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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 June 30, 1999
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 August 6, 1999 there were 17,170,414 shares of registrant's common stock
outstanding.
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 1999
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
-----------
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 1999 (unaudited) and
March 31, 1999...................................................... 3
Unaudited Interim Consolidated Statements of Income for the
Three Months Ended June 30, 1999 and 1998 .......................... 5
Unaudited Interim Consolidated Statements of Cash Flows for the
Three Months Ended June 30, 1999 and 1998........................... 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 6. Exhibits and Reports on Form 8-K ............................................ 17
SIGNATURES ......................................................................... 18
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
June 30, March 31,
1999 1999
-------- ---------
(unaudited)
CURRENT ASSETS:
Cash $ 3,082 $ 1,551
Accounts receivable, net of allowance for doubtful accounts of.............
$3,445 and $2,857 at June 30, 1999 and March 31, 1999, respectively.... 142,831 139,864
Inventories, net:
Inventories, excluding Priority Fulfillment Services Division.......... 85,284 77,557
Inventories, Priority Fulfillment Services Division.................... 26,851 30,361
Prepaid expenses and other current assets.................................. 3,643 4,982
Deferred tax asset......................................................... 438 137
---------- ----------
Total current assets......................................... 262,129 254,452
---------- ----------
PROPERTY AND EQUIPMENT, at cost:
Furniture, fixtures and equipment.......................................... 40,639 37,807
Leasehold improvements..................................................... 2,312 2,399
---------- ----------
42,951 40,206
Less - Accumulated depreciation and amortization........................... (21,840) (20,296)
---------- ----------
Net property and equipment................................... 21,111 19,910
OTHER ASSETS 12,233 12,070
EMPLOYEE RECEIVABLE............................................................ 493 485
EXCESS OF COST OVER NET ASSETS ACQUIRED, net................................... 30,499 28,962
---------- ----------
Total assets................................................. $ 326,465 $ 315,879
========== ==========
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
June 30, March 31,
1999 1999
-------- ---------
(unaudited)
CURRENT LIABILITIES:
Current portion of long-term debt................................... $ 116 $ 146
Trade accounts payable.............................................. 93,826 103,179
Accrued expenses.................................................... 11,863 11,802
Income taxes payable................................................ 2,559 561
---------- ----------
Total current liabilities............................. 108,364 115,688
---------- ----------
LONG-TERM DEBT, less current portion.................................... 56,322 43,021
---------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000,000 shares authorized
at June 30, 1999 and March 31, 1999; none issued
and outstanding................................................. -- --
Common stock, $0.01 par value; 30,000,000 shares
authorized at June 30, 1999 and March 31, 1999;
17,170,114 and 17,162,382 shares issued and
outstanding at June 30, 1999 and March 31, 1999,
respectively.................................................... 172 172
Additional paid-in capital.......................................... 87,500 87,394
Retained earnings................................................... 75,984 71,801
Other comprehensive income.......................................... (1,877) (2,197)
---------- ----------
Total shareholders' equity............................ 161,779 157,170
---------- ----------
Total liabilities and shareholders' equity............ $ 326,465 $ 315,879
========== ==========
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
June 30,
--------------------------------
1999 1998
------------ ------------
Net sales............................................................. $ 233,237 $ 222,589
Cost of sales......................................................... 205,971 196,062
------------ ------------
Gross profit.................................................. 27,266 26,527
Selling, general and administrative expenses.......................... 19,288 16,802
Acquisition related costs............................................. 370 405
------------ ------------
Income from operations........................................ 7,608 9,320
Interest expense...................................................... 750 852
------------ ------------
Income before income taxes.................................... 6,858 8,468
Provision for income taxes............................................ 2,675 3,030
------------ ------------
Income before cumulative effect of accounting change.......... 4,183 5,438
Cumulative effect of accounting change, net of tax.................... -- (405)
------------ ------------
Net income.................................................... $ 4,183 $ 5,033
============ ============
Net income per common share:
Basic:
Income before cumulative effect of accounting change.......... $ 0.24 $ 0.32
