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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, 1997
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.)
500 North Central Expressway, Plano, Texas 75074
-------------------------------------------------------------
(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 October 31, 1997 there were 6,815,700 shares of registrant's common stock
outstanding.
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 1997
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
-----------
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 1997 (Unaudited)
and March 31, 1997.................................................. 3
Unaudited Interim Consolidated Statements of Income for the
Three and Six Months Ended September 30, 1997 and 1996 ............ 5
Unaudited Interim Consolidated Statements of Cash Flows for the
Six Months Ended September 30, 1997 and 1996........................ 6
Notes to Unaudited Interim Condensed 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 ......................... 16
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,
1997 1997
--------- ---------
(Unaudited)
CURRENT ASSETS:
Cash $ 1,494 $ 552
Accounts receivable, net of allowance for doubtful
accounts of $2,242 and $2,360 at September 30, 1997 and
March 31, 1997, respectively 94,160 90,778
Inventories, net:
Inventories, excluding Priority Fulfillment Services Division 54,957 54,426
Inventories, Priority Fulfillment Services Division 10,224 10,354
Prepaid expenses and other current assets 1,875 1,214
Deferred income tax asset 258 565
--------- ---------
Total current assets 162,968 157,889
--------- ---------
PROPERTY AND EQUIPMENT, at cost:
Furniture, fixtures and equipment 23,233 20,949
Leasehold improvements 905 673
--------- ---------
24,138 21,622
Less - Accumulated depreciation and amortization (11,649) (9,648)
--------- ---------
Net property and equipment 12,489 11,974
EMPLOYEE RECEIVABLE 438 423
EXCESS OF COST OVER NET ASSETS ACQUIRED,
net of accumulated amortization of $709 and $608 at
September 30, 1997 and March 31, 1997, respectively 4,624 5,002
--------- ---------
Total assets $ 180,519 $ 175,288
========= =========
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,
1997 1997
--------- ---------
(Unaudited)
CURRENT LIABILITIES:
Current portion of long-term debt $ 491 $ 662
Trade accounts payable 55,022 62,552
Accrued expenses 6,832 6,260
Income taxes payable 1,662 1,398
Other current liabilities 7,725 6,769
--------- ---------
Total current liabilities 71,732 77,641
--------- ---------
LONG-TERM DEBT, less current portion 30,716 30,454
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000,000 shares authorized at September
30, 1997 and March 31, 1997; none issued
and outstanding -- --
Common stock, $0.01 par value; 20,000,000 shares
authorized at September 30, 1997 and March 31, 1997; 6,812,153 and
6,520,709 shares issued and outstanding at September 30, 1997 and March
31, 1997,
respectively 68 65
Additional paid-in capital 36,900 33,331
Retained earnings 42,801 35,103
Cumulative foreign currency translation adjustment (1,698) (1,306)
--------- ---------
Total shareholders' equity 78,071 67,193
--------- ---------
Total liabilities and shareholders' equity $ 180,519 $ 175,288
========= =========
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 INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended
September 30, September 30,
----------------------------- ------------------------------
1997 1996 1997 1996
------------ ------------ ------------- -------------
NET SALES $ 179,568 $ 138,148 $ 352,380 $ 275,042
COST OF SALES 161,697 124,559 317,203 247,783
------------ ------------ ------------ -------------
Gross Profit 17,871 13,589 35,177 27,259
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 11,052 8,397 21,635 16,703
------------ ------------ ------------ -------------
Income from operations 6,819 5,192 13,542 10,556
INTEREST EXPENSE 552 413 1,071 845
------------ ------------ ------------ -------------
Income before income taxes 6,267 4,779 12,471 9,711
PROVISION FOR INCOME TAXES 2,398 1,824 4,773 3,715
------------ ------------ ------------ -------------
NET INCOME $ 3,869 $ 2,955 $ 7,698 $ 5,996
============ ============ ============ =============
NET INCOME PER COMMON SHARE $ 0.54 $ 0.43 $ 1.08 $ 0.87
============ ============ ============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 7,210 6,921 7,117 6,915
============ ============ ============ =============
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,
----------------------------------
1997 1996
---------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,698 $ 5,996
Adjustments to reconcile net income to net cash provided by
(used in) operating activities --
Depreciation and amortization 2,263 1,682
Provision for doubtful accounts 819 566
Deferred income tax provision 307 247
Changes in operating assets and liabilities --
Accounts receivable (4,426) (2,723)
Inventories, net (545) (326)
Trade accounts payable and accrued expenses (6,401) 869
Income taxes payable 169 107
Prepaid expenses and other current assets (727) 1,257
------------- -------------
Net cash provided by (used in) operating activities (843) 7,675
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,612) (3,240)
Advances to employees, net (83) (44)
------------- --------------
Net cash used in investing activities (2,695) (3,284)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit, net 445 4,560
Increase (decrease) in other current liabilities, net 956 (9,834)
Payments on capital leases and notes payable (354) (315)
Net proceeds from exercise of stock options 3,542 1,317
------------- -------------
Net cash provided by (used in) financing activities 4,589 (4,272)
------------- --------------
EFFECT OF EXCHANGE RATES ON CASH (109) 28
------------- -------------
NET INCREASE IN CASH 942 147
CASH, beginning of period 552 204
------------- -------------
CASH, end of period $ 1,494 $ 351
============= =============
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 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATED TO THE THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 30,
1997 AND 1996 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, Australia 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, contract stationers, buying groups, computer and office
product superstores, warehouse clubs and other retailers who resell the products
to end-users.
