended September 30, 1996 and September 30, 1995, and was $0.8 million
during both the six months ended September 30, 1996 and September 30, 1995.
Interest expense remained relatively unchanged during both periods as a result
of an increase in the average line of credit which was partially offset by a
reduction in interest rates during fiscal year 1997. The weighted average
interest rate was 6.7% during the six months ended September 30, 1996 as
compared to 7.9% for the corresponding period of 1995.
Income Taxes. The Company's provision for income taxes was $1.8 million for
the three months ended September 30, 1996 as compared to $1.6 million for the
three months ended September 30, 1995. The Company's provision for income taxes
was $3.7 million for the six months ended September 30, 1996 as compared to
$3.0 million for the six months ended September 30, 1995. The increase was
primarily due to increased pretax profits. The effective tax rates for the
three and six months ended September 30, 1996 was 38.2% and 38.3%,
respectively, as compared to the effective tax rates of 38.2% and 38.4% for the
three and six months ended September 30, 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary source of cash has been from financing
activities. However, during the six months ended September 30, 1996, net cash
of $4.3 million was used by financing activities, compared to net cash provided
by financing activities of $3.5 million for the six months ended September 30,
1995. Net cash was provided by operating activities and used to reduce other
current liabilities and finance capital expenditures during the six months
ended September 30, 1996. However, financing activities should provide the
Company's primary source of cash during the remainder of fiscal year 1997,
primarily as a result of the Company's growth. During the six months ended
September 30, 1995, proceeds from bank borrowings and lease financings, and
from the exercise of common stock options were used to finance the Company's
operations and expansion.
Net cash provided by operating activities was $7.7 million during the six
months ended September 30, 1996, while net cash used by operating activities
was $1.9 million for the six months ended September 30, 1995. Net cash was
provided by operating activities during the six months ended September 30, 1996
as a result of net income growth exceeding incremental operating working
capital needed to support the Company's continued growth. The Company's net
cash used in operations during the six months ended September 30, 1995,
primarily related to increases in working capital requirements to support
growth in the Company's business during the periods. The increased working
capital requirements were partially funded by cash generated by the Company's
operations.
The Company's principal use of funds for investing activities was capital
expenditures of $3.2 million and $1.7 million for the six months ended
September 30, 1996 and 1995, respectively. These expenditures have consisted
primarily of additions to upgrade the Company's management information systems,
the Company's CD-ROM based catalog (SOLO) and other methods of electronic
commerce, and its Memphis distribution facility. The Company anticipates that
its total investment in upgrades and additions to facilities for fiscal 1997
will be approximately $5 to $6 million.
Working capital increased to $66.7 million at September 30, 1996 from $56.7
million at March 31, 1996, an increase of $10.0 million which was primarily
attributable to decreases in accounts payable and other current liabilities.
During the six month periods ended September 30, 1996 and 1995, the Company
generally maintained an accounts receivable balance of approximately 46 days of
sales, and an inventory turnover rate of approximately 12 and 10 turns,
respectively. Inventory turnover increased during the first six months of
fiscal year 1997 compared to fiscal year 1996 primarily due to the increased
inventory levels carried in fiscal year 1996 resulting from the one-time
inventory purchases in advance of manufacturer price increases.
In May 1995, the Company entered into an agreement with certain banks for a
three-year unsecured revolving line of credit facility (the "facility"). Under
the facility, the Company may borrow initially up to $25.0 million until April
1996, and up to $30.0 million thereafter until maturity. Availability under
the facility is based upon amounts of eligible accounts receivable, as defined.
Subsequent to September 30, 1996, the Company reached an agreement in principle
with its lenders which will increase the borrowing availability under its
facility to $50.0 million.
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As of September 30, 1996, the Company had borrowed $20.0 million, leaving
$10.0 million available under the facility for additional borrowings. The
facility matures in May 1998 and accrues interest, at the Company's option, at
the prime rate of a bank or a eurodollar rate plus an adjustment ranging from
0.625% to 1.125% depending on the Company's financial performance. A commitment
fee of 0.20% to 0.25% is charged on the unused portion of the facility. The
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 of the Company, including loans and payments to related
parties, incurring additional debt, acquisitions, investments and asset sales.
During the six months ended September 30, 1996, approximately $43.9
million, or 16.0%, of the Company's net sales were sold through the Company's
Canadian, Mexican and U.S. export operations, including Latin America. The
Company believes that international markets represent further opportunities for
growth. The Company attempts to protect itself from foreign currency
fluctuations by denominating substantially all of its non-Canadian
international sales in U.S. dollars. In addition, in May 1995, the Company
entered into a $4.3 million (U.S.) one-year forward exchange contract, which
expired in May 1996. The Company incurred a loss of approximately $30,000, net
of income taxes, related to this contract upon its expiration. In May 1996,
the Company entered into a new $6.6 million (U.S.) one-year forward exchange
contract to replace the contract which expired in May 1996. As of September
30, 1996, the Company had incurred a loss of approximately $27,000, net of
income taxes, related to this contract. The Company may consider entering into
other forward exchange contracts in order to hedge the Company's net investment
in its Mexican and Canadian subsidiaries, although no assurance can be given
that the Company will be able to do so on acceptable terms.
Effective October 1, 1996, the Company acquired, with cash and common
stock, substantially all of the assets and liabilities of Lasercharge Pty. Ltd.
(Lasercharge). Lasercharge is an Australian wholesale distributor of computer
and office automation supplies and accessories. The acquisition of Lasercharge
will be accounted for using the purchase method of accounting, and,
accordingly, the purchase price will be allocated to the assets and liabilities
assumed based on the fair values at the date of acquisition. The Company
believes that the acquisition and integration of Lasercharge into the Company's
future business operations will not require significant working capital nor
create significant other financing needs.