Cumulative effect of accounting change, net of tax............ $ -- $ (0.02)
------------ -------------
Net income.................................................... $ 0.24 $ 0.30
============ ============
Diluted:
Income before cumulative effect of accounting change.......... $ 0.24 $ 0.30
Cumulative effect of accounting change, net of tax............ $ -- $ (0.02)
------------ ------------
Net income.................................................... $ 0.24 $ 0.28
============ ============
Pro forma data (a):
Historical net income............................................. $ 4,183 $ 5,033
Pro forma adjustments:
Provision for income taxes.................................... -- (291)
Acquisition costs, net of tax................................. -- 246
------------ ------------
Pro forma net income.............................................. $ 4,183 $ 4,988
============ ============
Pro forma net income per common share:
Basic............................................................. $ 0.24 $ 0.29
Diluted........................................................... $ 0.24 $ 0.28
Weighted average common and common share equivalents outstanding:
Basic................................................... 17,166 17,005
Diluted................................................. 17,760 17,814
- ---------
(a) Pro forma data includes the following adjustments: (1) The Tape Company
included a business unit organized as a subchapter S corporation, whereby
income taxes were paid individually by the owners. The pro forma provision
for income tax adjustment is provided to reflect income tax under a
corporate tax structure. (2) Daisytek incurred various acquisition related
accounting, legal and other costs applicable to the acquisition of The
Tape Company. The pro forma adjustment for acquisition related costs, net
of tax, excludes such costs from pro forma net income for the three months
ended June 30, 1998.
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)
Three Months Ended
June 30,
--------------------------
1999 1998
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................... $ 4,183 $ 5,033
Adjustments to reconcile net income to net cash used in operating activities --
Depreciation and amortization............................................. 1,804 1,584
Provision for doubtful accounts........................................... 879 525
Deferred income tax benefit............................................... (301) (399)
Changes in operating assets and liabilities --
Accounts receivable................................................... (3,034) 11,949
Inventories, net...................................................... (2,979) (26,690)
Trade accounts payable and accrued expenses........................... (10,007) (2,217)
Income taxes payable.................................................. 2,000 721
Prepaid expenses and other current assets............................. 1,456 (1,861)
---------- --------
Net cash used inoperating activities..................................... (5,999) (11,355)
---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.......................................... (2,612) (1,807)
Acquisitions of businesses, net of cash acquired............................. (2,320) (2,886)
Advances to employees, net................................................... (32) (29)
Increase in other assets..................................................... (163) (3,980)
---------- --------
Net cash used in investing activities............................ (5,127) (8,702)
---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit, net.................................. 12,901 22,863
Payments on capital leases and notes payable................................. (59) (4,971)
Net proceeds from exercise of stock options.................................. 106 1,443
Distributions to former shareholders of The Tape Company..................... -- (973)
---------- --------
Net cash provided by financing activities 12,948 18,362
---------- --------
EFFECT OF EXCHANGE RATES ON CASH................................................. (291) 333
---------- --------
NET INCREASE (DECREASE) IN CASH.................................................. 1,531 (1,362)
CASH, beginning of period........................................................ 1,551 2,087
---------- --------
CASH, end of period.............................................................. $ 3,082 $ 725
========== ========
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
1. OPERATIONS AND BASIS OF PRESENTATION:
Daisytek International Corporation (a Delaware corporation) and
subsidiaries ("the Company") is a leading wholesale distributor of non-paper
computer and office automation supplies and accessories ("computer supplies")
and professional-grade video and audio media products ("professional tape
products"). Through its Priority Fulfillment Services subsidiaries ("PFSweb"),
the Company is also a leading provider of end-to-end transaction management and
e-commerce logistics business solutions. The Company, through its wholly owned
subsidiaries in the U.S., Canada, Australia, Mexico and Singapore, sells
products and services primarily in North America, as well as in Latin America,
Australia, Singapore, the Pacific Rim, Europe and Africa.
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 June 30, 1999, its results of operations and
its results of cash flows for the three months ended June 30, 1999 and 1998.
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 29, 1999 (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.
2. SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS):
Three Months Ended
June 30,
--------------------------
1999 1998
--------- ---------
Cash paid during the period for:
Interest............................... $ 591 $ 728
Income taxes........................... $ 402 $ 2,177
3. COMPREHENSIVE INCOME (IN THOUSANDS):
Three Months Ended
June 30,
------------------------
1999 1998
-------- --------
Net income............................................. $ 4,183 $ 5,033
Comprehensive income adjustments:
Cumulative translation adjustment................. 320 (127)
-------- --------
Comprehensive income................................... $ 4,503 $ 4,906
======== ========
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE:
Basic earnings per share ("EPS") is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
during the quarter. Diluted EPS reflects the potential dilution that could
occur if dilutive securities were exercised into common stock. Stock options
are considered dilutive securities.
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share data):
Three Months Ended
June 30,
--------------------------
1999 1998
-------- --------
NUMERATOR:
Income before cumulative effect of accounting change......... $ 4,183 $ 5,438
Cumulative effect of accounting change....................... -- (405)
-------- --------
Net income................................................... $ 4,183 $ 5,033
======== ========
DENOMINATOR:
Denominator for basic earnings per share -
Weighted average shares.................................... 17,166 17,005
Effect of dilutive securities:
Employee stock options..................................... 594 809
-------- --------
Denominator for diluted earnings per share -
Adjusted weighted average shares and assumed conversions...
17,760 17,814
======== ========
Net income per common share:
Basic:
Income before cumulative effect of accounting change..... $ 0.24 $ 0.32
Cumulative effect of accounting change................... -- (0.02)
-------- --------
Net income............................................... $ 0.24 $ 0.30
======== ========
Diluted:
Income before cumulative effect of accounting change..... $ 0.24 $ 0.30
Cumulative effect of accounting change................... -- (0.02)
-------- --------
Net income............................................... $ 0.24 $ 0.28
======== ========
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. SEGMENT & GEOGRAPHIC INFORMATION:
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related information." The Company operates in
three reportable business segments: (1) Computer Supplies, (2) Professional
Tape Products, and (3) PFSweb. The Company's reportable segments are strategic
business units that offer different products and services and they are managed
separately based on the fundamental differences in their operations. Segment
information excludes intersegment net sales. No single customer accounted for
more than 10% of the Company's net sales for the three month periods ended June
30, 1999 and 1998. The following tables set forth information as to the
Company's reportable segments (in thousands):
Professional
Computer Tape
Supplies Products PFSweb Total
-------- ------------ ------ -----
Quarter ended June 30, 1999
---------------------------
Net sales.................. $ 178,076 $ 22,561 $ 5,005 $ 205,642
Operating contribution..... 5,641 1,679 658 7,978
Assets at June 30, 1999.... 206,574 49,946 69,945 326,465
Quarter ended June 30, 1998
---------------------------
Net sales.................. $ 177,803 $ 26,475 $ 1,924 $ 206,202
Operating contribution..... 7,583 1,631 511 9,725
Assets at March 31, 1999... 200,110 48,295 67,474 315,879
The Company's Computer Supplies segment includes certain expenses and
assets that relate to other or all of the segments but are not allocated by
management to the other segments. These expenses relate primarily to the
Company's (i) centralized management information, warehouse and telephone
systems, and (ii) executive, administrative and other corporate costs. These
assets primarily relate to the Company's centralized management information,
warehouse and telephone systems and leasehold improvements on shared
facilities.
In the table above, and for management purposes, PFSweb net sales is
presented on a fee-equivalent basis. Fee-equivalent revenue is comprised of
service fees earned for certain outsourcing services that PFSweb provides on a
fee basis, plus gross profits that are recognized on other PFSweb contracts
where accounting principles require PFSweb to recognize product revenue because
PFSweb takes title to the inventory. Adjustment for PFSweb represents the
adjustment to PFSweb net sales to recognize net sales under generally accepted
accounting principles. Reconciliation of segment net sales to consolidated net
sales is as follows (in thousands):
Three months ended June 30,
-------------------------------
1999 1998
------------- --------------
Segment net sales................................. $ 205,642 $ 206,202
Adjustment for PFSweb............................. 27,595 16,387
--------- ---------
Consolidated net sales............................ $ 233,237 $ 222,589
========= =========
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reconciliation of segment operating contribution to consolidated income before
taxes is as follows (in thousands):
Three months ended June 30,
---------------------------
1999 1998
--------- -------
Segment operating contribution................... $ 7,978 $ 9,725
Acquisition related costs (a).................... 370 405
Interest expense................................. 750 852
-------- --------
Consolidated income before income taxes.......... $ 6,858 $ 8,468
======== ========
(a) These charges relate to the Professional Tape Products segment.