During fiscal year 1996, the Company formed Priority Fulfillment
Services, Inc. ("PFS"), a wholly owned subsidiary, to provide outsourcing
solutions to its business partners. Through PFS, the Company sells its core
competencies in call-center, product fulfillment, logistics and support services
to client companies worldwide, primarily on a fee-based relationship. PFS
customizes these services to meet specific requirements of these companies.
PFS's call-center services include: order entry, order tracking and customer
service (inbound), outbound telemarketing services and customized reporting of
customer and call information. PFS utilizes primarily the Company's centralized
distribution facility in Memphis, Tennessee to provide product fulfillment and
logistics services, with additional distribution facilities available in
Florida, Canada, Mexico and Australia. PFS maintains relationships with a number
of shipping companies to provide next business day delivery on domestic package
orders, truck shipments on larger domestic orders and a variety of air and
surface delivery options for international orders. PFS also provides other
support services such as invoicing, credit management and collection services,
and accounting and systems support.
2. INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
In the opinion of management, the Interim Unaudited Condensed 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, 1997, its results of operations for the
three and six months ended September 30, 1997 and 1996, and its results of cash
flows for the six months ended September 30, 1997 and 1996. 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 Condensed Consolidated Financial Statements should
be read in conjunction with the audited Consolidated Financial Statements and
accompanying notes of the Company included in the Company's Form 10-K (File
Number 0-25400) as filed with the SEC on June 27, 1997 (the "Company's Form
10-K"). Accounting policies used in the preparation of the Interim Unaudited
Condensed 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.
Certain prior period data has been reclassified to conform to the current
period presentation. These reclassifications had no effect on previously
reported net income, shareholders' equity or cash flows.
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATED TO THE THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 30,
1997 AND 1996 IS UNAUDITED.)
3. INVENTORIES:
Inventories (merchandise held for resale, all of which is finished goods)
are stated at the lower of weighted average cost or market.
4. DEBT:
Debt as of September 30, 1997 and March 31, 1997, is as follows (dollars in
thousands):
September 30, March 31,
1997 1997
---------- ----------
Revolving line of credit with commercial banks, interest (weighted average rate
of 6.6% at September 30, 1997) at the Company's option at the prime rate of
a bank (8.5% at September 30, 1997) or the Eurodollar rate plus 0.625% to
1.125% (6.5% at September 30, 1997), due July 1, 1999 $ 30,545 $ 30,100
Notes payable and obligations under capital leases for warehouse equipment,
computer equipment, office furniture and fixtures, interest at varying
rates ranging from 8% to 21%, with lease
terms varying from three to seven years 662 1,016
---------- ----------
Long-term debt 31,207 31,116
Less: Current portion of long-term debt (491) (662)
--------- ----------
Long-term debt, less current portion $ 30,716 $ 30,454
========== ==========
In May 1995, the Company entered into an agreement with certain banks
for an unsecured revolving line of credit facility (the "Facility") that, as
amended on June 30, 1997, has a borrowing availability of $50.0 million
and expires on July 1, 1999. Availability under the Facility is based upon
amounts of eligible accounts receivable, as defined.