The Company was recently appointed by a major manufacturer as the master
distributor for a certain product line of consumable supplies throughout the
United States, Canada, Mexico, the Caribbean and Latin America. The Company
expects that this arrangement will result in incremental revenue growth, and
similar to the Company's other business and revenue growth, will impose
additional working capital needs upon the Company. The Company believes it
will be able to satisfy its working capital needs for fiscal year 1997,
including such additional working capital required by this arrangement as well
as planned capital expenditures, through funds available under the facility,
trade credit, lease financing, internally generated funds and by increasing the
amount available under the facility. In addition, although the Company has no
plans to do so, and depending on market conditions and the terms thereof, the
Company may also consider obtaining additional funds through an additional line
of credit, other debt financing or the sale of capital stock; however, no
assurance can be given in such regard.
INVENTORY MANAGEMENT
The Company manages its inventories by maintaining sufficient quantities of
product to achieve high order fill rates while at the same time maximizing
inventory turnover rates. Inventory balances will fluctuate as the Company
adds new product lines and makes large purchases from suppliers to take
advantage of attractive terms. To reduce the risk of loss to the Company due
to supplier price reductions and slow moving inventory, the Company's
purchasing agreements with many of its suppliers, including most of its major
suppliers, contain price protection and stock return privileges under which the
Company receives credits against future purchases if the supplier lowers prices
on previously purchased inventory or the Company can return slow moving
inventory in exchange for other products.
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SEASONALITY
Although the Company historically has experienced its greatest sequential
quarter revenue growth in its fourth fiscal quarter, management has not been
able to determine the specific event, if any, of seasonal factors that may
cause quarterly variability in operating results. Management believes,
however, that factors that may influence quarterly variability include the
overall growth in the non-paper computer supplies industry and shifts in demand
for the Company's products due to a variety of factors, including sales
increases resulting from the introduction of new computer supplies products.
The Company generally experiences a relative slowness in sales during the
summer months, which may adversely affect the Company's first and second fiscal
quarter results in relation to sequential quarter performance. The Company
believes that results of operations for a quarterly period may not be
indicative of the results for any other quarter or for the full year.
INFLATION
Management believes that inflation has not had a material effect on the
Company's operations.
FORWARD-LOOKING INFORMATION
The matters discussed in this Form 10-Q, other than historical information,
and, in particular, information regarding future revenue, earnings and business
plans and goals, consist of forward-looking information under the Private
Securities Litigation Reform Act of 1995, and are subject to and involve risks
and uncertainties which could cause actual results to differ materially from
the forward-looking information. These risks and uncertainties include, but
are not limited to, the "Risk Factors" set forth in the Company's prospectus
dated January 25, 1996, which are incorporated by reference herein, as well as
general economic conditions, industry trends, the loss of key suppliers or
customers, the loss of strategic product shipping relationships, customer
demand, product availability, competition (including pricing and availability),
concentrations of credit risk, distribution efficiencies, capacity constraints,
technological difficulties, exchange rate fluctuations, and the regulatory and
trade environment (both domestic and foreign).
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARD
The Company must adopt Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" in fiscal year 1997. SFAS No. 121 requires companies
to periodically evaluate long-lived assets and to record an impairment loss if
the expected undiscounted future cash flows is less than the carrying value of
those assets. Impairment losses resulting from the initial application of this
statement shall be reported in the period in which the recognition criteria are
first applied. The Company is currently evaluating the implementation of SFAS
No. 121, the effects of which are unknown at this time.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Submissions of matters through the solicitation of proxies were provided to
security holders during the three months ended September 30, 1996. These
matters were voted on August 2, 1996, at the annual meeting of stockholders.
The annual meeting involved the reelection of directors as follows:
NAME POSITION
- ---- --------
Mark C. Layton President, Chief Operating Officer, Chief
Financial Officer and Director
Shares voted for: 5,590,069 Shares withheld: 16,125
Timothy M. Murray Director
Shares voted for: 5,590,144 Shares withheld: 16,050
The amendment to the Company's Amended and Restated Certificate of
Incorporation increasing the number of authorized shares of Common Stock from
10,000,000 to 20,000,000 was voted on at the annual meeting:
For: 5,467,743 Against: 132,676 Abstain: 875 Broker No-Vote: 4,900
The Company's Non-Employee Director Stock Option and Retainer Plan was approved
by a majority of votes cast as follows:
For: 4,960,129 Against: 640,080 Abstain: 1,085 Broker No-Vote: 4,900
The ratification and approval of Arthur Andersen LLP as the Company's
Independent Public Accountants for the fiscal year ending March 31, 1997 was
also voted on at the stockholder's meeting:
For: 5,604,994 Against: 550 Abstain: 650
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- ------- -----------------------
10.1 Form of Option to Purchase Shares of Common Stock under the
Daisytek Non-Employee Director Stock Option and Retainer Plan
11 Statement re: Computation of Earnings Per Share
27 Financial Data Schedule
b) Reports on Form 8-K:
Form 8-K filed on July 24, 1996 reporting Item 5. the Company's press
release dated July 24, 1996
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 13, 1996
DAISYTEK INTERNATIONAL CORPORATION
By: /s/ Mark C. Layton
---------------------------------
Mark C. Layton
President, Chief Operating
Officer, Chief Financial Officer
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INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
10.1 Form of Option to Purchase Shares of Common Stock
under the Daisytek Non-Employee Director Stock Option 19
and Retainer Plan
11 Statement re: Computation of Earnings Per Share 26
27 Financial Data Schedule 27
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