Geographic information (in thousands):
Three months ended June 30,
----------------------------
1999 1998
---------- ---------
Net sales:
United States............................ $ 173,059 $ 182,923
Canada................................... 26,375 21,003
Other.................................... 33,803 18,663
---------- ---------
$ 233,237 $ 222,589
========== =========
June 30, March 31,
1999 1999
-------- ---------
Long-lived assets:
United States............................ $ 58,106 $ 55,937
Canada................................... 1,337 1,340
Other.................................... 4,893 4,150
-------- --------
$ 64,336 $ 61,427
======== ========
6. NEW ACCOUNTING STANDARDS:
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires that an entity
recognize all derivative financial instruments as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. If certain conditions are met, a derivative may be used to hedge certain
types of transactions, including foreign currency exposures of a net investment
in a foreign operation. The Company presently utilizes derivative financial
instruments only to hedge its net investments in certain of its foreign
operations. SFAS No. 133 requires gains or losses on these financial
instruments in other comprehensive income as a part of the cumulative
translation adjustment. The Company is currently evaluating the provisions of
SFAS No. 133 and its effect on the accounting treatment of these financial
instruments. SFAS No. 133 is effective for fiscal years beginning after June
15, 2000, with initial application as of the beginning of an entity's fiscal
quarter. Early adoption of the standard is allowed, however, the statement
cannot be applied retroactively to financial statements of prior periods.
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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
Interim Consolidated Financial Statements and related notes appearing elsewhere
in this Form 10-Q.
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 March 26, 1998, and the matters set forth in the Company's
Report on Form 10-K filed on June 29, 1999, 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, integrating 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).
BUSINESS STRATEGY
Daisytek is a low cost distributor and outsourcing services provider. The
Company bases its continued growth on the following strategies:
1) Capitalize on e-commerce and outsourcing trends through expansion of
its PFSweb operations.
2) Focus on the growing computer supplies and professional tape
industries in the U.S. and international markets.
3) Seek acquisitions to supplement growth in the Company's computer
supplies business, professional tape business, and fulfillment service
business or to add selected product lines.
Through its PFSweb business, the Company utilizes its core strengths in
distribution and telemarketing to provide clients with end-to-end transaction
management and e-commerce logistics solutions on an international basis.
Services include sales and order processing, call center management, product
warehousing with real-time inventory management, customized packaging, product
fulfillment and transaction management accounting. The Company offers e-commerce
outsourcing solutions for companies to conduct sales over the Internet by
providing the infrastructure needed to support web-based activity. The PFSweb
segment of the Company's business strategy offers the Company the potential for
higher margins because it is primarily service fee-based.
The Company's Computer Supplies segment specializes in computer supplies
that have longer life cycles and lower risk of technological obsolescence than
hardware and software products. The Company believes that the demand for these
products remains strong due to the advancement and reduction in price points of
printer and computer technologies, which in turn grows the installed base of
equipment that consumes the products the Company distributes. Continuing
automation of the workplace and the growth in color printing technologies that
use consumable supplies at higher rates also fuel the demand for the computer
supplies product offering. The Company offers these products to its U.S.
customers using value-added services such as next-business-day delivery, the
latest order cutoff times in the industry, order confirmation, product
drop-shipping, and customized product catalogs. The Company plans to expand
sales to existing customers, including those in the contract stationer and
value-added reseller channels. The Company is also focusing on new distribution
channels such as mass merchants, grocery and convenience stores and direct mail
marketers.