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, 1997,
approximately $19.5 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, 1997 and March 31, 1997, the
Company had checks and other items outstanding in excess of its cash balance of
approximately $7.7 million and $6.8 million, respectively, which are included in
other current liabilities.
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATED TO THE THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 30,
1997 AND 1996 IS UNAUDITED.)
5. SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS):
Six Months Ended
September 30,
----------------------
1997 1996
--------- ---------
Cash paid during the period for:
Interest $ 1,121 $ 838
Income taxes $ 2,190 $ 2,567
6. STOCK OPTIONS:
During the six months ended September 30, 1997, the Company granted options
to certain employees under its employee stock option plans (the "Plans" ). These
options were granted at the fair market value of the Company's common stock 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. In addition to
the options granted under the Plans, during the six months ended September 30,
1997, the Company granted 39,633 non-plan options.
Also during the six months ended September 30, 1997, the Company, at the
option of individual employees, canceled options issued during fiscal year 1997
and issued replacement options, granted at the fair market value of the
Company's common stock on the date of the replacement grant. Such options also
become exercisable over a three year period starting with the date of the
replacement grant, based on vesting percentages. The following table summarizes
stock option activity for the six months ended September 30, 1997:
Shares Price per Share
---------- ---------------
Outstanding, March 31, 1997 853,469 $1.28 - $40.00
Granted 643,325 $25.00 - $44.88
Exercised (290,532) $1.28 - $32.50
Canceled (318,163) $19.50 - $40.00
----------
Outstanding, September 30, 1997 888,099 $1.28 - $44.88
==========
7. RECENTLY ISSUED ACCOUNTING STANDARDS:
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." This
statement establishes new standards for computing and presenting earnings per
share ("EPS"). SFAS No. 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods, and earlier
application is not permitted. When adopted, the Company will be required to
restate its EPS data for all periods presented. Had the Company adopted SFAS No.
128 during the six months ended September 30, 1997, basic earnings per share
would have been $0.57 and $0.46 for the three months ended September 30, 1997
and 1996, respectively, and $1.14 and $0.93 for the six months ended September
30, 1997 and 1996, respectively. Diluted earnings per share would have been the
same as net income per common share included in the accompanying Unaudited
Interim Consolidated Statements of Income.
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATED TO THE THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 30,
1997 AND 1996 IS UNAUDITED.)
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information." These statements are effective for fiscal years beginning after
December 15, 1997; however, earlier adoption is permitted. SFAS No. 130 requires
the presentation of comprehensive income and its components in a full set of
financial statements. SFAS No. 131 requires the disclosure of financial and
descriptive information about reportable operating segments. Both SFAS No. 130
and 131 are modifications of existing disclosure requirements which will have no
effect on the results of operations or financial condition of the Company. The
Company is currently evaluating the standards and their potential impact on
disclosures and if it will adopt these pronouncements prior to the required
effective date.
8. SUBSEQUENT EVENTS:
During October 1997, the Company's Australian subsidiary entered into an
agreement with an Australian bank for an unsecured revolving line of credit
facility (the "Australian Facility"). The Australian Facility, which expires on
July 1, 1999, allows the Company to borrow the Australian dollar equivalent of
approximately $5.4 million (U.S.). The Australian Facility accrues interest at
the Australian Bank Bill Rate plus 0.75%. A commitment fee of 0.25% is charged
on the total amount of the Australian Facility.
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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, 1997 AND 1996.
Net Sales. Net sales for the three months ended September 30, 1997 were
$179.6 million as compared to $138.1 million for the three months ended
September 30, 1996, an increase of $41.5 million, or 30.0%, as the result of an
increase in U.S. net sales of $24.6 million, or 21.0%, and an increase in
international net sales of $16.9 million, or 78.6%. Net sales for the six months
ended September 30, 1997 were $352.4 million as compared to $275.0 million for
the six months ended September 30, 1996, an increase of $77.4 million, or 28.1%,
as the result of an increase in U.S. net sales of $45.7 million, or 19.7%, and
an increase in international net sales of $31.7 million, or 72.3%. The growth in
U.S. and international net sales was primarily due to new customers, increased
sales volume to large national accounts, computer and office product
superstores, the Company's continued introduction of new products, and the
addition of net sales from its Australian subsidiary which was acquired by the
Company during the third quarter of fiscal year 1997. Net sales to new customers
for the six months ended September 30, 1997 were approximately $31 million,
including the net sales from its new Australian subsidiary, while net sales to
existing customers increased by approximately $46 million during this period.