The Company continues to research new markets to expand its international
computer supplies business. Many international markets are emerging markets
that have exponentially higher growth opportunities for consumable computer
supplies compared with the United States. Presently, the Company operates sales
and distribution centers in Canada, Mexico, Australia and Singapore and exports
products
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into Latin America and throughout much of the rest of the world. The Company's
computer supplies experience and broad product range place the Company in a
competitive position in emerging international markets.
The Company began its Professional Tape Products segment in 1998, and has
grown this division primarily through acquisitions. This segment operates as a
distributor of media products to the film, entertainment and multimedia
industries. The distribution sector of this industry in the U.S. is highly
fragmented and regionally focused. The Company's acquisition strategy has been
to acquire businesses which the Company believes can benefit from Daisytek's
core competencies in telemarketing and distribution management to create
efficiencies and provide value-added services to the customer base. The Company
believes it is nearing the end of its acquisition activity in the U.S., though
it will continue to evaluate acquisition opportunities in certain international
markets. Acquired businesses have been integrated to create economies of scale.
The Company believes this integration effort will allow it to maintain the
strong gross margins earned in this segment, while at the same time reducing the
SG&A costs as a percentage of sales, and, thus, increasing profit margins.
The Company plans to enhance growth by seeking acquisition opportunities
to supplement growth in the Company's computer consumables business,
professional tape business, and fulfillment service business or to add selected
product lines that can capitalize on Daisytek's expertise in distribution and
call-center management and offer the Company an opportunity to expand its
product line and increase profit margins.
RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED JUNE 30, 1999 AND 1998.
Net Sales. Net sales for the three months ended June 30, 1999 were
$233.2 million as compared to $222.6 million for the three months ended June 30,
1998, an increase of $10.6 million, or 4.8%. Computer Supplies net sales
increased slightly in the quarter ended June 30, 1999, compared to the same
period in fiscal year 1999. Sales in the international computer supplies
operations increased 27.4% in the quarter ended June 30, 1999, compared to the
same prior year period primarily due to market share growth and higher industry
growth rates in the international markets, such as Canada, Latin America,
Australia and the Far East. This increase was offset by a decrease of 10.7% in
the net sales of the U.S. computer supplies operations for the quarter ended
June 30, 1999, compared to the same period in fiscal year 1999, due primarily to
a reduction in business with large office superstores, partially offset by
increased activity with the contract stationers and grocery, drug and mass
merchant channels. PFSweb net sales increased during the first quarter of fiscal
year 2000 compared to the same period in fiscal year 1999 as a result of higher
sales volumes of products under master distribution outsourcing contracts.
PFSweb also experienced increases in its service fee-based activity as a result
of new contracts and expansion of existing contracts. Professional Tape Products
sales decreased 14.8% in the first quarter of fiscal year 2000 compared to the
same period in fiscal year 1999 due primarily to price degradation in certain
product lines.
Gross Profit. The Company's gross profit as a percent of net sales was
11.7% for the three months ended June 30, 1999 as compared to 11.9% for the
three months ended June 30, 1998. The decrease in the Company's gross profit as
a percentage of net sales was primarily due to a lower overall gross profit
percentage in the international computer supplies business partially offset by
a reduction in lower gross margin U.S. superstore business and increased PFSweb
service fee business, which generates higher gross margins. The decline in the
international computer supplies business gross margin percentage was caused by
large revenue growth in Hewlett Packard commodity line products and new
international retail business, both of which typically carry lower margins. The
Company believes that these trends may continue and could potentially have a
negative impact on gross margins during the remainder of fiscal year 2000. In
addition, the Company expects that competitive pressures in the U.S. computer
supplies operations may negatively impact gross margins during the remainder of
fiscal year 2000.
SG&A Expenses. SG&A expenses for the three months ended June 30, 1999
were $19.3 million, or 8.3% of net sales, as compared to $16.8 million, or 7.5%
of net sales, for the three months ended June 30, 1998, excluding acquisition
related costs in each period. The increase in SG&A expenses as a percentage of
net sales for the first quarter of fiscal year 2000 was due primarily to (i) a
reduction in net sales with lower SG&A expense ratios to large office
superstores, and (ii) the investments in resources and technology to further
develop the PFSweb Division.
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Acquisition Related Costs. During the quarter ended June 30, 1999, the
Company recorded costs of approximately $0.4 million applicable to transition,
integration and merger activities within its Professional Tape Division. During
this same quarter in fiscal year 1999, Daisytek incurred various acquisition
costs of $0.4 million related to accounting, legal and other costs applicable
to the acquisition of The Tape Company.
Interest Expense. Interest expense for the three months ended June 30,
1999 was $0.8 million as compared to $0.9 million for the three months ended
June 30, 1998. Interest expense was lower during the three months ended June
30, 1999 primarily due to lower interest rates in the first quarter of fiscal
year 2000 compared to the same quarter in fiscal year 1999. The weighted
average interest rate was 6.0% and 6.7% during the three months ended June 30,
1999 and 1998, respectively.
Income Taxes. The Company's effective tax rate increased to 39.0% for
the three months ended June 30, 1999, as compared to 35.8% for the three months
ended June 30, 1998. The increase was primarily due to the first quarter of
fiscal year 1999 income taxes being impacted by pooling of interests with The
Tape Company. Prior to its acquisition by the Company, The Tape Company
included a business unit organized as a subchapter S corporation, whereby
income taxes were paid individually by the owners. On a pro forma basis,
excluding the impact of The Tape Company's subchapter S corporation status
prior to the June 1998 merger, the Company's effective tax rate during the
first quarter of fiscal year 1999 would have been approximately 39.2%.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary source of cash has been from financing
activities. During the three months ended June 30, 1999, net cash of $12.9
million was provided by financing activities, compared to net cash provided by
financing activities of $18.4 million for the three months ended June 30, 1998.
Cash provided by financing activities was generated primarily from proceeds
from revolving lines of credit during the three months ended June 30, 1999 and
1998. In conjunction with the Professional Tape Products segment's business
combination, certain acquired debt of The Tape Company was paid in full by the
Company during the three months ended June 30, 1998. Included in cash flows
from financing activities for the three months ended June 30, 1998 are
distributions made to former shareholders of The Tape Company relating to taxes
incurred by these shareholders for earnings of the business unit of The Tape
Company, which was organized as a subchapter S corporation. These distributions
were made prior to the business combination with the Company. Financing
activities should provide the Company's primary source of cash during the
remainder of fiscal year 2000, primarily to support the Company's growth.
Net cash used in operating activities for the three months ended June 30,
1999 and 1998, was $6.0 million and $11.4 million, respectively. Working capital
increased to $153.8 million at June 30, 1999 from $138.8 million at March 31,
1999. This increase of $15.0 million was primarily attributable to 1) product
sourcing in the Computers Supplies segment becoming increasingly impacted by
suppliers' programs, which provide increased incentives to purchase higher
levels of inventory with more prompt payment terms; 2) increased working capital
requirements applicable to certain PFSweb clients; and 3) increased days sales
outstanding in accounts receivable due to continued customer consolidation with
large national accounts, which has led to slower than previously experienced pay
characteristics.
Funds used for investing activities during the three months ended June 30,
1999 and 1998 included primarily costs to acquire professional tape products
businesses and capital expenditures. During June 1999, the Company purchased
assets of a regional professional tape business for approximately $2.2 million.
Capital expenditures were approximately $2.6 million and $1.8 million during
the three months ended June 30, 1999 and 1998, respectively. These capital
expenditures consisted primarily of additions to upgrade the Company's
management information systems 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 2000 will be approximately
$12 million to $15 million.
The Company's unsecured revolving lines of credit provide for borrowings
up to approximately $102 million. At June 30, 1999, there were outstanding
balances on the lines of credit totalling $56.0 million, leaving approximately
$46 million available for additional borrowings. In addition, the Company has a
promissory note agreement with a bank, which allows the Company to borrow up to
a maximum of $10.0 million. The Company has no borrowings outstanding under
this promissory note agreement at June 30, 1999.