During November 1997, the Company announced that it would not match lower
pricing offered by a competitor to one of the Company's largest customers. Net
sales to this customer ranged from approximately 5% to 7% of the Company's total
net sales during fiscal year 1997 and the first six months of fiscal year 1998.
The Company believes that the loss of net sales to this customer in the future
will reduce the Company's growth rate in net sales, gross profit and net income
for the next 12 months.
Gross Profit. Gross profit for the three months ended September 30, 1997 was
$17.9 million as compared to $13.6 million in the same period in 1996, an
increase of $4.3 million, or 31.5%, primarily as the result of increased sales
volume in the second quarter of fiscal year 1998. Gross profit for the six
months ended September 30, 1997 was $35.2 million as compared to $27.3 million
in the same period in 1996, an increase of $7.9 million, or 29.0%, primarily as
the result of increased sales volume in the first six months of fiscal year
1998. The Company's gross profit margin as a percent of net sales was 10.0% for
the three month period ended September 30, 1997 as compared to 9.8% for the same
period of 1996. The Company's gross profit margin as a percent of net sales was
10.0% for the six month period ended September 30, 1997 as compared to 9.9% for
the same period in 1996. Gross profit margin as a percentage of net sales
declined slightly during the first six months of fiscal 1998 for the Company's
wholesale computer supplies business due to the ongoing competitive environment
and consolidation of its customers. These gross profit margin percentage
declines were offset by higher margin fee revenue business for the Company's
outsource providing subsidiary, Priority Fulfillment Services ("PFS"). The
Company believes that the competitive environment and consolidation of its
wholesale customers, and the corresponding decline in gross profit margin
percentage will continue during fiscal year 1998.
SG&A Expenses. SG&A expenses for the three months ended September 30, 1997
were $11.1 million, or 6.2% of net sales, as compared to $8.4 million, or 6.1%
of net sales, for the three months ended September 30, 1996. SG&A expenses for
the six months ended September 30, 1997 were $21.6 million, or 6.1% of net
sales, as compared to $16.7 million, or 6.1% of net sales, for the six months
ended September 30, 1996. The increase in SG&A expenses was primarily a result
of the increase in costs associated with the Company's increased sales volume.
The Company continues to incur incremental SG&A expenses to invest in growth
areas of the business, PFS in particular. SG&A as a percentage of net sales for
the first six months of fiscal year 1998 remained unchanged as these incremental
SG&A expenses were offset by 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, 1997 was $6.8 million as compared to $5.2 million for the same
period during 1996, an increase of $1.6 million, or 31.3%. Income from
operations for the six months ended September 30, 1997 was $13.5 million as
compared to $10.6 million for the same period during 1996, an increase of $2.9
million, or 28.3%. This increase was primarily due to increased sales volume and
increased gross profit. Income from operations
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as a percentage of net sales was 3.8% for both the three and six months ended
September 30, 1997 and September 30, 1996.
Interest Expense. Interest expense for the three months ended September 30,
1997 was $0.6 million as compared to $0.4 million for the three months ended
September 30, 1996. Interest expense for the six months ended September 30, 1997
was $1.1 million as compared to $0.8 million for the six months ended September
30, 1996. Interest expense was higher during the three months ended September
30, 1997 primarily due to an increase in the average line of credit due to
increased sales volume in addition to a slight increase in interest rates during
fiscal year 1998. The weighted average interest rate was 7.0% and 6.7% for the
six month periods ended September 30, 1997 and 1996, respectively.
Income Taxes. The Company's provision for income taxes was $2.4 million for
the three months ended September 30, 1997 as compared to $1.8 million for the
three months ended September 30, 1996. The Company's provision for income taxes
was $4.8 million for the six months ended September 30, 1997 as compared to $3.7
million for the six months ended September 30, 1996. The increase was primarily
due to increased pretax profits. The effective tax rates for all periods
presented was approximately 38.3%.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary source of cash has been from financing
activities. During the six months ended September 30, 1997, net cash of $4.6
million was provided by financing activities, compared to net cash used in
financing activities of $4.3 million for the six months ended September 30,
1996. Cash provided by financing activities was generated primarily from the tax
benefit relating to the exercise of non-qualified common stock options and from
the cash received from the exercise of common stock options. Financing
activities should provide the Company's primary source of cash during the
remainder of fiscal year 1998, primarily to support the Company's growth.