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The Company believes that international markets represent further
opportunities for growth. The Company attempts to protect itself from foreign
currency fluctuations by denominating substantially all of its non-Canadian and
non-Australian international sales in U.S. dollars. In addition, the Company
has entered into various forward Canadian and Australian currency exchange
contracts in order to hedge the Company's net investment in, and its
intercompany payable applicable to, its Canadian and Australian subsidiaries.
The Company has the following forward currency exchange contracts outstanding
as of June 30, 1999:
CURRENCY TYPE US$ CONTRACT AMOUNT CONTRACT TYPE EXPIRATION
------------- ------------------- ------------- ----------
Canadian Dollars $12.3 million Sell Canadian Dollars November 1999
Australian Dollars $1.3 million Sell Australian Dollars August 1999
Australian Dollars $6.7 million Sell Australian Dollars October 1999
As of June 30, 1999, the Company had incurred unrealized losses of
approximately $0.3 million on the outstanding Australian forward exchange
contracts and an unrealized gain of $0.1 million on the outstanding Canadian
forward exchange contract. The Company may consider entering into other forward
exchange contracts in order to hedge the Company's net investment in its
Canadian, Australian, Mexican, and Singaporean subsidiaries, although no
assurance can be given that the Company will be able to do so on acceptable
terms.
In the future, the Company may attempt to acquire other businesses to
expand its existing computer supplies and professional tape businesses in the
U.S. or internationally, expand its product line similar to the Company's entry
into the Professional Tape products segment and expand its services or
capabilities in connection with its efforts to grow its PFSweb business. The
Company currently has no binding agreements to acquire any such businesses.
Should the Company 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.
The Company believes it will be able to satisfy its working capital needs
for fiscal year 2000, 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.
In addition, 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is subject to market risk associated with changes in interest
rates and foreign currency exchange rates. Interest rate exposure is limited to
the Company's outstanding balances on its revolving lines of credit which
amounted to $56.0 million at June 30, 1999. The interest rates on the revolving
lines of credit float with the market. A 50 basis point movement in interest
rates would result in an increase or decrease in interest expense of
approximately $280,000 annualized, based on the outstanding balances of the
revolving lines of credit at June 30, 1999.
The Company's foreign currency exchange rate risk is primarily limited to
Mexican Pesos, Canadian Dollars, Australian Dollars, and Singapore Dollars. The
Company's international sales and purchases are generally U.S. Dollar based,
except in Canada and Australia. In order to mitigate foreign currency rate
risk, the Company periodically enters into foreign currency forward contracts
to hedge the net investments and long-term intercompany payable balances
applicable to its Canadian and Australian subsidiaries. The Company had three
outstanding foreign currency forward contracts at June 30, 1999. If the foreign
exchanges rates of the Canadian and Australian currencies fluctuate 10% from
the June 30, 1999 rates, gains or losses in fair value on the three outstanding
contracts would be $2.4 million.
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YEAR 2000 ISSUE
The Company utilizes a significant number of computer software programs and
information systems in its operations ("IT systems"). The mission-critical IT
systems include the Company's operating, accounting and telecommunications
systems, such as IT software applications that allow the Company to maintain
inventory and customer information and to communicate with its suppliers and
customers. The Company also makes use of a variety of machinery and equipment
in its business which are operated by or reliant upon non-information
technology systems ("non-IT systems"), for example, equipment or mechanical
systems which contain embedded technology such as microcontrollers. To the
extent that the source code of the software applications of these IT systems or
the embedded technologies of these non-IT systems are unable to appropriately
interpret and process the upcoming calendar year 2000, some level of
modification or possible replacement of such applications would be necessary
for proper continuous performance. Without such modification or replacement,
the normal course of the Company's business could be disrupted or otherwise
adversely impacted. This potential problem is commonly referred to as the year
2000 compliance issue ("Y2K").
In fiscal 1997, the Company began to address Y2K. The Company has formed a
Y2K task force under its Chief Information Officer to coordinate and implement
measures designed to prevent disruption in its business operations related to
Y2K. The Company is scheduled to complete the remediation of its
mission-critical IT applications software in August 1999 and is scheduled to
complete remediation of its non-mission critical applications software by
October 1999. The Company is assessing the effect of Y2K on its non-IT systems
and intends to modify or replace non-IT systems as necessary to insure Y2K
readiness by October 1999.
The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate Y2K. However, there can
be no guarantee that the systems of other companies on which the Company's
systems rely will be timely converted, or that a failure to convert by another
company, or a conversion that is incompatible with the Company's systems, would
not have a material adverse effect on the Company. The Company is developing
contingency plans to address the risks created by third parties' failure to
remediate Y2K. These plans include procuring alternative suppliers, when
available, when the Company is able to conclude that an existing supplier will
not be Y2K ready. The Company is scheduled to complete these contingency plans
by September 1999.
The Company continues to grow through business acquisitions. All
acquisitions of the Company have been converted to the Company's operating
system.
During the three months ended June 30, 1999, the Company incurred
approximately $0.1 million of expenses related to Y2K. In total, the Company's
assessment and remediation of Y2K has a budget of approximately $0.8 million,
which includes both external costs, such as outside consultants, software and
hardware applications, as well as internal costs, primarily payroll related,
which are not separately tracked. Funding for Y2K expenses will be generated
from on-going operations and available borrowings under the Company's revolving
line of credit facilities.
There can be no assurance that Y2K remediation by the Company or third
parties will be properly and timely completed and failure to do so could have a
material adverse effect on the Company's financial condition. The Company
cannot predict the actual effects of Y2K, which depends on numerous
uncertainties such as: (1) whether major third parties address this issue
properly and timely and (2) whether broad-based or systemic economic failures
may occur. The Company is currently unaware of any events, trends, or
conditions regarding this issue that may have a material effect on the
Company's results of operations, liquidity, and financial position. If Y2K is
not resolved by January 1, 2000, the Company's results of operations or
financial condition could be materially adversely affected.
INVENTORY MANAGEMENT
The Company manages its 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
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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 if the supplier
lowers prices on previously purchased inventory or the Company can return slow
moving inventory in exchange for other products.
Certain of PFS's product fulfillment and distribution service agreements
provide that PFSweb 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 PFSweb under these contracts are generally
higher than the Company would normally carry in its wholesale distribution
businesses.
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 or, if any, 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
computer supplies products due to a variety of factors, including sales
increases resulting from the introduction of new 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 seasonality of the Company's PFSweb business is dependent upon the
seasonality of the customers' products which PFSweb distributes or provides
services for. Accordingly, management must rely upon the projections of its
PFSweb customers in assessing quarterly variability.
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.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires that an entity
recognize all derivative financial instruments as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. If certain conditions are met, a derivative may be used to hedge certain
types of transactions, including foreign currency exposures of a net investment
in a foreign operation. The Company presently utilizes derivative financial
instruments only to hedge its net investments in certain of its foreign
operations. SFAS No. 133 requires gains or losses on these financial
instruments in other comprehensive income as a part of the cumulative
translation adjustment. The Company is currently evaluating the provisions of
SFAS No. 133 and its effect on the accounting treatment of these financial
instruments. SFAS No. 133 is effective for fiscal years beginning after June
15, 2000, with initial application as of the beginning of an entity's fiscal
quarter. Early adoption of the standard is allowed, however, the statement
cannot be applied retroactively to financial statements of prior periods.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
10 Asset Purchase Agreement between The Tape Company,
Inc. and Stage 4 Productions, Inc. (D/B/A Producers
Tape Service/All Media, Inc.) dated June 18, 1999
27.1 Financial Data Schedule for the three months ended
June 30, 1999
27.2 Financial Data Schedule for the three months
ended June 30, 1998
b) Reports on Form 8-K:
None.
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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: August 16, 1999
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
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10 Asset Purchase Agreement between The Tape Company, Inc. and Stage 4 Productions,
Inc. (D/B/A Producers Tape Service/All Media, Inc.) dated June 18, 1999
27.1 Financial Data Schedule for the three months ended June 30, 1999
27.2 Financial Data Schedule for the three months ended June 30, 1998