During the six months ended September 30, 1997, $0.8 million was used in
operating activities, while net cash of $7.7 million was provided by operating
activities for the six months ended September 30, 1996. Increased working
capital requirements during the six months ended September 30, 1997 were
partially funded by cash generated by the Company's operations. 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 growth.
The Company's principal use of funds for investing activities during the
six months ended September 30, 1997 was for capital expenditures of $2.6
million. The principal use of funds for investing activities were for capital
expenditures of $3.2 million for the six months ended September 30, 1996. The
capital expenditures have consisted primarily of additions to upgrade the
Company's management information systems, including the Company's Internet based
catalog and ordering tool (SOLO-Net) and other methods of electronic commerce,
and general expansion of its facilities, both domestic and foreign. The Company
anticipates that its total investment in upgrades and additions to facilities
for fiscal year 1998 will be approximately $5 to $6 million.
Working capital increased to $91.2 million at September 30, 1997 from $80.2
million at March 31, 1997. This increase of $11.0 million was primarily
attributable to an increase in accounts receivable and inventory and a decrease
in accounts payable, which were only partially offset by an increase in other
current liabilities. During the six month periods ended September 30, 1997 and
1996, the Company generally maintained an accounts receivable balance of
approximately 47 and 46 days of sales, respectively. This increase resulted
primarily from growth in sales to larger national accounts and computer and
office product superstores which typically take longer to settle their
outstanding balances. Inventory turnover, excluding Priority Fulfillment
Services Division, was approximately 11 and 12 turns for the six month periods
ended September 30, 1997 and 1996, respectively.
In May 1995, the Company entered into an agreement with certain banks for
an unsecured revolving line of credit facility (the "Facility") that, as amended
on June 30, 1997, has a borrowing availability of $50.0 million and expires on
July 1, 1999. Availability under the Facility is based upon amounts of eligible
accounts receivable, as defined.
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As of September 30, 1997, the Company had borrowed $30.5 million, leaving
$19.5 million available under the Facility for additional borrowings. The
Facility 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 October 1997, the Company's Australian subsidiary entered into an
agreement with an Australian bank for an unsecured revolving line of credit
facility (the "Australian Facility"). The Australian Facility, which expires on
July 1, 1999, allows the Company to borrow the Australian dollar equivalent of
approximately $5.4 million (U.S.). The Australian Facility accrues interest at
the Australian Bank Bill Rate plus 0.75%. A commitment fee of 0.25% is charged
on the total amount of the Australian Facility.
During the six months ended September 30, 1997, approximately 22% of the
Company's net sales were sold through the Company's Canadian, Mexican,
Australian 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 and non-Australian
international sales in U.S. dollars. In addition, on an annual basis, the
Company has entered into various one-year forward Canadian currency exchange
contracts in order to hedge the Company's net investment in, and its
intercompany payable applicable to, its Canadian subsidiary. In May 1997, the
Company entered into a new $9.6 million (U.S.) one-year forward Canadian
currency exchange contract to replace the previous contract which matured during
that same month. In September 1997, the Company settled a $4.8 million (U.S.) 60
day forward Australian currency exchange contract which hedged the Company's net
investment in, and intercompany payable applicable to, its Australian
subsidiary, and in October 1997, entered into a $1.8 million (U.S.) forward
Australian currency exchange contract which expires in October 1998. There have
been no material gains or losses incurred by the Company relating to these
contracts. The Company may consider entering into other forward exchange
contracts in order to hedge the Company's net investment in its Mexican,
Australian and Canadian subsidiaries, although no assurance can be given that
the Company will be able to do so on acceptable terms.
The Company believes it will be able to satisfy its working capital needs
for fiscal year 1998, as well as business growth and planned capital
expenditures, through funds available under the Company's various line of credit
facilities, trade credit, lease financing, internally generated funds and by
increasing the amount available under the Company's credit facilities (although
the Company has presently neither requested nor received any commitment to do
so). 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.
The Company may attempt to acquire other businesses to expand its product
line in its core wholesale business and/or in the call-center or public
warehousing industries in connection with its efforts to grow its PFS
subsidiary. The Company currently has no agreements to acquire any such
businesses, although it currently is involved in the due diligence process for a
potential acquisition target. The Company can give no assurance at this time as
to whether it will ultimately acquire this target. Should the Company acquire
this business, or be successful in acquiring other businesses, the Company may
require additional financing to consummate such a transaction. Acquisitions
involve certain risks and uncertainties, therefore, the Company can give no
assurance with respect to whether it will be successful in identifying such a
business to acquire, whether it will be able to obtain financing to complete
such an acquisition, or whether the Company will be successful in operating the
acquired business.
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INVENTORY MANAGEMENT
The Company manages its computer consumable supplies inventories held for
sale in its wholesale distribution business by maintaining sufficient quantities
of product to achieve high order fill rates while at the same time maximizing
inventory turnover rates. Inventory balances will fluctuate as 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.
During fiscal year 1997, the Company, through its PFS subsidiary, began
providing product fulfillment and distribution services for third parties.
Certain of these distribution agreements provide that the Company own the
related inventory, some of which also allow for the third party to manage the
levels of inventory held by the Company. As a result, the levels of inventory
held by the Company under these contracts is higher than the Company would
normally carry in its core wholesale business.
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 report on 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, and the matters set forth in the Company's Report on
Form 10-K filed on June 27, 1997, 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),
risks inherent in acquiring and operating new businesses, concentrations of
credit risk, distribution efficiencies, capacity constraints, technological
difficulties, exchange rate fluctuations, and the regulatory and trade
environment (both domestic and foreign).
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." This statement establishes new standards for computing and presenting
earnings per share ("EPS"). SFAS No. 128 is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods,
and
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earlier application is not permitted. When adopted, the Company will be
required to restate its EPS data for all prior periods presented. Had the
Company adopted SFAS No. 128 during the six months ended September 30, 1997,
basic earnings per share would have been $0.57 and $0.46 for the three months
ended September 30, 1997 and 1996, respectively, and $1.14 and $0.93 for the six
months ended September 30, 1997 and 1996, respectively. Diluted earnings per
share would have been the same as net income per common share included in the
accompanying Unaudited Interim Consolidated Statements of Income.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information." These statements are effective for fiscal years beginning after
December 15, 1997; however, earlier adoption is permitted. SFAS No. 130 requires
the presentation of comprehensive income and its components in a full set of
financial statements. SFAS No. 131 requires the disclosure of financial and
descriptive information about reportable operating segments. Both SFAS No. 130
and 131 are modifications of existing disclosure requirements which will have no
effect on the results of operations or financial condition of the Company. The
Company is currently evaluating the standards and their potential impact on
disclosures and if it will adopt these pronouncements prior to the required
effective date.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Submission of matters through the solicitation of proxies were provided to
security holders during the three months ended September 30, 1997. These matters
were voted on August 15, 1997, at the annual meeting of stockholders. The annual
meeting involved the following:
The following directors were reelected as follows:
NAME POSITION
- ---- --------
David A. Heap Director - Chairman of the Board
Shares voted for: 5,654,016 Shares withheld: 32,005
Edgar D. Jannotta, Jr. Director
Shares voted for: 5,655,621 Shares withheld: 30,400
Peter P. J. Vikanis Director
Shares voted for: 5,655,221 Shares withheld: 30,800
The Company's 1997 Employee Stock Option Plan was approved by a majority of
votes cast as follows:
For: 3,768,240 Against: 996,336 Abstain: 18,131 Broker No-Vote: 903,314
The ratification and approval of Arthur Andersen LLP as the Company's
Independent Public Accountants for the fiscal year ending March 31, 1998 was
also voted on at the annual meeting as follows:
For: 5,683,907 Against: 39 Abstain: 2,075
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
-------------- -----------------------
11 Statement re: Computation of Earnings Per Share.
27 Financial Data Schedule.
b) Reports on Form 8-K:
Form 8-K filed on July 23, 1997 reporting Item 5. the Company's press
release dated July 23, 1997.
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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, 1997
DAISYTEK INTERNATIONAL CORPORATION
By: /s/ Thomas J. Madden
---------------------------
Thomas J. Madden
Chief Financial Officer,
Chief Accounting Officer,
Vice President - Finance
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INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION OF EXHIBITS PAGE
- ----------- ----------------------- ------------------
11 Statement re: Computation of Earnings Per Share 19
27 Financial Data Schedule 20
18